Analysis: The effective termination of construction contracts
Imogen McGrath SC and Shauna Keniry BL set out the key legal principles to consider when terminating construction contracts.
Challenges faced by the construction industry come into sharp focus during straitened economic times. Projects are often beset by the cost of credit, cash flow pressures, inflation in the cost of building materials and difficulties in securing and maintaining sufficiently skilled labour force.
Such factors make the risk of events that may give rise to grounds for termination, such as delay in the progression and completion of works under construction contracts, or, at worst, the insolvency of a party to the contract, more likely to materialise.
Legal principles applying to contractual termination notices
An election to accept repudiation of a contract does not have to be made in any particular form, but simply must convey clearly and equivocally, by communication or conduct, to the defaulting part that the innocent party is treating the contract to be at an end.
However, where a party seeks to determine a contract based on a contractual termination clause, there will usually be a number of steps to observe by way of contractual notice requirements. These may include requirements regarding the content, timing, or formalities of the notice.
Case in context: Thomas Barnes & Sons PLC
The recent judgment of High Court of England and Wales (H.H.J. Davies) in Thomas Barnes & Sons plc (in administration) v. Blackburn with Darwen Borough Council demonstrates the operation of several legal principals in practice.
The claimant contractor was employed by the defendant to carry out the construction of a bus station under a standard form JCT contract. The construction of the bus station was subject to significant cost increases and delay overruns. The contract was terminated by the defendant for alleged default by the claimant on 4 June 2015 before work was finished and the defendant proceeded to have the work completed by a replacement contractor.
The defendant alleged in its termination notice that the claimant had failed to proceed regularly and diligently with the works and had substantially suspended the carrying out of the works, and stated that as an alternative to contractual termination, the letter was to take effect as an acceptance of repudiatory breach.
The claimant subsequently entered into administration later that year. In 2020, the claimant’s administrators issued proceedings claiming monies alleged to be due to the claimant under the contract on a proper valuation of the works done at termination, and damages for wrongful termination of the contract by the defendant representing the claimant’s loss of profit on the remaining works.
The termination clause
Under clause 8.4 of the standard form JCT contract (the termination clause) the contract administrator was permitted to give the contractor a default notice in specified events, including where the contractor without reasonable cause wholly or substantially suspended the carrying out of the works and where it failed to proceed regularly and diligently with the works. If the contractor continued the specified default for 14 days then the employer might terminate within 21 days or, if the default was repeated by the contractor, within a reasonable time of such repetition. However, such termination notices could not be given unreasonably or vexatiously. All such notices required, by reference to a separate clause, to be delivered by hand or recorded or special delivery post.
The judgment recorded, at p. 189, that the contract stated in terms that the termination provisions were “without prejudice to any other rights and remedies of the employer”. It followed that it was open to the defendant to serve a notice of termination under the termination clause, and, in the alternative, by the same notice inform the claimant of the acceptance of the claimant’s repudiatory breach. The Judge relied, in that regard, on Keating at §§[6–118]–[6–120] and the cases cited therein. The authors note, inter alia, that:
“6–118 Contractual determination clauses do not exclude common law remedies available upon repudiation unless the agreement expressly or impliedly provides that the contractual rights are to be the exclusive remedy for the breaches in question […] 6–120 […] Where the contractual determination clause is expressed to be operable without prejudice to the parties’ rights, there would appear to be no difficulty in that party subsequently relying on the same events as a ground of repudiatory breach”.
Event triggering the termination notice
Davies J held, at p. 188, that the two separate substantial grounds referred to in the termination notice, that is, the claimant contractor’s failure to proceed regularly and diligently with the works and substantial suspension of the works, would, if established, both be sufficient to justify termination under the termination clause.
The Court then considered whether the conduct of the claimant contractor would, in the alternative, have amounted to a repudiatory breach of the contract.
The judgment cites the following useful observations of Etherton L.J. in Eminence Property Developments Ltd v. Heaney outlining the test for a repudiatory breach of contract:
(a) (at ):
‘First […] So far as concerns repudiatory conduct, the legal test is simply stated […] It is whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon and altogether refuse to perform the contract.’
(b) (at ):
‘Secondly, whether or not there has been a repudiatory breach is highly fact-sensitive. That is why comparison with other cases is of limited value.’.
(c) (at ):
‘Thirdly, all the circumstances must be taken into account in so far as they bear on an objective assessment of the intention of the contract breaker. This means that motive, while irrelevant if relied upon solely to show the subjective intention of the contract breaker, may be relevant if it is something or it reflects something of which the innocent party was, or a reasonable person in his or her position would have been, aware and throws light on the way the alleged repudiatory act would be viewed by such a reasonable person.’
(d) (at ):
‘Fourthly, although the test is simply stated, its application to the facts of a particular case may not always be easy to apply […]’”
Davies J was satisfied, at p. 189, that where from the end of February 2015 the works had been plagued by delays which were almost entirely the claimant’s own fault and contractual responsibility, the claimant was in such serious and significant breach of contract as entitled the defendant to terminate the contract or to accept that breach as repudiatory so as to discharge itself from any continuing obligation to perform the contract from that date.
Interestingly, at pp. 191–192, the Court rejected an attempt by the defendant to rely on the insolvency of the claimant contractor as a further ground for determining the contract.
This was because:
- there was no mention of insolvency as a ground for terminating the contract in the termination notice (which the Court surmised was probably because the specific definition of insolvency in the termination clause was not satisfied at the date the termination notice was served), and nor had the defendant it expressly referred to insolvency as evidence of repudiatory conduct on the part of the claimant; and
- the Court considered that there was no hard evidence that the claimant was insolvent at date of service of the termination notice. Davies J concluded that the default on the part of the claimant contractor justified the defendant in terminating the contract, but considered that the separate alleged ground was not made out.
Formalities for the service of the termination notice – wrongful termination?
The formalities for the service of the termination notice were not strictly complied with by the defendant. This gave rise to an issue of whether the defendant had wrongfully terminated the contract, and thus itself committed a repudiatory breach of the contract, in light of the principle noted in Keating at §[11–033] that “a wrongful termination by the employer or its agent normally amounts to repudiation on the part of the employer.”
At issue was the fact that the contract required service at of the termination notice at the claimant’s registered office either by hand or by recorded or special delivery post before the
claimant contractor was excluded from the site, but the defendant had instead delivered to the site, as the known address where the claimant was based. Davies J was therefore satisfied, at p. 194, that the defendant failed to terminate the contract in accordance with the contractual termination provisions.
However, in the circumstances, the Court considered that that failure to comply with the formalities for service of the termination clause was not a repudiatory breach by the defendant.
It was held that while, for example, a termination could be wrongful and itself amount to a repudiatory breach where the party purporting to determine the contract trying to terminate had no right to terminate because the substantive conditions for termination were not made out, the situation at hand was markedly different. Davies J explained at p. 197 that:
 […], the essential question is whether the ineffective contractual termination and the removal from site in reliance on such ineffective contractual notice was repudiatory, in circumstances where the defendant was entitled to terminate and had communicated its decision to do so before it excluded the claimant from the site, but in a legally ineffective manner, but also where the claimant knew from the termination letter already sent by email that the defendant intended to send the notice by the correct contractual method, i.e. by recorded delivery to the claimant’s registered office. In deciding the issue in this case I have again found helpful the approach of Etherton LJ in [Eminence Property Developments Ltd v. Heaney  EWCA Civ 1168] and focused on all of the relevant circumstances.
 In my judgment the crucial question is whether the impact upon the claimant of being removed from site in such circumstances, effectively two working days earlier than it could validly have been removed anyway, was conduct which was in all the circumstances repudiatory? In my judgment it was not, for the following principal reasons: (a) the claimant had by then – as I have found – effectively ceased all meaningful activity on site and was, realistically, in no position to move forwards to complete the works even in accordance with a proper EOT had one been granted; (b) the claimant must be taken to have known, objectively, that the defendant was entitled to terminate under the contract; (c) the claimant knew that the defendant was intending to terminate the contract by receipt of the termination notice before it was excluded from site; (d) the claimant knew from the last section of the termination notice that the defendant was seeking to exclude the claimant from site and to secure it under and in accordance with the termination provisions of the contract; (e) the claimant must be taken to have known, objectively, from the top of the termination notice that the defendant intended to and doubtless was in the process of serving the termination notice by the required contractual means; (f) there was no adverse impact upon the claimant in being removed from site two days earlier than it would have had to leave anyway.
At p. 198, the Court concluded:
“In the circumstances, the claimant was not entitled to accept the defendant’s precipitate termination as repudiatory and it follows that the defendant was entitled to terminate under the contract at the point when its termination notice was deemed served and took effect.”
In summary, although the defendant had not strictly complied with the formalities for service of the termination notice, in light of the technical and inconsequential nature of the defect in service, and objective reality that the claimant contractor was well aware that the defendant was intending to terminate the contract, and was actually in the process of doing so in a manner that would comply with the contractual termination provisions, the defect in complying with the required formalities was not a repudiatory breach.
It is relevant to note that, by way of preface to all of the above, the Court also made the interesting and quite technical point at pp. 192 to 193 that (i) because the claimant was also already in repudiatory breach of the contract, and the defendant had expressly made clear in the termination notice that it was relying alternatively on the right to accept the claimant’s repudiatory breach, it followed that (ii) even if the defendant’s termination of the contract had been wrongful for defective service of the termination notice, the claimant would simply be too late to accept that breach as repudiatory in turn.
Therefore, by relying in the alternative on the right to accept the claimant’s repudiatory breach in the termination notice, the defendant had already successfully accepted the claimant’s prior, and overarching, repudiatory breach of the contract. In effect, the way it had drafted its termination notice meant that the defendant had successfully hedged its bets, and ensured that its acceptance of repudiation would be in any event be first in time.
Davies J ultimately held that the claimant had no prospect of recovering anything in the litigation. Any entitlement it could establish under a final account analysis would be extinguished by the defendant’s right to recover and to set off against such entitlement the net cost of having the contract completed by replacement contractors. The Judge declined to consider in detail the quantum of the claimant’s claim.
The judgment in Thomas Barnes & Sons plc (in administration) v. Blackburn with Darwen Borough Council highlights, first and foremost, the importance that serving termination notices in compliance with the formalities required by the contract. Careful attention to the contractual requirements regarding the content, timing and means of service of a termination notice can avoid expensive litigation of a claim for wrongful termination of the contract by the defaulting party.
50. It also illustrates the utility, where possible for an innocent party to do so, of relying alternatively on the common law right to accept repudiation of the contract. It could be very helpful in the long run (where it appears there are good objective grounds for alleging that a breach of contract amounts separately to a repudiatory breach of the contract) if a carefully drafted termination notice is served which makes clear that the defaulting party’s repudiatory breach is relied on.
Separately, Thomas Barnes & Sons demonstrates where the failure to comply with a termination notice is largely technical and the prejudice to the defaulting party is minor or insignificant, the courts are not likely to allow it to advantage the defaulting party.
Terminating a construction contract is a perilous exercise. The terminating party must follow any contractual termination procedure in its entirety. Any deviation from that process runs the risk of rendering the termination invalid. Even worse, a failure to terminate the contract correctly may itself constitute a repudiatory breach. Undoubtedly, careful consideration is required as to whether to nail one’s colours to the common law or contractual mast.
- Imogen McGrath SC and Shauna Keniry BL are members of the Construction Bar Association of Ireland (CBA). This article was adapted from a recent paper from the CBA conference and was previously published on the Law Library website.