Essential law: Termination, part one

In these inflationary times, both contractors and employers may find themselves searching for a way to escape unhappy contracts. Termination is a common cause of high-stakes disputes, with each party blaming the other and claiming damages. It is notoriously difficult to predict which party’s interpretation of the facts will be favoured by a court or adjudicator, whose ultimate judgment may turn on a clinical analysis of ill-tempered correspondence, hastily written in the heat of the moment. Therefore, before seizing an apparent opportunity to terminate a contract, you should consider your strategy carefully.

This is the first in a series of articles on termination and will focus on repudiation.

In addition to any contractual termination rights (to be considered in later articles), there is a common law right to terminate where the other party has committed a sufficiently serious breach of contract. This is known as a repudiatory breach and gives the wronged party the right to choose whether to affirm or end the contract.

>>See also: Force majeure in the context of war

>>See also: Designing conflict avoidance into contract terms

If you want to terminate, it can be necessary to rely on an alleged repudiatory breach at common law if your reason for terminating does not fall neatly into any of the contractual termination provisions or you do not have time to strictly follow the contractual notice provisions.

Potential repudiatory breach

There are a number of situations which could potentially amount to a repudiatory breach by either the employer or the contractor during a construction project:

Failure to make payment

A single late payment by the employer is unlikely to justify termination at common law. However, a continued and unjustified refusal to pay could be repudiatory. As always, much will depend on the specific circumstances, and there are likely to be more certain contractual consequences for non‑payment, such as a right to suspend the works.

Preventing the contractor from completing the works

If the employer renders completion impossible by, for example, ejecting the contractor from the site, this will usually constitute repudiation. In addition, the employer cannot generally reduce the contractor’s scope of work just to have that work carried out by a third party. A good example is provided by the case of Sweatfield Ltd vs Hathaway Roofing Ltd. Here the main contractor, concerned that work was falling behind schedule, instructed other workmen to carry out part of a subcontractor’s work. This was held to be a repudiatory breach of contract by the main contractor, entitling the subcontractor to damages.

Failure to progress the works

If the contractor abandons the site or completely refuses to carry out any further works without a good excuse, this will almost certainly be a repudiatory breach. However, mere delay is unlikely to be sufficient unless the contract states that time is of the essence. Even a complete failure to attend site for several days may be insufficient to evidence an intention by the contractor to repudiate the contract if, for example, it has retained some plant and equipment on site.

Defective work

The defects must be serious enough to show that in all the circumstances the contractor does not intend to or cannot substantially perform its contractual obligations. The court is likely to permit some “temporary disconformity” on the basis that a degree of defects will inevitably arise during a construction project. Provided that the contractor appears able to put these defects right in a timely manner, termination by the employer is unlikely to be justified save in the most extreme examples.

Insolvency of the contractor

While there will usually be a contractual right to terminate if the contractor becomes insolvent, at common law insolvency may not necessarily be sufficient to show that the contractor cannot perform its obligations as, for example, the administrator may be willing and able to arrange the completion of the contract.

Anticipated non-performance

An anticipatory repudiatory breach may also arise in advance, if the defaulting party clearly shows from its words or actions that it does not intend to perform the contract in the future.

Alternatives to repudiation

Save for very clear-cut circumstances, it is usually risky to rely on an alleged repudiation. It is difficult to be certain that a future court or adjudicator will agree with you.

If a contract term is expressly described as a condition, then this may be a strong indication that the parties intended any breach to allow termination. However, in building contracts there is usually more ambiguity, and the consequences of a breach are likely to depend on the commercial significance of the clause, the nature of the breach and the potential consequences. This leaves plenty of room for argument and uncertainty. It is therefore far safer to rely on the contractual termination clauses if you can.

Andrew Keeley is a partner at Charles Russell Speechlys