Continuing on the topic of termination, as part of our essential law series, Carolyn Davies discusses the importance of following the contractual procedure breach
Our first article on termination considered where particular actions may amount to a repudiatory breach and therefore entitle the wronged party to terminate (or affirm) the contract under common law.
However, most construction contracts will also include specific provisions about when parties can terminate, what procedure must be followed, and the consequences of termination. But what if that procedure is not followed?
The contractual mechanism
Common grounds for termination in a contract include an ability to terminate for the other party’s material breach or insolvency and other specified grounds such as a failure by a contractor to proceed regularly and diligently with the works.
The contract will usually contain a mechanism for effecting such termination. For instance, the terminating party may be required to issue notices in a particular form, to a particular person at a particular address, or using a particular method of delivery, such as by hand or special delivery.
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The contract is also likely to set out the consequences of termination, such as the basis for assessing the final account and practical measures such as vacating the site and providing documentation to the employer. The consequences of termination can be different depending on who is terminating and what ground of termination is relied upon.
No right to terminate
The first point to consider when reviewing whether or not a contract has been wrongly terminated is whether the contractual ground for termination relied upon (such as material breach) is valid. In the context of material breach, this question needs to be considered in light of the nature of the breach and the impact of that breach on the wronged party.
If the party purporting to terminate does not have a valid right to do so (say, because the other party is not in fact in material breach) then the purported termination will usually amount to a repudiatory breach because the notice of termination demonstrates an unjustified intention to stop performing the contract.
If the party purporting to terminate does not have a valid right to do so then the purported termination will usually amount to a repudiatory breach
The other party could then potentially accept the repudiatory breach and claim its losses arising from the termination. The party purporting to terminate would then go from having its own claim for losses arising from the termination (for example, if it is an employer, the extra costs of employing a third party contractor to complete the works) to facing a claim from the other party for the losses it has suffered as a result of the termination (for example, if a contractor, the loss of profit it could have made had it finished the job).
Following the termination procedure
The next point to consider is the mechanism by which the contract can be terminated.
If the termination notice contains a mistake, it may still be valid if it is sufficiently clear and unambiguous and complies with the contractual requirements.
If there is a failure to follow the contractual procedure (such as not allowing the cure period to expire before purporting to terminate), the court’s starting point will usually be that this is a wrongful termination amounting to a repudiatory breach.
However, there are occasions when the courts have found there has been no repudiation by a party trying in good faith to enforce its supposed rights under the contract. The question depends not on that party’s intention or beliefs, but on whether its acts and words showed an intention not to be bound by the contract.
The question depends not on that party’s intention or beliefs, but on whether its acts and words showed an intention not to be bound by the contract
For example, in the recent case of Thomas Barnes vs Blackburn and Darwen Borough Council, the council had sent the termination notice by email and post. The same date that the termination notice was emailed and put in the post, Thomas Barnes was removed from site. Only posting (and not email) was a valid method of service under the contract, but it was not deemed served until two business days later. The court therefore had to consider whether the earlier removal from site was a repudiatory breach. It decided it was not, because (a) the council had a right to terminate, (b) Thomas Barnes had already ceased all meaningful activity on site, (c) Thomas Barnes knew that termination was justified and that the council was intending to terminate the contract, and (d) there was no adverse impact on Thomas Barnes being removed from site two days earlier than it would have had to leave anyway.
However, a word of warning: termination clauses are often strictly construed and even a seemingly minor breach can be found to lead to an invalid termination such that the terminating party is found to be in repudiatory breach.
It is therefore vital that parties carefully review the termination provisions (including the notice provisions that are often in a separate part of the contract) and strictly comply with them to avoid any arguments regarding the efficacy of the termination and unexpected counterclaims for loss of profit.
Carolyn Davies is an associate at Charles Russell Speechlys