Building contract – VAT – Appellant querying amount of assessment and failing to pay – Respondent serving notice of default – Whether valid assessment given – Whether appellant raising valid objection to assessment – Whether valid notice of default served – Whether respondent entitled to serve notice of determination of contract – Appeal dismissed
The appellant was the employer and the respondent was the contractor under a contract for construction work that included commercial and residential development. The former work was chargeable to VAT at the standard rate and the latter was zero-rated. The contract sum of £6.2m and the amounts of the interim certificates that were to be provided each month were exclusive of VAT. The respondent was to make and serve on the appellant, by the date of issue of each interim certificate, a separate provisional assessment of VAT setting out the values of the supplies to which that certificate related, the rate of tax chargeable thereon and “the grounds on which he considers such supplies are so chargeable”. The appellant had three working days within which to object to the assessment.
In April 2005, the respondent submitted a provisional assessment value for the commercial premises of £415,000 and enclosed a VAT invoice for £72,625 as being 17.5% of that value. Three days later, the appellant e-mailed the respondent, querying the amount and asking how the valuation had been reached. The sum was not paid and the respondent served a notice of default. In January 2006, it served a further notice of default in respect of the appellant’s decision to withhold liquidated and ascertained damages (LADs) from the sum due on an interim certificate. In reliance upon that default, it also served notice to determine the contract. In earlier proceedings, it was held that the appellant had been entitled to withhold LADs such that the January 2006 notice of default was invalid: see [2008] UKHL 12; [2008] 17 EG 164. A further matter was then tried as to whether the 2005 notice of default had been valid such that the respondent was entitled to rely upon that notice to justify its notice of determination.
The appellant contended that: (i) the April 2005 letter was not a valid provisional assessment of VAT since it failed to give the basis for the respondent’s calculation; and (ii) even if it were, the appellant’s e-mail in response had raised a valid objection. The judge held that the April 2005 provisional assessment had been validly made and that no valid objection had been raised. The appellant appealed.
Held: The appeal was dismissed.
(1) The terms of the contract did not require the respondent to specify the basis of the calculation by which the provisional VAT figure was produced. An “assessment” of a value did not have to explain the basis upon which it was reached; it need do no more than state the relevant figure. Nor did such an obligation flow from the respondent’s obligation to state “the grounds on which he considers such supplies are so chargeable”. The respondent was required to explain why a positive rate of tax was applicable (and, if applicable, which rate), not to explain how the assessed value had been calculated. The ground on which a part of the relevant supply was standard-rated was that it related to the construction of commercial rather than residential accommodation. The respondent had made a valid provisional assessment.
(2) The appellant’s e-mail did not amount to a valid objection to the assessment. It was equivocal in that, although it did not accept or admit that the sum claimed was due, it did not in terms object to the assessment or set out any grounds for doing so. It merely sought further clarification. Had the appellant asked the quantity surveyor to advise on the appropriate figure as soon as the respondent’s assessment had been received, the surveyor could have responded quickly and the appellant could, if need be, have served a notice of objection on the ground that the respondent’s figure was too high. It had not done so. Accordingly, the notice of default served by the respondent in April 2005 had been valid.
(3) The service of the June 2006 notice of default did not involve a waiver by the respondent of its right to rely upon the 2005 default. No inconsistency arose such as to make the situation analagous to waiver by election. Nor had the respondent waived its right by the service of the subsequent notice of determination specifying only the January 2006 notice of default. A party that refused to perform or that terminated a contract, providing no reason or a reason that was incorrect or inaccurate, could still be justified in doing so if facts at the time justified the refusal or termination: Banning v Wright [1972] 1 WLR 972 considered. Consequently, the respondent’s notice of determination was valid because of the 2005 notice of default, despite the invalidity of the notice of default served in January 2006.
Stephen Furst QC and Andrew Singer (instructed by Hill Dickinson LLP, of Manchester) appeared for the appellant; John Marrin QC and Alexander Hickey (instructed by Hammonds LLP, of Manchester) appeared for the respondent.
Sally Dobson, barrister
