Contract termination: contractor not waiving, employer drowning

In the light of a recent decision in the Court of Appeal, employers should be wary of assuming that a default, even if highly technical, if repeated say a year later, might not be used to determine the contractor’s employment under the contract. There are similar lessons for contractors.

The long-running litigation between Reinwood and Brown (part of which went to the House of Lords) has thrown up an interesting illustration of how an old payment default can come back to haunt an employer.

The practical impact is twofold.

• Employers must be careful not to assume (under, for instance, the JCT forms of contract) that a payment default will somehow be overtaken by events or forgotten when, if the default is repeated, a contractor serves a determination notice say a year later.
• On the other hand, contractors (and employers for that matter) should be aware that just because they have determined the contractor’s employment on the basis of a default notice that asserts an invalid ground for determining, that is not to say that they cannot rely upon an alternative (valid) ground.

Some background:

• In mid-2005 Brown (the contractor) gave Reinwood (the employer) notice that Reinwood had defaulted on a VAT payment due under an amended JCT Standard Form of Contract 1998 edition With Quantities.
• The parties subsequently agreed that Reinwood would pay Brown a smaller amount than that originally claimed for VAT. Nonetheless the notice of default had been served and was not deprived of its effect by this agreement.
• Eight months later Brown gave Reinwood a second notice specifying a default in relation to a separate issue. In mid-2006 Brown served a notice of determination of the contract based on the second notice of default and a recent interim payment where, due to an administrative error, the payment was not made on time. The notice of determination did not mention the first default notice. In separate proceedings it was found that the second notice of default did not justify the determination. The question that the Court of Appeal was thus asked to consider was whether the contractor was entitled to determine its employment on the basis of the first notice of default (of mid-2005) coupled with Reinwood’s failure to make an interim payment on time in mid-2006.

Reinwood said that Brown had waived its right to rely on the first default notice issued in mid-2005. The court disagreed, for two reasons:

• The contractor had done nothing to indicate it was waiving its right to rely on the earlier default.
• The specific wording of the JCT 98 form said that the default notice procedure could be used by the contractor cumulatively rather than just once. In other words, the contract allowed the contractor to hark back to the mid-2005 payment default as a basis for determination once there was a second payment default (in mid-2006). The JCT 2005 form operates to similar effect.

The result of the case may seem a little odd. The contractor was allowed to determine its employment under the words of the contract even though there was more than a year between the first and second payment defaults, and it did not even mention the first default in its determination notice. What this demonstrates is that seemingly small, unintentional and easily-corrected defaults can have a drastic effect when it comes to contractual determination. Not only that, but these defaults can be stored up potentially for the life of a project and unleashed at a time when one party wishes to bring commercial pressure to bear on the other.

Reference: Reinwood Ltd v L Brown & Sons Ltd [2008] EWCA Civ 1090