Reinwood Ltd v L Brown & Sons Ltd

This appeal is against an order made by His Honour Judge Gilliland Q.C. on the basis of one of the last judgments he delivered as a judge of the Technology and Construction Court. It brings to this court for the second time the issue whether the contractor under a particular building contract was entitled to determine the contract by notice to the employer in July 2006 and walk away from the project or whether, as the employer contends, it thereby repudiated the contract and is accordingly liable in damages.

On 9 November 2006 the judge held that the contractor’s notice of determination of the contract dated 4 July 2006 was valid, based on a default on the part of the employer in January 2006. This court allowed the employer’s appeal against that finding: [2007] EWCA Civ 601; the House of Lords upheld that decision: [2008] UKHL 12. In the meantime, however, this court had remitted to the trial judge the question whether the contractor’s notice of determination was valid on the basis of an earlier default on the part of the employer. The judge heard argument on that point on 31 August 2007, having directed that no further evidence should be adduced, and again held in favour of the contractor in his judgment handed down on 6 December 2007. He refused permission to appeal, but Dyson LJ granted permission to appeal on four out of the eight grounds originally advanced on behalf of the employer.

The contract was between Reinwood Ltd, the Claimant and Appellant, as employer, and L Brown & Sons Ltd, the Defendant and Respondent, as contractor. It was dated 16 January 2003 and was in the form of a JCT Standard Form of Contract, 1998 Edition, With Quantities incorporating Amendments 1 of 1999, 2 of 2000 and 3 of 2001. There were individual amendments, but none of relevance for present purposes. It was for construction work at Duke Street, Castlefield, Manchester, the project including both commercial premises on the ground floor and residential premises on several upper floors. The contract sum was £6.2 million, with the usual provision for monthly Interim Certificates on the 7^th day of every month. The Architect was identified, as was the Quantity Surveyor, namely Messrs Thomas & Adamson. The date for possession was 14 July 2003 and the date for completion 18 October 2004. The retention percentage was 3%.

Because the work related partly to residential and partly to commercial accommodation, some of the supplies of goods and services to be made under the contract would be zero-rated (residential) and the rest (commercial) would be chargeable to VAT at the standard rate. The contract sum was exclusive of VAT and special provision was made in the contract for dealing with VAT, to which I shall turn in detail later. In outline, Interim Certificates were for sums exclusive of VAT, and it was for the contractor to make and serve on the employer separate provisional assessments of VAT. Not until March 2005 did the contractor raise this issue for the first time, and no provisional assessment was raised before April 2005.

In brief, the employer did not pay the VAT which was the subject of the first provisional assessment. On 12 May 2005 the contractor gave notice of a “specified default” in respect of this non-payment. Later the parties agreed an amount (smaller than the amount that had been provisionally assessed in April) as being due for VAT and the employer paid that amount. However, the notice of default had been served and, if valid, it was not deprived of effect by the subsequent agreement and payment of a lesser sum for VAT.

On 26 January 2006 the contractor gave another notice specifying a default, following the employer’s decision to withhold £61,629 on account of liquidated and ascertained damages when paying the sum due on interim certificate number 29, issued in January 2006.

On 28 June 2006 the employer failed to pay £39,981 due under Interim Certificate number 34. On 4 July 2006 the contractor served notice of determination of the contract, expressly relying on the notice of default dated 26 January 2006, and not referring to the previous notice of default dated 12 May 2005.

The result of the appeals from the first judgment is that the employer was entitled to make the deduction that it did from Interim Certificate 29, so that it was not in default in January 2006 and the notice of default dated 26 January 2006 was not valid. The question now is whether the earlier notice of default was valid and, if so, whether the contractor is entitled to rely on it as justifying the notice of determination dated 4 July 2006.

In order to explain the points that arise on this appeal, against that background, I must refer to several provisions of the contract: first those relevant in the main contract and then the relevant terms in the separate VAT agreement incorporated by clause 15.

Determination by the contractor is governed by clause 28. It is necessary to consider parts of clause 28.2, as follows:

The contractor’s case is that the notice given in May 2005 validly specified a default under clause 28.2.1, namely the employer’s failure to pay VAT due on an amount due in respect of an Interim Certificate. That default continued for 14 days but the contractor did not give a notice of determination as it could have done under clause 28.2.3. In June 2006 the employer again failed to pay a sum due on an Interim Certificate, and thereby repeated the specified default. By virtue of clause 28.2.4 that entitled the contractor to give notice of determination of the contract.

In order to see whether the notice in May 2005 was valid and effective it is necessary to examine the VAT agreement, but it is also necessary to take into account some of the provisions of clause 30 of the main agreement as to Interim Certificates.

The papers do not include any interim valuation made by the quantity surveyors, but it was not in dispute that the architect required such a valuation for the purposes of each Interim Certificate, and that each successive valuation was supplied not only to the architect but to both employer and contractor.

As I have mentioned, clause 15 introduced supplemental provisions dealing with VAT which were referred to as the VAT agreement. By clause 15.2 all references to the Contract Sum were to be taken as references to that sum exclusive of any VAT, and recovery by the contractor from the employer of VAT properly chargeable by the Commissioners of Customs & Excise (now HMRC) was to be under the provisions of the VAT agreement.

In the VAT agreement itself it is necessary to consider clauses 1.1, 1.2 and 1.3. The references to VAT regulations are out of date, but nothing turns on that as the substituted regulations are to the same effect:

Clause 3.1 provides that, if the Employer disagrees with the Contractor’s final statement under clause 1.3, he may request the Contractor to obtain the decision of the Commissioners on the tax properly chargeable on the Contractor for all supplies of goods and services under the contract, so long as he makes the request before any payment or refund has become due under clause 1.3.3 or 1.3.4.

As I have mentioned, the question of VAT was not raised by Browns until March 2005. Both parties must have been well aware that part of the work was zero-rated and the rest standard-rated for VAT, and that this would give rise to issues of apportionment. On 23 March 2005 Mr Jepson, for Browns, wrote to Reinwood referring to this issue. In the course of his letter he said this:

Reinwood did not respond to this letter. By a letter dated 11 April 2005 Mr Jepson wrote again, referring to his previous letter and saying this:

He enclosed a VAT invoice for 17.5% of that sum, £72,625, and asked for payment by 21 April. The invoice is headed “To VAT only in respect of works to the ground floor commercial units”.

On 14 April Mr Bradshaw on behalf of Reinwood sent an email to Mr Jepson, copied to representatives of Thomas & Adamson, on the subject of VAT. It seems that he had tried to contact Mr Jepson by telephone, but had failed. The text of the email is as follows:

The first two issues on the appeal turn on the letter of 11 April and the email of 14 April. Nevertheless it is instructive to see how the communications proceeded after that.

On 20 April Mr Jepson wrote to Thomas & Adamson, copying the letter to Mr Bradshaw, asking for their verification of the sums due in respect of the ground floor commercial units, and seeking a prompt response so that Browns could correctly account to HM Customs & Excise for VAT. It seems likely that 30 April was the end of a VAT quarter for Browns, so that VAT on supplies up to that date would have to be accounted for by the end of May.

On 5 May 2005 Browns sent to Thomas & Adamson a page setting out a calculation for VAT which gave a figure of £414,934.04. It is reasonable to assume that these calculations had been done, whether or not embodied in this document, before the letter dated 11 April was sent. I need not set out the details of the calculation, but it proceeded as follows. First, the floor areas of the various areas from basement slab up to the 6^th floor were given, and of that part of the ground floor which represented the commercial premises. From this, three percentages were derived: the commercial area as a percentage of the whole (7%), as a percentage of the superstructure (8%) and as a percentage of the ground floor (42%). Then one of these percentages was applied to each of a number of sums under headings which were no doubt derived from the quantity surveyors’ valuation (though 3.5% was applied to one item: materials on site). It was common ground that, without knowing what the percentages were, and which was applied to which item, Reinwood could not have worked out how Browns had got to their figure of £415,000.

On 12 May 2005 Mr Murphy, managing director of Browns, wrote to Reinwood giving notice of default under clause 28.2.1.1, in respect of Reinwood’s failure to pay the VAT on the sum specified in the provisional assessment dated 11 April.

On 17 May Mr Bradshaw of Reinwood sent a further email to Mr Jepson, taking issue with the VAT calculation. He accepted certain elements in the calculation, but suggested that others should not have been included at all and yet others had been included at too high a figure. He therefore asked for it to be recalculated. On 1 June Browns did supply a revised calculation, omitting any sum under one head and applying the agreed percentage to lower sums under a number of heads (even though, because a later valuation had been issued in the meantime, some of the overall sums had been increased). Further discussion ensued, as a result of which on 8 June a further calculation was put forward, taking into account yet another valuation, but reducing the amount chargeable to VAT still more, to £287,673.08. This showed £50,342.79 as being due. A few days later Browns issued a revised VAT invoice for this amount, backdated to 30 April 2005. Later they issued a further credit against this invoice because it had not allowed for the deduction of the 3% retention. Reinwood paid the amount ultimately agreed in this way.

Moving on in time, on 26 January 2006, Browns wrote to Reinwood giving notice of default under clause 28.2.1.1 in respect of the failure to pay £49,303 due on 25 January. It was this notice that was held to have been invalid in the first appeal.

In June 2006 Reinwood failed to pay a sum which was due under the contract, namely £39,981 due under Certificate number 34 on 28 June. The failure is said to have been the result of an administrative oversight. On 4 July 2006 Browns gave notice of determination of the contract under clause 28.2.4. The letter identified the failure to pay that sum, and went on to say “this default repeats the previously highlighted default set out in our notice to yourselves dated 26 January 2006”. That is the notice whose validity is primarily in issue in the proceedings.

The judge summarised the position as regards VAT as follows

It is common ground that, if the employer serves a valid objection under clause 1.2.2, it does not have to pay to the contractor the amount specified in the provisional assessment. It will pay the amount of the Interim Certificate, but no extra amount (at that stage) for VAT. As the judge said, the position as regards the contractor is unclear if it does not opt to treat the payment made on the Interim Certificate as if it were VAT-inclusive. But on the one hand it is clear that it matters for the contractor to know whether the employer does object to the assessment, and on the other hand it seems that the contractor does not have to issue a VAT invoice in advance of receiving payment under the Interim Certificate, and that if it does not do so, then the time of the supply of the relevant services, for VAT purposes, is the date on which the contractor receives payment under the Interim Certificate. It may be, therefore, that in the present instance Browns imposed on themselves an avoidable obligation to account for VAT earlier than they need have done by issuing a VAT invoice and sending it to the employer together with the letter dated 11 April 2005.

Browns were entitled to determine the contract in July 2006 if, but only if, the default in June 2006 repeated an earlier default which had been specified in a notice under clause 28.2.1.1. The first question is therefore whether the default notice dated 12 May 2005 was valid. On this two issues arise: first, was the letter dated 11 April 2005 a valid provisional assessment under clause 1.1 of the VAT agreement; secondly, if so, was the email dated 14 April a valid objection under clause 1.2.2?

If the notice of default in May 2005 was valid, Reinwood contends that Browns nevertheless waived their right to rely on it, either by giving notice specifying a default in January 2006, rather than giving notice to determine the contract on the basis that the default in January was a repeat of the earlier specified default, or by referring in the July 2006 notice to the January default and not to the May 2005 default.

On behalf of Reinwood, Mr Furst Q.C. argued that, in a case where the sum due under an Interim Certificate falls to be apportioned between zero-rated and standard-rated supplies, it is not sufficient for the contractor to state an amount as being standard-rated, and that the basis of the calculation of that amount must be explained. Either the word “assessment” itself carries that obligation, or it is drawn from the requirement to state the grounds on which the contractor believes that the relevant supplies are standard-rated. He also relied on the need for the employer to be able to form a view as to whether he has reasonable grounds for objecting to the assessment: in order to do so, he contended, the employer needs to be in a position to understand the basis of the calculation. If his arguments based on the word “assessment” and on the obligation to state “the grounds” were not to prevail, he also submitted that a term should be implied into the contract requiring the contractor to explain the basis of the calculation. No such term had been pleaded, and it seems to me that Reinwood can only rely on the express provisions in the contract.

For Browns, Mr Marrin Q.C. submitted that, where (as here) there is zero-rated work and standard-rated work, the assessment must state the value of the standard-rated work, the rate at which it is chargeable, and why it is so chargeable. The employer will have received the corresponding Interim Certificate and the quantity surveyor’s valuation, and will therefore know the gross sum; since there is at present only one rate at which VAT can be chargeable, it is unnecessary to do more than identify the amount which is subject to the standard rate of tax. The letter and the invoice between them stated that the value was £415,000, the rate was 17.5% and the reason why it was so chargeable was that it related to the commercial part of the development. He argued that, although Reinwood would not have been able to reconstruct Browns’ figure without knowing how it had been arrived at, Reinwood was in a perfectly good position, with the advice of the quantity surveyor if desired, to take its own view as to what the right amount was, and that, if it thought that £415,000 was excessive, it would be open to Reinwood to object on the ground that Browns’ figure was too high.

Both Counsel said that the contract calls for and expects co-operation between the parties. Mr Furst submitted that a bare unexplained figure was not sufficient, and that an objection by the employer that the contractor’s figure was excessive, without any supporting explanation, would not qualify as “reasonable grounds” under clauses 1.2.1 and 1.2.2. He pointed out that, if an unexplained figure was sufficient under clause 1.1, the contractor could put such a figure forward at every stage, the employer could object at every stage, and the situation might never be sorted out until the last stage, by resort to the Commissioners. He suggested that this is far from what is likely to have been intended.

I do not accept the argument that an “assessment” of a value must include an explanation of the basis on which it is reached. In my judgment an assessment need do no more than state what the relevant figure is. Under clause 1.2.1 it is to the assessment that the employer may object, and it seems to me clear that what it would object to is the figure.

If Reinwood is to succeed on this point it must be because of the contractor’s obligation to “state the grounds on which he considers such supplies are so chargeable”, that is to say, chargeable at a rate other than zero. The ground on which a part of the relevant supply is standard-rated is (in the present case) that it relates to the construction of commercial rather than of residential accommodation. That is one thing that has to be stated (expressly or impliedly) in order to satisfy clause 1.1. Mr Furst’s argument involves a contention that the Contactor must go further and state why he considers that the amount in question is the amount so chargeable. I can see that it may be very helpful if the contractor does so, and Browns could no doubt have supplied the workings (as it did on 5 May) with the letter of 11 April. However, as a matter of the interpretation of the clause, I do not see that this is necessary.

What the contractor has to do under clause 1.1 is to make and give to the employer “a written provisional assessment of the respective values … of those supplies of goods and services for which the Certificate is being issued and which will be chargeable” at zero and at any positive rate of VAT, specifying the positive rate, and giving the grounds on which the positive rate is chargeable. It seems to me that this formulation shows that the “grounds” are only required to explain why a positive rate of tax (and, if it were relevant, which out of several) is applicable, not to explain how the assessed value has been calculated. By contrast, the contract is specific in requiring that an Interim Certificate must specify, among other things “the basis on which [the certified amount] was calculated”: see clause 30.1.1.1. The absence of any comparable wording from clause 1.1 of the VAT agreement seems to me to be significant and revealing.

On this point, the judge, with his great experience of matters of this kind, said this at paragraphs 27 to 28:

I respectfully agree. For those reasons, I would reject the first of the permitted grounds of appeal, namely that there was no valid provisional assessment.

I recognise that this could mean that the contractor might never put forward more than a bare unexplained figure by way of a provisional assessment, that the employer might, on advice, object each time that the figure was too high, and that, unless the parties co-operated outside the framework of the contractual provisions, the true position might not be sorted out until the final stage by reference to the Commissioners. It seems to me relatively unlikely that this would occur without any attempt by the parties to work out the correct position in the meantime, but it would not be an unworkable or absurd result even if the respective parties did dig their heels in and rely on the strict position under the contract. I note that, in the course of the sequence of events directly relevant to this appeal, the first failure to collaborate was that of Reinwood in not responding to Browns’ letter dated 23 March 2005.

The second ground of appeal is that the email dated 14 April amounted to a valid objection under clause 1.2.2. I have quoted the email above. It seems to me that what it lacks is any clear indication that Reinwood did object to the assessment. It is a fair comment that it asked for verification by the quantity surveyor. It did not amount to an admission or agreement that the sum was correct. But an objection under clause 1.2.2 has particular consequences for the contractor, which may affect its liability to account for VAT. It is therefore essential that the contractor should know whether the employer is relying on clause 1.2.2 or not. Mr Marrin submitted that the employer must expressly “take a stand” and that it had not done so by this email. I agree.

Despite the opening reference to a “formal approach”, it seems to me that there is nothing in the email which indicates that Reinwood was seeking to rely on its rights under clause 1.2.2. There is no use of the word “objection” or any similar or related word, nor does the email set out any grounds of objection. All it does is to seek further clarification, partly from Browns and partly from the quantity surveyors. The latter could have been sought directly immediately upon receipt of the letter of 11 April. In the absence of knowing the basis of Browns’ calculations, the quantity surveyors would have had to work out their own approach, but they would have had all the necessary material available to them, and there seems to be no good reason why they should not have been able to advise Reinwood quickly as to what figure they considered to be appropriate for the purpose. Unless this was close to or in excess of £415,000 that would have enabled Reinwood to serve a notice of objection under clause 1.2.2 setting out the ground that Brown’s figure was too high. Being based on Thomas & Adamson’s advice, that would have been a reasonable ground. I accept Mr Furst’s point that Reinwood did not know and could not tell that Browns had failed to deduct the Retention, as they should have done. I agree with the judge that this is no more than a point on quantum, which has no more significance than getting the figure wrong in other respects.

In my judgment, in order to qualify as a notice of objection under clause 1.2.2, the employer would have had to have used the word “object” or “objection”, or some other language making it clear that it refused to accept the assessment as correct, and it would have to indicate why it so objected or refused. I agree with Mr Marrin that it would not be a valid objection that the contractor had not given enough of an explanation of how it made its assessment, but it would be enough to say that the assessment was too high.

As it is, the email of 14 April 2005 was equivocal. It did not accept or admit that the sum claimed was due but it did not object, in terms or otherwise, to the assessment nor did it give any grounds for doing so other than, at most, the lack of explanation.

For those reasons I would reject the second ground of appeal. I therefore conclude that the notice of default dated 12 May 2005 was valid, that Reinwood committed a specified default in April 2005, and therefore that the default in June 2006 was a repetition of a specified default. Browns were entitled to rely on this unless they had waived their right in the meantime.

The first argument raised in this respect was that Browns waived the right to rely on the earlier default when they served a notice of default under clause 28.2.1 in January 2006. This argument, said to be based on waiver by election, seems to me wholly lacking in substance. The proposition is that Browns had to choose between two inconsistent courses of action at that stage, that is to say that, if the contractor has already served one notice of default, the next time that the employer commits a similar default, the contractor cannot serve a further notice of default, without precluding itself from relying later on the earlier default, unless it expressly reserves the right to do so when serving the new notice of default. Given that one of the purposes of serving a notice of default under clause 28.2.1 is to prompt the employer into remedying the default, I can see no basis for the suggested inconsistency. It is also undermined by the words quoted above from clause 28.2.4 “(whether previously repeated or not)”, which seem to me to indicate that the contractor can use this procedure cumulatively, not just once. I agree with the judge that, while service of the January notice (if it had been valid) would have precluded the contractor from determining the contract under clause 28.2.4 in reliance on the January default (though of course if the notice had been valid and had not been complied with, there would have been a separate right to determine under clause 28.2.3), it would not have prevented it from relying on the earlier default on a later occasion following some later repetition of a specified default, as occurred in June 2006. It might well be relevant for the contractor to be able to rely on earlier defaults if the employer sought to argue that the determination was unreasonable or vexatious, under clause 28.2.5.

Quite apart from the fact that the January notice was invalid, because the employer was not then in default, I therefore conclude that this ground of appeal is not justified.

The second argument about waiver is based on the fact that the notice of determination served in July 2006 referred expressly to the January notice of default, and not to the earlier notice in May 2005. This is not a case of waiver by election, but what is said to be pure waiver. It is accepted that a notice of determination under clause 28.2.4 does not need to specify the default relied on. The judge held, having heard Mr Murphy’s oral evidence, that though he did rely on the January default (as he thought it to be) he was not only relying on that default when he gave notice of determination.

Mr Furst put this point to us with the assistance of a passage in the speech of Lord Hailsham LC in Banning v Wright [1972] 1 W.L.R. 972 at 979:

That was a tax case about what might or might not have been the waiver of the terms of a lease. Nothing in that case, or in anything else shown to us, suggests to me that pure waiver could operate so as to preclude Brown from relying on the earlier notice of default despite not having mentioned it in the notice of determination. The examples given of pure waiver are all concerned with prospective operation, discharging a party from future performance of the obligation waived. They do not relate to waiver of the consequences of past conduct.

The Appellant’s contention is inconsistent with the general principle of contract law that if a party refuses to perform a contract, giving a reason which is wrong or inadequate, or giving no reason at all, or terminates a contract under a contractual provision to that effect, the refusal or termination may nevertheless be justified if there were at the time facts in existence which would have provided a good reason for the refusal: Chitty on Contracts 29^th ed., paragraph 24-014. That principle is often used in relation to facts unknown to the party refusing at the time of its refusal, but there is no reason why it should not be used in relation to facts which were known to that party at that time. Waiver can apply to qualify that principle, but only in cases of, in effect, estoppel.

Accordingly it seems to me that neither of the waiver grounds of appeal can succeed, and that the appeal ought therefore to be dismissed. In my judgment the judge was correct to hold that the notice of determination under clause 28.2.4 was valid, because of the valid notice of default dated 12 May 2005, despite the invalidity of the notice of default served in January 2006.

I agree.

I also agree.