Exterminate! The Pitfalls Of Contractual And

Common Law Termination

Presented ByJack Swadling, Associate

Contractual And Common Law TerminationPresented By:Jack Swadling, Associate Solicitor

Jack is a Solicitor specialising in construction law. He has broad hasbroad experience representing parties to construction disputesin adjudications, litigation in the TCC, mediation andarbitration.Jack regularly advises in employers and contractors duringprojects on contractual interpretation and issues relating topayment, variations, termination, delay and the allegednegligence of professional consultants and designers.Jack regularly presents seminars and lectures to the public, localauthorities, construction companies of all sizes and consultancies

Tel: 0207 167 6602 Email: jackswadling@silverllp.com

Summary• What Is Termination & Why It’s Not For The Faint Hearted!• Common Law Termination & Frustration• Repudiation & Affirmation• Termination Under The Contract - Termination ForConvenience & Termination For Cause

• Contractual Termination Under JCT Forms• Considerations During The COVID 19 Shutdown & Recent CaseLaw

Not For The Faint Hearted…• Terminating a construction contract, eitherunder a contractual procedure or at commonlaw, is perhaps the most drastic and riskyaction a party to a construction contract cantake

• If you want to make your lawyer squirm, askthem to advise whether you can terminateyour contract due to fault by the other party

• The outcome of a termination is binary and thefinancial consequences of getting it wrong canbe very substantial

Hard Fought & Risky Disputes

• Termination disputes are often very bitter, expensive and hard fought.They often arise when there has been a complete breakdown inrelationship between the employer and the contractor.

• If the party who believes it is entitled to terminate the contract gets itwrong, it is very likely that its conduct will be regarded as“repudiatory” and the other party will be entitled to accept thatbreach and claim damages.

• The swing between winning and losing a termination dispute can bevery significant. There will nearly always be a counterclaim. If theemployer wins, it will generally be entitled to recover the additionalcost of completion, which is often very substantial. If the contractorwins, then it will generally be entitled to recover losses, including lossof profit.

The Context Of Termination Disputes

• Termination disputes are also generally hard fought because in manycases, in the run up to a decision to terminate, the parties will havebeen taking legal advice including advice not only as to whether theyhave the right but also how to frame the notices, which are generallyrequired before the contract can be terminated

• Inevitably, lawyers must advise against a tight timetable andincomplete information

• Getting a termination right requires circumspection, carefulpreparation of evidence and documents and decisive action

• Getting it wrong can create a very expensive and intractable problemfor a party, even if its conduct up to the termination was otherwisebeyond repute

What Does Termination Mean?Termination can be understood as the legal process allowing a party to unilaterally bring a contractto an end

Contracts can come to an end either by:

(1) Completed Performance,

(2) Frustration – a common law remedy,

(3) Agreement,

(4) Termination under the contract before completed performance under a “termination forconvenience” or “termination for cause” provision, or

(5) Discharge by breach at common law (i.e. by repudiation and acceptance of the repudiation –this is a common law termination)

In disputed circumstances, the most frequent reason for a contract coming to an end prematurely isas a result of breach of contract by one party, which is relied on by the other “innocent party” toend the relationship

The major UK and international standard form construction and engineering contracts have a rangeof express provisions for termination that provide for how parties can contractually bring theother’s employment under a contract to an end and the consequences of taking such action.Contractual procedures bring certainty to the entitlement and consequences of terminationcompared to common law rights

Non-Contractual Rights To Terminate(1) Frustration:This occurs when neither party has defaulted on the original contract but other circumstanceshave intervened after formation to prevent the contract from being performed as originallyintended. The result must be that further performance of the contract is impossible, illegal orradically different from what the parties contemplated when they entered into the contract.

Although much has been written about frustration during the current shutdown, it is unlikelyto offer contractors an escape route from onerous construction contracts.

Case law gives examples of circumstances that are not frustrating events:• It is not a frustrating event if the contract is more expensive to perform;• it will not be a frustrating event if an event happens that is provided for in the contract,even if this prevents performance.

Standard forms of building contract allocate risk for events likely to cause delay and disruptionto projects e.g. government interventions to shutdown sites or force majeure events (ageneral term referring to unforeseeable circumstances outside parties’ control that preventperformance)If your contract makes provision for a “frustrating event” you cannot rely on common lawfrustration

Non-Contractual Rights To Terminate(2) Repudiation• Repudiation occurs when a party commits a breach of contract that is sufficiently serious that it

entitles the innocent party to treat the contract as terminated and sue for damages for breach ofcontract.

• Usually, a party would only seek to rely on common law repudiation if either the contract doesnot make express provision for termination or after the event.

• Repudiatory breach by one party does not itself bring the contract to an end; the repudiationmust be accepted by the innocent party.

• Certain extreme types of breach will amount to a clear repudiation of a construction contract.Notice of intention to accept conduct as a repudiation is still recommended. Examples ofrepudiatory breaches include:

• refusal to carry out work;• abandonment of the site or removal of plant by the contractor;• employing other contractors to carry out the same work;• failure by an employer to give access to the site.

• In the event of less clear cut conduct, if an innocent party purports to treat a contract asrepudiated because of a breach that is not in fact repudiatory, it will have committed wrongfultermination and be in breach itself.

• If there is doubt about whether a breach is repudiatory, the innocent party would be well advisedto consider exercising a contractual right to terminate, even if the scope of damages recoverablewould usually be lower than damages for repudiatory breach.

Repudiation And Affirmation

• To terminate the contract, acceptance of the repudiation by theinnocent party must be unequivocal

• Only if repudiation is accepted are both parties released fromperformance of their respective unperformed obligations

• If the innocent party does not accept the repudiation, it will instead'affirm' the contract. It is still entitled to claim damages for the breachbut the contract will continue and it will lose the right to terminate

• Difficulties can arise if the innocent party inadvertently affirms thecontract instead of accepting the repudiation by acting in a way thatcontradicts acceptance or is equivocal in some way. It may find itself inbreach of contract if it stops performing its obligations in the mistakenbelief that it has accepted the repudiatory breach

If The Innocent Party Waits Too Long To Elect…

• The innocent party to a repudiation has a choice: treat the contract ascontinuing (affirming the contract) or bring it to an end (accept therepudiation)

• The decision of whether to affirm the contract or to accept therepudiation is not easy. The courts have recognised that the innocentparty is entitled to a period of time for considering its position – notlong though. Decisive action is needed

• Whether the innocent party wishes to terminate at common law orunder the contract, the validity of the decision to bring the contract toan end will be judged at the date of acceptance

Contractual Termination• Termination clauses in contracts give parties right to terminate incertain circumstances. These most commonly deal with breaches ofspecified contractual obligations.

• There may be rights to terminate in other situations too, such as theoccurrence of a force majeure event (COVD19 perhaps) or on theoccurrence of an insolvency event

• There is an important distinction between provisions that allow aparty to terminate for cause and clauses that allow for termination atwill

Differences Between Common Law &Contractual TerminationContractual termination will differ from a common law termination intwo respects:

• First, a contractual right to terminate may be exercised even if thebreach is not of the fundamental repudiatory character. In the caseof termination for insolvency or under a termination forconvenience clause, no breach need have occurred at all.

• Secondly, a contractual termination does not automatically entitlethe terminating party to the remedies provided for by the commonlaw; the terminating party may be limited to those remediesexpressly conferred by the termination clause itself.

Termination For Convenience• Standard JCT conditions contain provisions allowing parties to terminate for

cause/default but do not termination at will. These are sometimesintroduced by main contractors under schedules of amendments.

• Other forms of contract, e.g. the FIDIC forms and the NEC3, includetermination for convenience provisions.

• Termination for convenience clauses can assist both employers andcontractors, e.g. to allow an employer to terminate if it cannot securenecessary financing or a contractor to escape if they later finds that aproject will be unprofitable or too risky.

• A contract may provide no express limitation on when, or in whatcircumstances, a termination for convenience clause may be operated.

• Case law tends to suggest that, in the absence of sufficient wording, it willbe a breach of contract to exercise a termination for convenience clausesimply for the employer to obtain a better price.

Termination For CausePoints for consideration under JCT forms:As mentioned, the JCT building contracts have termination for cause butno pure termination for convenience provisionsFor example, Clauses 8.4.2 and 8.5.12 of the Design and Build Contractprovide that:“If the Contractor continues a specified fault for 14 days from receipt ofthe notice [default notice], under clause 8.4.1, the Employer may on, orwithin 10 days from, the expiry of that 14 day period by a furthernotice to the Contractor termination the Contractor’s employmentunder this Contract…If the Contractor is Insolvent, the Employer may at any time by noticeto the Contractor terminate the Contractor’s employment under thisContract…”

Termination For Cause Under The JCT FormsThe key points arising from these contractual termination provisions are:1. Termination for cause requires the establishment of an objective fact,

e.g. the continuation of a “specified default”. “Specified default”and “insolvent” are defined terms under the contract.

2. Termination in both situations (continuing breach or insolvency)demands the observance of a notice procedure and, in the case of“specified defaults”, observance of strict time limits.

3. The JCT contract offers the contractor a 14 day cure period, duringwhich the opportunity exists to cease and/or put right the specifieddefault and thus deprive the employer of the right to terminate forthe cause specified in the notice.

Termination For Cause Under The JCT Forms

• Non-compliance with the required procedure will make thecontractual termination potentially ineffective, leading to repudiationarguments

• Special care must be taken to ensure you can prove the “specifieddefault” or necessary circumstance (e.g. insolvency), you havecomplied with the necessary notice provisions under the terminationclause and you have allowed the cure period before issuing the finalnotice. Proving a “specified default” is often hotly disputed

Termination For Cause Under The JCT FormsSpecified Defaults

Under the Design and Build Contract (which follow a very similar wording to the BuildingContract), the contractors “specified defaults” are listed under Clause 8.4.1:

• “without reasonable cause wholly or substantially suspends the carrying out ofthe Works; or

• fails to proceed regularly and diligently with the performance of his obligationsunder this Contract; or

• refuses or neglects to comply with a written notice or instruction from theEmployer requiring him to remove any work, materials or goods not inaccordance with the Contract and by such refusal or neglect the Works arematerially affected;

• fails to comply with Clause 3.7 (requirement for consent for subcontracting) orClause 7.1 (prohibition on assignment);

• fails to comply with Clause 3.25 (CDM Regulations)”A terminating party must take special care to ensure it can prove the “specified default”

JCT Termination Provisions During The COVID19 Lockdown• A force majeure event could suspend performance of some or all of thecontractual obligations of any party affected by the event

• Should the Government be pushed to exercise statutory powers to, for example,force the shutdown of construction sites, this act also has the effect of"suspending" performance of the works: Clause 8.11 of the un-amended JCTStandard Building Contract provides for termination by either party by reason offorce majeure or if works are stopped by reason of statutory power

• Under the JCT, the right to terminate will arise if the carrying out of the wholeor substantially the whole of the uncompleted works is suspended for theperiod set out in the contract particulars, which is two months in an un-amended contract

• If the period is suspended due to a force majeure event, either party is entitledto notify the other that, unless the suspension ceases within seven days ofreceipt of the notice, the contractor's employment may be terminated on theservice of a second notice (which is given upon the expiry of the first noticeperiod)

A Recent Example Of Termination Gone Wrong!

• The issue of termination has recently arisen in thecase PBS Energo A.S v Bester Generation UK Ltd[2020] EWHC 223 (TCC)

• Both parties alleged a valid entitlement toterminate, with both parties serving notices oftermination. The Court was concerned as to whichnotice of termination was effective and valid

• PBS sought to terminate on the basis of a lack ofpayment for a particular milestone

• The Court found that’s PBS’s entitlement to terminate under the had not arisen• In contrast, Bester issued its own contractual notice of termination based on PBS’sfailure to comply with a Notice to Correct, substantial breaches of the Subcontractregarding ongoing delay with the civils design (amongst others) and an abandonment ofthe works – evidenced by the issuance of the PBS notice of termination

• The Court found that there was no need to consider common law repudiation. Thecontractual notice and its grounds were sufficient and the termination was valid

Don’t Be A Dalek!Concluding thoughts:1. Whether under contract or common law, termination of a

contract is risky and likely to result in a heated dispute2. Termination warrants careful preparation - record keeping is

key3. Contractual provisions offer more certainty but proving the

necessary facts can still be challenging4. Knowledge and use of contractual notices of intention to

terminate can be a useful strategic tool to compel action, evenif this is not followed through

CONCLUSION

QUESTIONS?jackswadling@silverllp.com

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