Essential law: Termination, part four

Projects will sometimes go wrong and situations arise where a party wishes to terminate a contract – for example, a contractor is not performing as it should, and so the employer wishes to engage a different contractor to finish the job.

An employer generally has two potential routes to terminate the contract, either for:

• A repudiatory breach (at common law). This is where a breach is sufficiently serious to deprive the innocent party of substantially the whole benefit it was to obtain under the contract. This can be quite a high bar. A party will generally have a common law right to terminate for a repudiatory breach unless excluded by clear words in the contract.
• By exercising a contractual right to terminate. The right to terminate and the consequences will depend on what is set out in the contract.

Can you do both?

To cover all bases in an attempt to ensure that the termination is valid, an employer may consider seeking to terminate a contract for a repudiatory breach and by exercising its contractual rights to terminate in the alternative at the same time.

The risk is that when an innocent party is faced with the opportunity to terminate for a repudiatory breach, it has two options at common law:

• Accept the repudiatory breach and terminate the contract.
• Affirm the contract as continuing, thereby waiving any rights to terminate for the repudiatory breach.

Further, the “innocent party” should clearly communicate its choice to terminate for a repudiatory breach.

>>Also read: Essential law: Termination, part three

>>Also read: Essential law: Termination, part two

>>Also read: Essential law: Termination, part one

There is therefore an argument that by trying to terminate in accordance with the contractual terms, the innocent party affirms the contract, thereby making it impossible to terminate for a repudiatory breach.

This could lead to a position where the innocent party is found not to have terminated properly and so is itself in repudiatory breach, exposing it to a termination by the other party and a claim for damages.

Is there a solution?

Case law suggests that it is possible to seek both to exercise a contractual right of termination and to terminate for a repudiatory breach.

For example, in Thomas Barnes vs Blackburn with Darwen BC, the employer had sought to terminate a building contract in accordance with the contractual terms and under the common law for a repudiatory breach in the alternative. The court held that although the purported termination under the common law was invalid (as the relevant notice provisions had not been complied with), the acceptance of the repudiatory breach was still valid.

There is therefore an argument that by trying to terminate in accordance with the contractual terms, the innocent party affirms the contract, thereby making it impossible to terminate for a repudiatory breach

The court also considered whether the employer’s failure to terminate the contract in accordance with the contract was itself a repudiatory breach. It held that where the party had in fact no right to terminate, a purported termination on an erroneous basis would normally be a repudiatory breach by the innocent party. However, the court also held that the ineffective contractual termination was not repudiatory as the employer was entitled to terminate and had communicated its decision to do so before it excluded the contractor from the site (just not in a legally effective manner).

However, it may not always be possible to ride both horses in this manner. In particular, where the consequences of a contractual termination and termination for a repudiatory breach are inconsistent (which they were expressly found not to be under the JCT form used in Thomas Barnes vs Blackburn with Darwen BC). In that scenario the innocent party should make clear which one of the rights is being exercised, and it arguably cannot exercise one right while reserving the other inconsistent right.

In theory, this may sound simple. However, precisely determining whether the consequences are inconsistent will require legal analysis.

The court recently made clear in Havila Kystruten AS vs Abarca Companhia De Seguros SA that this “area of the law of contract may still be developing, and a number of points may yet remain unresolved (such as the precise circumstances in which a party can validly rely simultaneously on both the common law right and an express contractual right, bearing in mind the degree of difference between the consequences; and the position where a termination notice is unspecific as to the reasons for terminating).”

Conclusion

When faced with the opportunity to terminate, an innocent party should not simply say it is “terminating” the contract, but should instead carefully consider whether it is terminating under the contract, for repudiatory breach, or for both reasons in the alternative – there may be risks in all approaches. The innocent party can then seek to terminate in the safest and most advantageous manner.

Patricia Nathan-Amissah and Mark Barley are associates at Charles Russell