Construction projects: termination without tears

Construction projects like many things in life are rarely perfect and for all types of reasons can go horribly wrong.

Termination, unless circumstances are such that it “naturally” arises through insolvency or similar, is a bold move, but if it presents itself as the only practical commercial option, if taken, it needs to be carefully managed.

Contractual termination broadly falls into two categories, default and non-default. Non-default provisions (often referred to as termination at will) may permit a party to a contract to terminate the employment of another party or its own engagement following a specified period of notice or upon the occurrence of a particular event. These kinds of provisions are attractive as, notwithstanding any performance issues or potential claims, they allow a party to end contractual relations without having to prove breach of contract.

Termination for default, as the name suggests, requires the terminating party to demonstrate breach. The threshold for proof of breach of contract is high and brings with it the risk that, if challenged and if it cannot be proved to the satisfaction of an adjudicator or the courts, the terminating party could itself be found to have repudiated or wrongfully ended the contract and be liable for damages.

An additional difficulty with termination for default is that proving a breach takes time and incurs costs. A party may be dissatisfied with the other’s performance, but will usually need sufficient time to collate evidence of the breach to be able to substantiate it. There is also the risk that it may have waived its rights in respect of the breach and affirmed the contract if it takes too long considering its position. As a result, provided the terms of the contract are followed to the letter, non-default termination or termination at will, if a contract option, would be a lower-risk option than termination for breach/default.

However, if that route is chosen, it is crucial to be aware that if there are substantial losses that may arise specifically from the resulting termination, those claims will not be allowed if the termination is effected for non-default/at will. This was confirmed by a recent Commercial Court judgment, Phones 4U Limited vs EE Ltd.

In that case, Phones 4U and EE entered into an agreement under which Phones 4U was to sell EE mobile phone contracts. After suffering various commercial setbacks, Phones 4U received a notification from EE that it would not be renewing the agreement after its expiry the following year. Phones 4U entered into administration and its business and trading were subsequently suspended indefinitely. EE then sent an email to Phones 4U indicating that it was terminating their agreement for insolvency (which their contract allowed it to do) and a termination letter to this effect followed shortly afterwards.

A dispute arose about the consequences of the termination and EE alleged that Phones 4U was in breach of its key obligations under the agreement to market and sell EE’s services. EE counterclaimed for damages against Phones 4U for a loss of bargain on the basis that the breach by Phones 4U had caused damage to its business and significant further damage would be caused for the foreseeable future. Phones 4U contended that there could be no loss of bargain claim for EE as it had terminated under the non-default provisions in the contract.

The judge held that EE had expressly and lawfully terminated under the express non-default terms of the agreement, not for a default/breach event, and therefore could not claim damages for loss of bargain on that basis. In addition, even though EE’s termination letter included a proviso that EE did not waive any breaches and reserved its rights generally, the judge found that “a right merely reserved is a right not exercised”, which meant that EE’s claim for damages and loss of bargain was dismissed.

While this is a commercial, rather than a construction case, it reminds us that although a claim for previous breaches (such as for defective works) should not be affected, the consequences of electing a position on termination can be serious and should be considered very carefully. The use of a seemingly innocuous termination provision allowing termination at will effectively slammed the door shut on a claim for damages arising from that breach that may have been otherwise legitimate. This resulted in protracted and expensive litigation.

If your contract allows you to terminate for non-default/at will, but you believe that a substantial claim (like a loss of bargain) could arise from termination which you wish to preserve, the termination notice must be consistent with that. Some commentators are of the view that this issue can be addressed in the notice itself but the judge’s comments in Phones 4U do not support the view that you could successfully terminate for non-default and then reserve your rights for a default termination, thereby hedging your bets. Adding wording reserving your other rights is a common approach, but in circumstances where you have lawfully terminated the contract for specific non-default grounds then reserving your rights in respect of a default termination will be largely irrelevant.

The headline message here is to seek legal advice if at all possible before initiating termination. There is no “one size fits all” wording that lawyers can recommend and the approach must be tailored to your specific circumstances. You should also consider the wording of your contracts to ensure that you have anticipated the grounds that might give rise to termination and the consequences flowing from those circumstances. While clearly it is eminently sensible for employers/clients to include non-default options in contracts, Phones 4U is a useful reminder that operating the non-default option, as with any termination, needs to be used with caution.