Termination: how to get it right

Energy Works (Hull) Ltd entered into a contract with MW High Tech Projects UK Ltd to design, procure, contract, commission and test an energy-from-waste plant in Hull. The contract was based upon the IChemE Red Book, a form predominantly used for complex plant projects.

The project hit difficulties. On 4 March 2019, 11 months after the contractual completion date, parts of the plant had still not been commissioned and MW High Tech had suspended its works. Accordingly, Energy Works terminated the contract. Eventually the parties ended up before the Technology and Construction Court. The judgment runs to some 264 pages and addresses numerous issues. This article only touches on a few of those issues.

The contract contained a cap on MW High Tech’s exposure to liquidated damages. Once MW High Tech had exceeded the cap, Energy Works had the ability to terminate the contract. MW High Tech had exceeded the cap by 7 January 2019, some 56 days before the actual termination, so Energy Works was entitled to terminate unless MW High Tech could establish an extension of time of at least 56 days.

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However, the court rejected MW High Tech’s claims and found it was not entitled to any extension of time. Therefore, as at the date of termination, MW High Tech had run well past the delay damages cap entitling Energy Works to terminate the contract.

The court also addressed Energy Works’ alternative case that it was entitled to terminate under common law. MW High Tech argued that the common law right to terminate was excluded and any failed termination for default under clause 44 would take effect as a termination for convenience pursuant to clause 43 of the contract. This led to far more favourable financial consequences for MW High Tech.

MWHTP relied upon clause 44.12: “If the issue by [Energy Works] of any notice terminating… [MW High Tech] under this clause 44 is subsequently determined to have been invalid, such notice shall not constitute a repudiation of the contract by [Energy Works] but shall be deemed to have been a [termination by Energy Works for convenience]”.

In this case, the court was clear that an 11-month delay amounted to a repudiatory breach. However, it is important to realise that the fact that a project is in delay does not of itself amount to a repudiatory breach

The court noted that “clear express words” were required to displace a party’s rights under common law. The court noted that the right to terminate for a contractor default was said to be without prejudice to Energy Works’ other rights and remedies. Therefore, in principle, Energy Works could terminate for a repudiatory breach.

A repudiatory breach goes “to the root of the contract”. The court seemed to suggest that if, as a matter of contract, there is a level of liquidated damages beyond which one can terminate, this points to the parties agreeing that such amount of culpable delay goes to the root of the contract.

In this case, the court was clear that an 11‑month delay amounted to a repudiatory breach. However, it is important to realise that the fact that a project is in delay does not of itself amount to a repudiatory breach.

Further, if MW High Tech had been able to justify elements of its extension of time claim, then the termination may have been invalid and the commercial situation could have been vastly different. Termination should never be taken lightly.

In an interesting twist, this contract enabled Energy Works, following any termination, to require any subcontracts to be assigned to it if desired. This was in addition to any ability by Energy Works to step into those subcontracts through separate collateral warranties. Energy Works exercised its right to the assignment.

When Energy Works commenced proceedings against MW High Tech, the latter sought to pass part of this claim down to Outotec (one of the assigned subcontractors). However, the court decided the assignment transferred MW High Tech’s rights under the subcontract to Energy Works. This meant MW High Tech had no right to pursue Outotec for breach of the subcontract, as this ability now rested with Energy Works.

MW High Tech’s only recourse against Outotec was to look to the Civil Liability (Contribution) Act 1978. A claim for contribution could only be successful if MW High Tech was liable to Energy Works under the main contract and Outotec was liable to Energy Works in respect of the “same damage” under the assigned subcontract or collateral warranty.

The court had found (in an earlier judgment on a preliminary issue) that MW High Tech could potentially recover delay damages and losses arising out of defects but not termination losses – these were significant.

This assignment following termination left MW High Tech with a potentially gaping hole in its attempt to lay off some of its losses that may (or may not) have been caused by Outotec. In January 2021, the IChemE issued amendments to its Red Book form of contract, removing the requirement to assign any subcontract to the purchaser following termination.

Steven Carey is head of the construction, engineering and projects group at Charles Russell Speechlys.