8 TERMINATION OF CONTRACT

Termination versus determination

A construction contract can be terminated where one of the parties has acted in a way that is so wrongful that the law allows the other to end the contract, i.e. the contract has been breached. Termination can happen two ways – by either a common law determination, where the guilty party must have committed a fundamental, or repudiatory, breach and the innocent party must have, by word or action, elected to accept the repudiation, or a contractual determination where a party may lawfully determine the contract by exercising powers to the effect expressly provided for in a contractual termination clause.

Under English law, a party can terminate or repudiate the contract when the other party clearly shows that it has no intention of performing, or has committed such a major breach of the contract that it will be treated as having no intention to perform under the terms of the contract and, thus, will be treated as having repudiated the contract. Under either scenario, the non-breaching party can either affirm that the contract exists, and require that the promised obligations be upheld and seek damages accordingly, or accept the repudiation and “bring the contract to an end”.¹ Put another way, repudiation of the contract by one party entitles the other to consider that the contract has been discharged.² Under “repudiation”, both of the parties have no further contractual obligations and further performance is excused, leaving only those contract provisions necessary to allocate liability, assess damages and sort out any ADR provisions, such as arbitration.

Termination, however, should not be confused with “determination” of the contract. Determination clauses are contained in many construction contracts and allow for just that; determination of certain rights, duties and related matters under specific circumstances. It should be noted that not all of these, on their own, amount to a sufficiently serious breach to justify “termination”. Indeed, for example, provisions requiring determination related to notices are not classified as breaches in the contract at all. Usually such “determination” provisions allow for certain procedures that must be followed for the “determination” to be effective.³ The case of Lockland Builders Ltd v Rickwood⁴ illustrates the differences. Here, Rickwood purchased a plot of land and contracted with a builder to build a house on the plot. Rickwood in turn was to convey a part of the plot to the builder who was to build a second house and sell it for the builder’s advantage and Rickwood was to make further cash payments to the builder. This arrangement was formalised in two contracts. One was between Rickwood and Lockland (a company with which the builder was closely associated), providing for the sale of the plot to Lockland. The other agreement, the building agreement, between Rickwood and the builder provided that if Rickwood was dissatisfied with the progress, or quality, he might follow a certain procedure and, having done so, determine the agreement, enter upon the Works and call upon another builder to complete the Works. Without following the specified procedure, Rickwood excluded the builder from the site. Lockland issued proceedings seeking implementation of the contract for the sale of land and Rickwood sought damages from the builder for defective work. The trial judge held that Rickwood had not been entitled to determine the builder’s employment and Rickwood appealed. The court reviewed the facts and dismissed the appeal. It held that:

Thus, in effect, the court held that where a contract sets out a specific procedure for determination, this implies that any common law right for “termination” is excluded, except where the “breaching party” shows intent not to be bound by the contract, e.g. some form of repudiatory breach.⁵

There are many types of repudiatory breach that can entitle either party to terminate the contract. The most common is the employer’s failure to pay the contractor on time, which justifies the contractor in terminating the contract.⁶ It should be pointed out that while failure to pay the contractor on time usually qualifies as a repudiatory breach, failing to pay on “another” contract is not so likely to qualify as repudiatory.⁷ Most construction contracts contain provisions regarding determination for non-, short or continued late payments, which in and of themselves may not be repudiatory but their continued existence amounts to a repudiation.

In CJ Elvin Building Services Ltd v Noble,⁸ the court, after finding that the defendants were in serious breach of contract for failing to pay a significant outstanding sum, turned to whether the claimant was entitled to suspend work and wrote:

“… The undoubted reason why the claimant did suspend work was that the defendants were not paying sums which were due. The claimant was not willing to continue with the work and complete it unless further sums due were paid.

Although it is not alleged by the claimant that the defendants repudiated the contract let alone that the claimant accepted any such repudiation, it is my view that the defendants were in repudiatory breach of the contract. They were in breach of what to the claimant was a most important term of the contract, namely that reasonable sums due should be paid at reasonable intervals. Not only were the defendants in breach of contract by late October 2001 for not paying, they were threatening (in breach of contract) not to pay any further sums until the works were completed. Although the claimant was financially able to complete the works, it is undoubtedly the case that the claimant’s suspension was brought about directly as a result of the defendants’ breach of contract in failing to pay. In those circumstances, the claimant was entitled to suspend the work. It certainly cannot be said that the suspension triggered as it was by the defendants’ own breach was itself repudiatory. The defendants cannot rely upon its own breach to justify a contention that the Claimant was itself in repudiatory breach.

Reliance has been placed by the defendants on an unreported case, DR Bradley (Cable Jointing) Ltd v Jefco Mechanical Services Ltd (1998), referred to in the footnote in Chitty on Contracts, 28th Edition, para 37–199. I have been unable to find or obtain a copy of this case. I am not convinced that the learned editors’ statement in the book (“non-payment by the employer is not generally a breach which will entitle the contractor to treat the contract as at an end”) is correct or, at least, unconditionally correct. Failure or refusal to pay sums due under a building contract can amount and often does amount to repudiatory conduct on the part of the employer. This will obviously depend upon the terms of any construction contract. Many construction contracts have termination clauses which, invariably, permit the Contractor to terminate under the provisions of the contract on the grounds of non-payment by the Employer. The obligation to pay on the part of the construction contract employer is one of the most important obligations which the Employer has. A refusal to honour payment obligations, at least insofar as it relates to a relatively sizeable sum of money due or the threat not to pay further sums due in accordance with the contract must be capable of being repudiatory.”

Another type of repudiatory breach is where the employer fails to give possession of the site. Needless to say, just interfering with possession does not amount to a repudiation of the contract, but full refusal would qualify, as would removal of the contractor from the site, i.e. ejection. Again, this can all be seen as a sliding scale with the more onerous conduct qualifying as repudiation. Also included in employer repudiatory breaches is where the certifier, i.e. the engineer, architect or contract administrator, fails and/or refuses to certify, or does so negligently, or under-certifies repeatedly; these constitute repudiatory breaches on the employer’s part – again, the seriousness of the conduct is what counts.

From the employer’s perspective there can be many acts by the contractor which qualify as repudiatory. These include unjustified walking off the job or suspension of the work. It is necessary to carefully review the underlying contract to make sure that there are no contract provisions covering the contractor’s right to leave or suspend work. However, if the contractor’s work is defective the employer cannot generally terminate the contract, but rather seek damages for the costs to correct. It should be noted again that if the defective work is of such a character as to amount to a total lack of performance, then the employer is justified in claiming repudiation. In Sutcliffe v Chippendale & Edmondson (A Firm),⁹ the court was faced with many small defects none of which would qualify on its own as a repudiatory breach but accumulated together they did qualify, and the court wrote:

“… [The Contractor’s] manifest inability to comply with the completion date requirement, the nature and number of complaints from sub-contractors and their own admission that … the quality of work was deteriorating and the number of defects was multiplying”.

In the totality of the situation this was sufficient to allow the employer to terminate the contract and order the contractor off the site. While there are other reasons that justify the employer in terminating the contractor, delay is undoubtedly one of the major ones that arise. But the delay must be substantial if it is to justify repudiation in and of itself. The employer must show, for example, that the contractor had no fundamental intention to be bound by the terms of the contract and the contract itself must clearly state, or make sufficiently clear, that “time is of the essence”. If the delay occurs, the employer must notify the contractor that “time is of the essence” and give reasonable time to comply – if the contractor fails to do so, a repudiation has occurred.

If either party acts rashly and claims that repudiation has occurred it can then be held liable for wrongfully terminating the contract. In this regard, the Hong Kong case of Lee Chau Mou v Kin Sing¹⁰ is illustrative. In that case the plaintiff, Lee Chau Mou, the principal contractor, entered into a contract in January 2002 with the Water Supplies Department (“WSD”) to conduct construction works in respect of water supply in Hong Kong. The Works involved laying exposed and buried water mains and constructing concrete supports for the exposed water mains. The contract sum was HK$19,245,850 and the Works were to be completed by September 2003. In March 2002 the principal contractor subcontracted the Works to the defendant, Kin Sing.

The issue dealt with Clause 5 of the contract between the principal contractor and the subcontractor that stated:

“Upon receiving notice or warning for slow progress of works or other no[n] compliances, if no improvement and no rectification is made or continuous occurrence of slow progress of works or even deliberately cease works without acceptable reasons, [the Principal Contractor] shall have the rights to terminate this Contract and all cost incurred from the damages made shall be solely responsible and liable by [the Subcontractor] without objection.”

After several disputes between the principal contractor and the subcontractor, the principal contractor, in January 2003, exercised its right under this Clause 5 to terminate the subcontract and re-enter the site.

The issue was whether Clause 5 could be invoked only if the subcontractor failed to remedy the delay or other non-performance that was so substantial or fundamental in nature that it amounted to a repudiation of the subcontract. The court reviewed the facts and found substantial delay by the subcontractor throughout the execution of the Works. The facts showed that, during the period from April 2002 to January 2003, monthly progress meetings were held and attended by WSD, the principal contractor and, on occasions, the subcontractor. The meeting minutes showed that WSD frequently commented that progress was behind schedule, insufficient resources were deployed and targets were not being met. During this period the principal contractor issued four “warning letters” to the subcontractor, stating that if the cited delays persisted, the principal contractor would terminate the subcontract.

The delays that occurred were found to be the fault of the subcontractor and included the continued replacement of poor site agents, insufficient deployment of workmen and cash-flow problems. The subcontractor argued that a term should be implied into Clause 5 that allowed the principle contractor to terminate the subcontract only where the subcontractor committed a repudiatory breach. The subcontractor relied on the UK decision of Rice (trading as Garden Guardian) v Great Yarmouth Borough Council.¹¹ In Rice, the Great Yarmouth Borough Council argued that an express termination clause allowing the council to terminate Mr Rice’s four-year employment contract as gardener for “a breach of any of his obligations under the Contract” should be applied literally, unless those breaches were trivial. The Court of Appeal, however, felt that the clause which “would entitle the council to terminate a contract such as this at any time for any breach of any term, flies in the face of commercial common sense”. The court felt that despite the reference to a breach of “any obligation”, there had to be either a single breach serious enough to be repudiatory on its own or an accumulation of breaches that together could be described as repudiatory.

The court felt that the underlying issue was whether the council was deprived of substantially the whole benefit of its bargain over a given period and it held that this was not the case and as such the council was not entitled to terminate.¹²

Applying this to Lee Chau Mou, the court agreed with the principal contractor finding that the term alleged by the subcontractor could not be implied. This was found on the basis of the well-established proposition that, given an express contractual termination clause, it is not necessary to establish that the breach or event, on which the clause is expressly conditioned, is of the fundamental repudiatory character required for a common law determination. Rather, it will be sufficient that it has been contractually defined or nominated as a ground for contractual determination.

Put another way, in Lee Chau Mou the subcontract provided for express termination so long as the requirements under that provision were met and the court found the principal contractor was justified in terminating as there was substantial delay. Here, it was not necessary to determine whether the subcontractor’s breaches were so fundamental as to be repudiatory (a common law determination), nor to imply a term into the subcontract. From this it would appear, that the express termination provision in Rice was too broad and, as a result, the court was faced with a situation where it had to resort to the common law for a solution, whereas Lee Chau Mou’s more specific termination clauses allowed the court to find for the principal contractor.

It should be noted that, in actuality, the distinction between the common law determination and contractual determination can blur, especially when the construction contract is drafted to allow for termination (contractual determination) based upon serious breaches that would also qualify as a common law determination.