What do you mean, ‘be reasonable’?

Can you have regard to your commercial interests when terminating employment under a JCT contract? And if you do, what are the chances that it would amount to unreasonable or vexatious conduct, thereby putting you in breach of that contract?

This was one of the issues recently decided by His Honour Judge Gilliland in the Salford Technology and Construction Court in Reinwood vs L Brown & Sons – a case in which I was involved on behalf of the successful defendant, Brown.

Brown was employed by the claimant, Reinwood, to construct 59 residential apartments in Manchester under a JCT1998 Private With Quantities Standard Form Contract, with Contractor Design Portion Supplement and the parties’ amendments.

Reinwood, which was part of the Dandara Group, was a single-purpose corporate vehicle established for the project. This was the second project between Brown and a Dandara special purpose vehicle, neither of which ran smoothly.

On this one, there were delays in completing the works, for which Brown had received extensions of time. Brown also had grievances about the way payments had been made, complaining that on a number of occasions it had not been paid the proper amount or on time.

In January 2006, the contractor gave a notice of specified default complaining it had not been paid the money due against an architect’s certificate. The next step was to terminate its employment if Reinwood repeated this. In July, the contract was determined, as Reinwood had again failed to pay Brown.

This decision was not taken lightly. Apart from the breaches involved, it was based on two projects that were in trouble. On the other project, the parties had engaged in a number of adjudications. Brown was also informed that Reinwood had been involved in many adjudications against a contractor on another project.

Brown realised that to protect its commercial interests and avoid fighting for money due in numerous formal proceedings, it should terminate its employment.

No contractor determines a contract lightly as the repercussions can be severe

No contractor takes such a decision lightly as the repercussions can be severe if the termination is later found to have been wrongful.

But was it right for commercial matters not strictly within the scope of the contract to influence Brown’s decision? Reinwood clearly thought not and argued that Brown’s termination was unreasonable and vexatious.

After reviewing the meaning of unreasonable and vexatious determination, Judge Gilliland distilled them into the following propositions:

• It is for the employer to show on the balance of probabilities that the contractor has determined the contract unreasonably or vexatiously.
• “Vexatiously” means that the contractor ended the contract to oppress, harass or annoy the employer.
• An “unreasonable” determination is ascertained by how a notional “reasonable contractor” would have acted in all the circumstances.
• It is not for the court to dictate what is reasonable.
• Although the contractor’s motive for termination is a consideration, what is unreasonable conduct is objective. The contractor’s thinking that the determination was reasonable is not conclusive.
• The effect of the termination on the employer should be considered. It may be unreasonable if it disproportionately disadvantages the employer.

The judge went on to say that in giving a notice of determination under clause 28.2.4, contractors were entitled to consider their commercial interests.

He found that Brown had not acted unreasonably.

The principles set out above are likely to apply to the other contracts in the JCT98 suite and the JCT05 suite as they are couched in virtually the same terms. Those thinking of terminating their employment under a JCT contract ought to read the judgment before doing so.

This case is now going to appeal, to be heard later in the year