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Relationships that are not ended properly nearly always end in a mess, and construction contracts are no exception. If you are going to terminate a construction contract, make sure you do it strictly in accordance with the terms of the contract.

Most construction contracts contain specific provisions allowing for termination of the contract for specified reasons (for example poor performance, failure to proceed diligently with the works, insolvency etc). But it is crucial to remember that termination under a provision like this will only be effective if the contractual mechanism for termination is strictly followed. Most typically, the party terminating the contract must give the other party prior notice in writing, giving the defaulting party a certain amount of time to remedy the breaches (a default notice). If that notice is not given, then the termination will not be valid.

The trouble is that in the hurly-burly world of construction, the party attempting to terminate the contract either forgets to give the notice, or does not give sufficient notice under the terms of the contract (e.g. sends the notice by email, instead of by letter). An oversight like this will mean that the termination is invalid, which will have serious knock-on effects for the terminating party, as it will in all probability face a claim for wrongful termination, and the losses that arise from that (the principle loss being loss of profit, which can be very substantial).

However, all is not lost where a party fails to validly terminate the contract in this way. As well as having an express contractual right to terminate the contract, the party may have a “common law” right to terminate the contract. This is a right that arises where a party commits a breach of contract that is so serious that it entitles the other party to terminate. This is known as a ‘repudiatory breach’.

It is far harder to terminate a contract for a repudiatory breach, mainly because there are always arguments as to whether the breach is sufficiently serious to be a repudiatory breach. A recent High Court decision[1], however, may mean that it is slightly easier to terminate a contract for repudiatory breach.

In this case the defendant, Enterprise, purported to terminate its contract with C&S. It could have terminated the contract under an express termination provision in the contract. Unfortunately, it did not issue the requisite default notice first. It therefore had to argue that it had terminated the contract for repudiatory breach.

The difficulty for Enterprise was that none of the breaches that it was basing its termination on were, taken on their own, sufficiently serious to constitute repudiatory breaches. So Enterprise had to argue that taken together, they constituted a repudiatory breach. There was no previous case law on this point, and of course C&S argued that the breaches had to be looked at on their own.

So it was very interesting that the High Court decided that  it was possible that a series of breaches, taken cumulatively, can constitute a repudiatory breach, even if the breaches, taken on their own, cannot. It also made the following findings in respect of arguments that parties attempting to terminate a contract at common law frequently come up against:

  1. Just because a party has an express contractual right to terminate a contract, does not mean that it cannot terminate the contract at common law.
  1. A party who terminates a contract but gives a wrong or inadequate reason (or even no reason at all) when it tries to terminate the contract can later justify its termination if at the time of termination there were facts in existence that would provide a justification. This, of course, is good news for a party that issues an invalid termination notice and then wishes to rely on a breach that was not specified in the termination notice.

This is undoubtedly good news for any party that finds itself trying to terminate a contract at common law. Yet despite this helpful decision, it is still the case that it is far harder to terminate a contract at common law, not least because showing that the breach or breaches are sufficiently serious enough to justify termination is a very high hurdle. In short, the message is still the same- end it properly!

 

For more information, email blogs@gateleyplc.com.

[1] C&S Associates UK Limited v Enterprise Insurance Company Plc


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.