Blog Author: Simon Tolson – senior partner, Fenwick Elliott LLP
Termination of a contract is a serious measure that should only be engaged in cases of fundamental breaches, after exhausting all possible preventive measures. When courts interpret termination clauses, they acknowledge the severe consequences, deeming it a draconian remedy that ends the contract with significant repercussions. Over time, legal principles have evolved to prevent accidental terminations.
The process requires careful consideration and legal advice, it is often referred to by lawyers as the ‘nuclear option.’ This underscores the complexity and potential pitfalls associated with exercising the right to terminate. Understanding the key terms of the contract and following the necessary steps are crucial in navigating this legal minefield. As practitioners, we are often asked to advise our clients about this area of the law.
The traditional judicial approach emphasises the sanctity of contracts, rooted in the Latin maxim “pacta sunt servanda,” meaning agreements must be kept. This commitment is based on the moral principle that a promisor, by making a promise, creates a reasonable expectation that it will be fulfilled. Parties to a contract are generally obliged to perform their respective duties unless legally excused.
Despite termination being a powerful self-help remedy allowing a party to exit an agreement and mitigate losses, it is not without risks as it is a complex process fraught with legal, financial, and logistical challenges. In my Povey paper I found drawing parallels with the Terminator movie can provide a metaphorical lens to explore the intricacies of contract termination!
At the start it is important to identify all possible termination rights, and to carefully select which one to deploy. The right to terminate can be easily lost if the correct steps are not taken at the correct time. Furthermore, if a party purports to end a contract when it does not have the right to do so, it can make that party liable for the other party’s losses arising from the wrongful termination.
The principal way contracts are brought to a premature end is when one party does not perform the major primary obligations on their side of the bargain. As a rule, if a breach is modest the other party must still proceed and perform their obligations, but will then be able to claim compensation, or a “secondary obligation” from the party in breach.
If, however, the breach is very material, i.e. a “fundamental” one or that hackneyed legal phrase goes “to the root of the contract”, then the innocent party gets the right to elect to terminate their own performance for the future. The same goes where one party makes clear they have no intention of performing their side of the bargain, in an “anticipatory breach or repudiation”, so the innocent party can go straight to court to claim a remedy, rather than waiting until the contract’s date for performance which never arrives.
A termination for default i.e. doing something wrong / culpable will always require a substantive factual case to support the grounds for termination – it is not enough to simply point to a ground of termination; the terminator should be able to identify cogent evidence which supports its decision, if it cannot it is in trouble.
Termination clauses in most building contracts will set out the express grounds upon which a contract may be ended/terminated.
As termination is often so ‘nuclear’ I always caution my clients to first undertake an options analysis and to brainstorm it, before terminating to consider the alternatives to doing so, is there a viable alternative to termination?
- Consider whether they want the relationship to end, or whether to continue with the contract but reserve the right to claim damages for any breach.
- Where the relationship between the parties is still intact, a ‘line in the sand’ type settlement and a variation to the terms which are causing the problems (such as amending the payment terms or scope) may restore order.
- Maybe ad hoc descoping or resequencing is possible. Possibly omission of a section of the Works?
Hitting the preverbal red button should be a last resort.
We have had ten blockbuster decided cases in this hot field of the law in the last 18 months. They are all compulsive reading.
- Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd  EWHC 3275 (TCC)
- Thomas Barnes & Sons v Blackburn with Darwen Borough Council  EWHC 2598 (TCC)
- Struthers & Anr v Davies (t/a Alastair Davies Building) & Anr  EWHC 333
- Manor Co-Living v RY Construction  EWHC 2715 (TCC)
- Topalsson v Rolls-Royce Motor Cars Ltd  EWHC 1765 (TCC)
- James Kemball Ltd v “K” Line (Europe) Ltd  EWHC 2239 (Comm)
- Lombard North Central Plc v European Skyjets Ltd
- Bellis v Sky House Construction Ltd  EWHC 1473 (TCC)
- Dalton Group Limited v City of Edinburgh Council  CSOH 4
- C&S Associates UK Ltd v Enterprise Insurance Company plc  EWHC 3757 (Comm)
Each deserves a brief mention, but space permits I deal with only five briefly. To wet your whistles.
Energy Works (Hull) Ltd v MW
Energy Works (Hull) Ltd entered a contract with MW High Tech Projects UK Ltd to build an energy-from-waste plant in Hull, leading to challenges and delays. The termination of the contract after 11 months resulted in a detailed 264-page judgment by Mr Justice Pepperall. The judgment addresses practical risks, contractor reporting obligations, and legal issues in construction, emphasising the lack of a contractor’s inherent right to suspend works. It applies principles from a previous case to reinforce the enforceability of liquidated damages provisions. The court emphasises the need for clear language to override common law rights and notes the right to terminate for a repudiatory breach. The case also explores the legal effects of assignment in a termination scenario.
Thomas Barnes & Sons v Blackburn
In Thomas Barnes & Sons plc v Blackburn with Darwen Borough Council, a construction dispute over a new bus station, BDBC terminated Barnes’ contract due to cost increases and delays. Barnes, in administration, claimed BDBC’s actions caused it to fail. Despite issues with the termination notice both its manner of service and timing, the court ruled BDBC rightfully accepted Barnes’ own repudiatory breach. The judge dismissed Barnes’ claim, citing BDBC’s entitlement to terminate, offsetting potential claims with recovery from the replacement contractor’s cost. The court didn’t address Barnes’ claim quantum.
However, the issue for BDBC was that the termination notice was initially sent by email, which was not a permitted method of service for notices under JCT SBC clause 1.7.4, and Barnes was removed from the site the very same day. The notice was subsequently sent by post but, pursuant to the contract, deemed service took effect two business days later by which time Barnes had already been removed.
The court dismissed Barnes’ argument that the invalid termination notice constituted repudiatory breach by BDBC. Consequently, BDBC was entitled to recover and set off the replacement contractor’s cost, extinguishing any potential claim by Barnes. Given these circumstances, the judge deemed it unnecessary to consider the quantum of Barnes’ claim. This judgment is a valuable lesson on the importance of carefully drafting and serving a termination notice – had BDBC got it right from the outset, it’s possible this claim might never have been brought.
Struthers & Anr v Davies
The Struthers case also underscores the crucial need for strict adherence to contractual termination procedures in construction contracts. Under a RIBA Domestic Building Contract, Mr. and Mrs. Struthers terminated their contract with builder Davies due to delays and non-compliance. However, the termination notice, sent by the employer instead of the contract administrator, was deemed invalid. The court all the same found Davies in repudiatory breach for various failures, and despite the improper contractual termination, it held that the notice operated as acceptance of the breach. This case emphasises that any deviation from the correct termination process may render it invalid, risking potential damages for the terminating party. It serves as a reminder to carefully follow contractual termination procedures to avoid unintended consequences.
In this case the Claimants were saved from their error on termination by the Defendant’s repudiatory breach, but that secondary argument is unlikely to be available to many Claimants. Otherwise, a failure to terminate the contract correctly may itself constitute a repudiatory breach and expose the Claimant to a claim for damages by the Defendant. So if considering how to terminate a construction contract, make sure to read the contract termination procedure carefully.
Manor Co-Living v RY Construction
The case serves as a reminder that parties need to carefully follow the contract when it comes to termination notices, otherwise their conduct could inadvertently lead to repudiatory breach of contract.
In this adjudication enforcement case, the termination of the contract failed due to premature notice action, highlighting the critical importance of serving termination notices correctly. Under JCT SBC 2016, a termination notice was sent prematurely by the contract administrator, not the employer, and the contractor was locked out from site before effective notice. The dispute arose from an attempt to terminate based on insolvency and failure to proceed regularly and diligently. Of supporting the adjudicator’s decision deciding the termination was invalid, the court in the Part 8 proceedings held the termination was indeed invalid, emphasising the risk of inadvertent repudiatory breach if termination procedures are not diligently followed. The case yet again underscores the need for careful adherence to contractual termination processes.
Topalsson v Rolls-Royce Motor Cars
In this TCC case, Rolls-Royce (RR) and Topalsson, a software company, entered a Service Agreement for a digital visualization tool. Topalsson failed to meet milestone dates, leading RR to terminate the agreement. Topalsson challenged the termination, claiming the December Plan dates weren’t binding and affirming the contract. By as the court was to decide choosing to affirm the contract in response to RRMC’s first termination notice, Topalsson had waived RR’s breach of invalidly terminating the contract. Therefore, RRMC had managed to evade committing a repudiatory breach itself.
RR issued a second termination notice, and this time Topalsson accepted the alleged repudiatory breach, stopping work. In court, RR was found to have validly terminated the agreement, with time being expressly of the essence. Topalsson’s failure to meet milestones constituted a breach of condition, allowing RR to terminate. The court awarded damages to RR, emphasising the critical role of timely performance in agreements with explicit termination provisions for delays.
The court agreed and found time was of the essence. That meant that timely performance was a condition of the Agreement and that any delay goes to the root of the contract, no matter how small or trivial the breach. Topalsson’s failure to meet the agreed milestones amounted to a breach of condition which entitled RR to terminate either under the Agreement or at common law for repudiatory breach. The case provides valuable insight into the interpretation of contractual obligations, especially with regard to project timelines, conditions, and the grounds for contract termination.
In my Povey lecture last November themed, ‘The Terminator’ I made the point that terminating construction contracts can be seen as akin to a Terminator movie plot, involving high stakes and complex consequences, as these five cases show. Like the Terminator’s pursuit, termination is not taken lightly in construction, often triggered by missed deadlines, mirroring the relentless Terminator.
Termination clauses act as powerful tools, much like Skynet in Terminator, the all-powerful artificial intelligence in the Terminator series, but now with deeper meaning given the direction of AI for real. These clauses typically outline the circumstances under which either party can terminate the contract and the associated consequences.
Common grounds for termination include prolonged delays, refusing to follow instructions, material breaches of design and or workmanship, insolvency, or failure to perform according to performance or specified standards. Contractual procedures must be followed to avoid legal entanglements, similar to Terminator’s pursuit leading to collateral damage. Rare as hen’s teeth they may be but force majeure events, acting as vulnerabilities, may impart legal escape routes for termination, paralleling the Terminator’s vulnerabilities.
Therefore, force majeure events may provide a way for parties to exit the contract without facing the usual consequences of termination. Termination can be a strategic move for self-preservation, protecting interests amid unforeseen obstacles.
Legal battles post-termination, resembling Terminator’s relentless pursuit, involve disputes over compensation and resources. Managing termination intricacies, much like navigating time travel complexities in Terminator, is crucial for project managers. Technology, as in Terminator’s emphasis on advanced weaponry, aids in efficient termination through digital tools and project management software. Overall, termination requires a strategic approach to minimise collateral damage and pave the way for a new beginning, mirroring the Terminator series’ epic battles.
To view Simon Tolson’s Povey Lecture, please go to: https://corporate.jctltd.co.uk/povey-lecture-2023/