As Tony Blackler noted recently (23 March), the law is easy to state but difficult to apply. If a breach of contract is sufficiently serious, it will be a repudiatory breach, giving the other party the right to terminate if it wishes. The difficulty often lies in knowing what level of performance goes beyond the merely irritating and becomes a sending-off matter.
Subject to anything the contract says, the client that allows the contractor a reasonable opportunity to put things right will usually receive more sympathetic treatment from a court than one that does not. In Bedfordshire County Council vs Fitzpatrick [1998, 62 Con LR], the council came unstuck. Although it was entitled to seek the contractor's confirmation that it would still be starting work on site despite a running dispute about TUPE, the four-day deadline that it set for compliance was held to be too short. It is a reflection of the care that is needed in these types of cases that the court held that, by imposing such a short response period, the council had itself committed a repudiatory breach of the contract.
Leaving aside the issue of whether the contractor merits a "last chance", what sort of events warrant termination? Of course, most construction contracts contain a list. In addition to the events allowing immediate termination (for example, insolvency) the client usually has the option of terminating if the contractor commits a material breach, or persistent minor breaches. There is usually provision for warning notices. Where performance is measurable – in certain process plant projects, for example, or in the operation/maintenance period of a PFI contract – one can be precise about the level of service below which the contractor simply cannot go. But this does not solve the problem of the more general failure to deliver.
The client that allows the contractor an opportunity to put things right will usually receive more sympathetic treatment from a court. In Bedfordshire County Council vs Fitzpatrick, the council came unstuck
A client faced with this problem might think that drafting a clause that allows it to terminate for any breach of contract would be a sufficient "catch-all". Great Yarmouth council probably thought so too (see Great Yarmouth Borough Council vs Rice t/a The Garden Guardian (2000)). It engaged Mr Rice's firm to provide maintenance services over four years for its sports and leisure facilities, and its parks and gardens. It particularly wanted someone to maintain the summer flower beds, the court said, "to produce the sort of display to be expected in a town which regularly came second in the large towns category of the Anglia in Bloom competition".
Unfortunately, Mr Rice had barely started up his mower before the first of many default notices were served. The council's complaints centred mainly around the state of the cricket pitches and bowling greens. After a further few months, the council, after taking counsel's advice, terminated the contract.
The relevant clause said that the council could terminate "if the contractor … commits a breach of any of its obligations under the contract". Indeed, the default notices were not actually necessary (though they were needed if the council wanted to claim certain compensation). So, how was it that the council lost, both before the trial judge and the Court of Appeal?
A contract that provides that any breach can lead to immediate termination would be harsh, to say the least
The court accepted that it was open to parties to enter into a contract that provides that any breach can lead to immediate termination. On the other hand, it said, such a term would be harsh, to say the least. The court therefore asked itself whether, looking at matters from a "business common sense"
point of view, that was what the parties had really intended. Their view was: no, since that would mean that the same draconian consequences would apply to all breaches, however small.
Next, was the accumulation of minor breaches by the contractor sufficiently serious to warrant termination? Here, the court declined to interfere with the judge's finding on the facts. The contractor won.
Although many people would applaud the court for adopting a commercial, rather than a literal, approach to the clause, those drafting termination provisions have reason to be a little uneasy. After all, if a client wants to impose harsh termination provisions on a contractor, and believes that it can persuade a contractor to accept them, what more can be done other than to draft a clause similar to the one in this case?
Ian Yule is a partner in solicitor Wragge & Co.