Termination: Parting of the ways

Terminating a contract is a last resort. There is no going back so the stakes are high. If a party gets it wrong, it can be in breach. So what advice is there for parties either receiving or initiating a termination notice? Most recently, issues around termination have been considered in Sabic UK Petrochemicals Ltd vs Punj Lloyd Ltd [2013] (see Nick Henderson, Building, 15 November 2013).

A termination clause will list the grounds for termination and which of them are capable of remedy and therefore subject to prior notice.

Most termination clauses are fault based, with the exception of a party’s insolvency which may trigger automatic or discretionary termination. A termination clause may prescribe what must be contained in a notice of termination. Identification of the breach to be remedied in the notice will be required regardless of what such a clause says. 

In the Sabic case, the recipient of the notice argued it was invalid because:

• It did not say on the face of it that it was a clause 27.2.10 (Termination) Notice
• It did not identify in sufficient detail the breach to be remedied or the steps to be taken to do so
• The period to rectify was too short. 

In construction contracts what is material breach can be difficult in matters such as progress and suitability of work and materials as these can be matters of judgment

The judge in the Sabic case found that such a notice, although it requires to refer to the actual termination clause, does not need to say it is a clause 27.2.10 Notice. 

In Sabic, the ground for termination was the contractor failing to proceed with the works with due diligence and the judge found in that case that, where such a warning is given of a failure to exercise due diligence, it does not necessarily require to particularise the respects in which the contractor has failed. 

In this case, a seven-day period was given to rectify. The length of a remedial period is a constant source of debate. In Sabic, the court considered that the contractor on the receiving end of this notice should have been able, within seven days, to demonstrate that it was “taking steps to get to grips with the contract”.  Even if it was too short, the judge considered this would not take away from the fact it was a termination notice - it would merely allow for more time to be given to the recipient before termination could take place.

Another specified ground of termination is often “material breach of contract”. Where the contract does not define “material breach”, the best assistance is that material breach:

• Depends on the nature of the contract and the actual obligation involved
• The circumstances surrounding the breach - why it occurred
• The impact on the innocent party.

For example, repeated failure to pay significant sums under the contract will be likely to be considered material. However, in construction contracts what is material breach can be difficult in matters such as progress and suitability of work and materials as these can be matters of judgment. 

Is material breach different from repudiatory breach, and if so what distinguishes them?  Again, this was considered in Sabic. Repudiatory breach is where a party by its conduct indicates an intention not to perform its obligations under the contract in some essential respect. The “innocent” party can then accept that repudiation or insist on the other party performing. If the repudiation is accepted, the contract is at an end. Both scenarios may give rise to a claim for damages for breach - it’s just in one the contract is no longer in existence.

Where there is partial performance, determining what amounts to repudiatory breach is not easy. The judge in Sabic considered that there were aspects of the contractor’s conduct which amounted to deliberate decisions not to comply with all of its contractual obligations, one of which was instructing its subcontractors to demobilise. However, his view was that, as at all material times it stated its intention to bring the project to completion, that could not necessarily be equated with a renunciation of its side of the bargain. In that case, the contractor’s conduct came close to being repudiatory but “didn’t cross the line”.

This shows that establishing repudiatory breach in situations where there is not an absolute refusal to perform may be difficult. A termination notice which relies on an express ground for termination may be a safer bet. If need be a repudiation argument can be relied upon in the same notice as a fall back.

Lindy Patterson QC is a partner and solicitor advocate at Dundas & Wilson LLP