Determination provisions: Reinwood Limited -v- L Brown & Sons

The use of determination provisions in construction contracts.

Summing up

• The case: Reinwood Limited -v- L Brown & Sons Limited [2008] EWCA Civ 1090.
• The issue: Whether or not a determination notice was valid when it referred to a second notice of default that was invalid.
• The implication: Determination notices are likely to be valid where a previously valid default notice had been given, even where the notice of determination had referred to a second notice of default that was invalid.

Construction contracts invariably contain determination provisions, permitting either party to determine the contract on the occurrence of a specified cause identified in such provisions. A notice of default is often required before the right to determine arises under a contract and the validity of such notices under a JCT 98 Contract was considered in the case of Reinwood Limited-v-L Brown & Sons Limited.

Reinwood engaged Brown to construct commercial and residential premises. Because the works were a mix of residential and commercial, the residential work was zero rated and the commercial work was subject to VAT at the standard rate. The contract sum was exclusive of VAT and interim certificates were for sums exclusive of VAT.

Separate assessments

Special provision was made in the contract for dealing with VAT, requiring Brown to make and serve on Reinwood separate provisional assessments of VAT and that amount of VAT became payable by Reinwood, unless it objected to the assessment.

On 11 April 2005, Reinwood issued its first provisional assessment and on 14 April 2005 Reinwood responded via email by asking the sum to be verified by a quantity surveyor. Reinwood did not pay the VAT that was the subject of the first provisional assessment and Brown gave notice of a specified default on 12 May 2005. On 26 January 2006, Brown issued a second notice of default following Reinwood's failure to pay an amount due under an interim certificate, followed by a notice of determination relying on the second notice of default. The second notice of default was held to be invalid, but Brown claimed that its notice of determination was valid on the basis of the first notice of default.

Notice of determination

Reinwood argued that: (i) the notice of determination was invalid as the notice of default was not based on a valid provisional assessment as it did not set out the basis of the calculation (ii) its email response to the provisional assessment was a valid objection (iii) Brown had waived its right to rely on the first notice of default by giving a second notice of default rather than a notice of determination or by relying on the second notice of default in its notice of determination.

As to these issues, the Court of Appeal unanimously decided that:

• Under the VAT agreement the provisional assessment had to do no more than state what the relevant figure was, a precise and detailed calculation was not required. Brown's provisional assessment was therefore valid.
• Reinwood's email did not amount to a valid objection as it lacked any clear indication that Reinwood did object to the provisional assessment. There was no use of the word 'objection' or any similar related words in the email, and it did not set out any grounds of objection. It was considered that for the email to qualify as a notice of objection, Reinwood 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 had to indicate why it objected or refused
• Brown had not waived its right to rely on the earlier default by serving the second notice of default or by referring to the second notice when serving its notice of determination. The contract at clause 28.2.4 stated: " the employer repeats (whether previously repeated or not) a specified default". This allowed Brown to use the contractual procedure cumulatively, not just once, entitling it to rely on the earlier notice of default to give notice of determination of the contract under clause 28.2.4.

Specified default

Accordingly, the first notice of default was valid as Reinwood had committed a specified default in April 2005 and its default in June 2006 was a repetition of specified default, entitling Brown to determine the contract.

Finally, where notices are required to object to a claim, such notices to be valid should use clear, unequivocal language stating that it is an objection to the claim and setting out the reason(s) for that objection. It is likely that the failure to do so could render such notices invalid.