24 May 2022
Under construction - May 2022 – 2 of 5 Insights
Contractual rights to terminate construction contracts are valuable. But, failing to correctly exercise the right to terminate under the contractual notice provisions can run the risk of an invalid termination. A recent TCC case highlights the difficulties faced when serving termination notices.
The case concerns an action by homeowners (the Claimants) against their building contractor (the Defendant) and their Architect/Contract Administrator (though this latter claim was settled before the hearing). The action concerns a claim for damages for the Defendant's alleged defective and incomplete work at the Claimants' property. In assessing whether the Claimants were eligible to damages, the court explored the termination provisions to ascertain whether termination had been effective, before considering whether the Defendant was in repudiatory breach.
The Claimants engaged the Defendant as the building contractor at their property in Surrey, under a contract dated 31 March 2015. The completion date was set for 10 August 2015, but despite the works going into delay, no applications for extensions of time were made. Following periods of minimal work, the Defendant ceased works on 10 December 2015. The Claimants issued a Notice of Intention to Terminate on 28 December 2015 followed by a Termination Notice on 8 January 2016. Following this, the Claimants engaged an expert inspector to assess the Defendant's works and a replacement contractor to remediate and finish the works.
The contractual notice provisions provided for two notices to be issued for termination by the Claimants where the Defendant contractor was in breach of contract, or where the Defendant had failed to proceed regularly and diligently with the works or had abandoned the works.
The first notice, the Notice of Intention to Terminate, was to be issued by the Contract Administrator, following which, the Claimants could issue a second notice, a Termination Notice, should there be no remediation of the default within 14 days.
The issue before the court was whether the termination notices were correctly served. The difficulty for the Claimants was that the Notice of Intention to Terminate had been issued by the Claimants, as the employer, and not by the Contract Administrator as provided by the notice provision.
The court held that the contractual termination was in fact invalid as the contract provisions required the Contract Administrator to issue the Notice of Intention to Terminate and the Termination Notice had not been issued 14 clear days after the Notice of Intention to Terminate had been issued.
There were also issues about if or when the Notice of Intention was received by the Defendant.
The judge went on to consider the effect of the (invalid) Termination Notice. The court was satisfied that the Defendant's "litany of failures" such as refusal to purchase materials for the works, using materials the Claimants had paid for on another job, failing to progress the works, and confirming the Defendant would and could not progress the Claimant's works until finalising other clients' works amounted to a repudiatory breach. The Termination Notice was construed as an acceptance of the repudiatory breach, albeit that it was not a contractually valid notice.
This case is a reminder that termination provisions are construed strictly by the courts and therefore any contractual procedures to affect termination must be followed absolutely. Particular attention should be paid to the parties' roles and timeline in effecting termination.
This take-away applies to those operating the termination provisions under unamended JCT 2016 contracts. The JCT provisions are detailed and prescriptive and should be operated with care. Always check that the circumstances do in fact give rise to the right to terminate and follow the contractual notice provisions precisely. Notice provisions should also not be used "unreasonably or vexatiously".
The right to terminate is not always straightforward. Getting termination provisions wrong can be risky since attempting to bring a contract to an end without having the right to do so can in itself amount to a repudiatory breach entitling the other party to accept that breach and claim damages.
This article was written by Kachenka Pribanova