Posted: 04/03/2022
Parties ending contractual relationships is an unfortunately common feature on construction projects and taking the correct legal steps to deal with it can be crucial. This article looks into the legal principles for a construction contract to be terminated by contractual notice or, alternatively, under the common law ground of repudiatory breach.
Common problems faced by contractors and employers facing a contract break include attempting to terminate contracts before discovering restrictions in the terms of the agreement or, even worse, wrongfully terminating the contract in breach of the agreement. The recent case of Struthers & Anor v Davies can be seen as a microcosm of the disputes arising out of many medium and large-scale projects up and down the country.
The five key points to be considered by contractors and employers seeking to terminate construction contracts or those parties on the receiving end looking to contest termination are:
Mr and Mrs Struthers (the employer) engaged Alastair Davies (t/a Alastair Davies Building) (the contractor) in March 2015 to carry out works to their residential home, including the construction of an extension. The completion date under the building contract was 10 August 2015 but the contractor not only failed to complete the works by then but also failed to apply for any extensions of time. The court accepted the employer’s evidence that the contractor failed to proceed regularly and diligently and did not carry out any appreciable work from 10 December 2015 onwards.
On 23 December 2015, the employer issued a notice of intention to terminate to the contractor’s home address. On 11 January 2016, the employer issued a notice of termination to the contractor by recorded delivery and email. Helpfully, the termination provisions under the contract set out grounds for termination which included abandonment of work, failing to proceed regularly and diligently, and being in material breach of the contract.
The court, however, held that this attempted contractual termination was invalid for the following reasons:
Instead, the court construed that the notice of termination, while not valid under contract, operated as an acceptance of the contractor’s repudiatory breach. The court was satisfied that the contractor’s abandonment of the works and failure to attempt to comply with his obligations sufficiently amounted to repudiatory breach.
In addition, the court was also satisfied that the contractor’s failure to proceed regularly and diligently prior to the abandonment of works also amounted to repudiatory breach. While establishing this breach can be fact-sensitive, the court highlighted the contractor’s “egregious self-caused failures” and failure to apply for any extension of time (despite being prompted to do so by both the employer and contract administrator) as relevant factors.
As applied in the above case, it is established that termination clauses are construed strictly by the wording in terms of service requirements. This was applied in the above case in respect of the party responsible for issuing a notice and the grace period permitted before a termination notice is issued. The employer in this case was also inhibited by what appeared to be a lack of a deemed service provision.
The benefit of such provisions is that a server follows specific requirements (such as a specific period of time to elapse following service) for the notice to be deemed received. In the absence of this, the server (as was the case here) has to prove that the notice was received by the recipient. There is no universal test in common law but the Supreme Court accepted in a employment termination case that deemed receipt applied in circumstances when a party has in fact read the notice or had a reasonable opportunity to do so (Newcastle upon Tyne Hospitals NHS Foundation Trust v Haywood [2018] UKSC 22). The Companies Act also helpfully sets out that deemed receipt is 48 hours after service, subject to any contractual provisions applicable.
Accordingly, while the employer was lucky to demonstrate termination by acceptance of repudiatory breach in this case, it is important to comply with any strict contractual notice obligations when terminating a contract and, in the absence of any deemed service provisions, demonstrating that a recipient had received the requisite notice.
By definition, a repudiatory breach is a breach of obligations that provides an aggrieved party the right to accept the breach and terminate the contract. A repudiatory breach is, therefore, by its nature a more serious breach which deprives an aggrieved party of substantially the whole benefit of the contract and or where a party renunciates their obligations. In the Struthers’ case, this was demonstrated primarily by the contractor abandoning the works. With respect to employers, the common example of repudiatory breach is wrongfully terminating the contract.
On the other hand, other common breaches of construction contracts are more difficult to establish as repudiatory breach. These includes contractors whose works are in delay or are defective or employers who do not make payment on time or fully. It will ultimately come down to a question of degree of the breach including the defaulting party’s competence, willingness to rectify its breach, and overall conduct. It is important to assess the relevant breach before proceeding with termination.
Finally, an innocent party may be able to rely on facts it did not know and/or refer to at the time of termination if terminating the contract is based on repudiatory breach. Again, this is the principle the Struthers relied on in demonstrating that their contractual termination notice was also an acceptance of the contractor’s repudiatory breach.
The next question is how the right to terminate for contractual breach can co-exist with the right to terminate for repudiatory breach. This goes back to the principle that repudiatory breach will have to be established as a more serious breach considering the significant consequences of a party being entitled to terminate the contract. While there is significant case law on this topic, set out below a brief summary of how the courts have considered this issue to varying extents:
Here, the developer had a contractual mechanism to terminate the contract (which it was entitled to exercise based on the contractor’s breaches) yet chose not to rely on it but instead chose to rely on alleged repudiatory breach to which it did not have entitlement.
In this case, the distinguishing feature in summary was that the employer would be entitled to retain the plant being constructed by the contractor if contractual termination was applicable but the contractor would be entitled to retain the plant if common law termination was applicable.
The court used an example of a case where, if a party explicitly states that it will not “perform the contract or acts in such a way”, then repudiatory breach has been established and thus the defaulting party does not need to be afforded a notice period to remedy its breach.
The key guidance on acceptance of repudiatory breach is set out in Vitol SA v Norelf Ltd [1996] A C 800 HL at 810–811:
“An act of acceptance of a repudiation requires no particular form: a communication does not have to be couched in the language of acceptance. It is sufficient that the communication or conduct clearly and unequivocally conveys to the repudiating party that the aggrieved party is treating the contract as at an end …”
Finally, Force India Formula One Team Ltd v Etihad Airways PJSC [2010] is also useful in setting out that a party has to elect to accept a repudiatory breach and terminate the contract or affirm the contract. Furthermore, the amount of time an innocent party is given to either terminate or affirm the contract will depend on the complexity and urgency of the situation.
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