19 December 2022
Under construction - December 2022 – 3 of 5 Insights
A recent case illustrates the difficulties that can arise when a contractual termination process is not followed correctly. As we have previously discussed, contractual termination clauses are a valuable right which enable a party to bring a contract to an end, usually on the service of notice on the other party. Parties need to exercise such rights with care since the consequences of getting it wrong can be serious. A premature or wrongful contractual termination is likely to amount to a repudiation of the contract under common law, with the resultant risk of a claim for damages from the other party.
The employer, Manor Co-Living, sought to terminate RY Construction's engagement under a JCT Standard Form Building Contract 2016 with bespoke amendments, to carry out certain works at Clare Hall Manor.
The default notice required under clause 8.4.1 of the contract was served by the Contract Administrator on 11 November 2021, identifying certain defaults and warning of the intention to terminate if those were not remedied within 14 days. This notice replaced an earlier notice given on 4 November.
By letter dated 30 November 2021 sent under cover of an email dated 1 December 2021, the contract administrator purportedly terminated the contract with immediate effect in accordance with clause 8.4.2 of the contract due to the failure by the contractor to remedy the defaults in default notice. The covering email pointed out that the employer had arranged for security for the site and asked the contractor not to attempt to gain access without prior arrangement.
The contractor commenced an adjudication to challenge the validity of the termination notice:
Additionally, the contractor claimed that the employer's actions in changing the locks on the site and failing to allow access to the contractor amounted to a repudiatory breach of contract by the employer, which the contractor had accepted.
The adjudicator decided on the merits that the employer had prematurely tried to terminate the contract before the expiry of the 14-day period in clause 8.4.2; that the employer was in breach of contract in preventing the contractor from accessing the site, and that this amounted to a repudiatory breach which the contractor had accepted.
The employer then challenged the validity of the adjudicator's decision in Part 8 proceedings on the grounds that the adjudicator lacked jurisdiction since they had breached natural justice in failing to take into account the employer's argument that the employer also had an entitlement to terminate at common law for the contractor's repudiatory breach, or that the employer's (ineffective) termination notice amounted to an acceptance of the contractor's common law repudiatory breach.
The court upheld the adjudicator's decision finding that the adjudicator had not breached natural justice in reaching its decision. The question of common law termination was not outside the adjudicator's jurisdiction because it had been raised by way of a material defence by the employer. However, the adjudicator had dealt with the issue "head on" and rejected the contention that the termination letter constituted an acceptance of repudiatory breach by the employer and therefore concluded correctly that it was not necessary to hear whether the contractor had shown repudiatory conduct.
Manor Co-Living v RY illustrates the need to ensure that the correct procedure is followed when seeking to terminate. This involves giving the other party the requisite time to remedy any alleged defects if the contract provides for this; and also ensuring that the relevant notices are sent to the correct address. In the case of JCT contracts, notices will also need to comply with the provisions of clause 1.7 and be served by hand or pre-paid post to the address set out in the Contract Particulars, or if that address is not current to the registered or principal business address. This point was also made clear in a further TCC decision, Thomas Barnes & Sons v Blackburn with Darwen Borough Council (2022), where the fact that the termination notice was delivered to site invalidated a contractual termination notice, the court noting that "nothing less or different" than strict compliance with clause 1.7.4 would suffice, and any "non-trivial departure" would invalidate the notice.
Care also needs to be taken to ensure that the correct party serves the default and termination notice. There is a difference in approach between the JCT Standard Form Building Contract 2016 and the JCT Design and Build Contract 2016. The standard form building contract provides for default notice to be given by the Contract Administrator/Architect and the Termination Notice to be given by the Employer; whereas the design and build form provides for both notices to be issued by the Employer.
Finally, an invalid contractual termination by the Employer is likely be a repudiatory breach of contract as was the case here which enables the Contractor the opportunity to terminate the contract itself and claim damages from the Employer. However, all the facts and circumstances need to be considered since the fact that a contractor has ceased all meaningful activity on site or that a contractor may not be in a position to carry on at the time of the intended termination may mean that an Employer's failure to terminate in accordance with the contractual provisions is found not to be a repudiatory breach (Thomas Barnes & Sons v Blackburn with Darwen Borough Council (2022)).
19 December 2022
by Luke Newman
Higher-risk buildings (HRBs)
by multiple authors