Importance of terminating with care
VIVERGO FUELS v REDHALL ENGINEERING SOLUTIONS [2013]
This case demonstrated the importance of terminating a contract with care. If a party does not have, or no longer has, the right to terminate or if it does not exercise its rights properly then this can mean that an ‘innocent’ party is itself in breach which then gives the party originally in breach a right to terminate instead. Here, the Technology and Construction Court (TCC) decided that a customer was in breach when it wrongfully tried to terminate an agreement because the alleged breach of contract no longer existed at the time the termination notice was sent.
Termination Rights:
There are two main ways that a contracting party may terminate for breach of contract by the other party, under:
- a right to terminate under the express terms of the contract; and/or
- a common law right to terminate for repudiatory breach.
A repudiatory breach has to be a sufficiently serious breach of contract that goes to the root of the contract or where there is a demonstration of an intention not to be bound by the agreement in the future (for example, an employer barring a contractor from site or a contractor downing tools and walking off site). A repudiatory breach will not bring the contract to an end automatically – the innocent party must choose to either affirm (continue) the contract or accept the breach and terminate the contract.
Facts:
- Vivergo (V) engaged Redhall (R) to carry out work on an engineering project. The works were delayed and V alleged they were exacerbated by R’s failure to provide a programme of work.
- The contract included a two-stage termination procedure which provided that if R was in material default by failing to proceed ‘regularly and diligently’ with the works, V could notify R of this and if R did not commence and diligently pursue the rectification of this default within 14 days, V could terminate R's appointment by giving notice.
- V sent R several letters one of which stated that R was in breach of contract through its failure to provide a revised programme of work and that it was failing to proceed regularly and diligently with the works. The effect of that notice was to give R 14 days to commence and diligently attempt to rectify the problems even though the letter did not expressly refer to this timeframe or that failure to comply could lead to termination under the relevant termination clause.
- R produced a programme of work document within the 14 day period but it accepted it was not complete in every respect. However, V then sent a notice to R purporting to terminate the contract on the grounds that it was in material breach of its obligations to provide an ongoing programme for the works and to proceed regularly and diligently with the works. V sent this notice even though R’s document was under consideration and had not been rejected by V.
- A few days after the termination notice was sent, V barred R’s workers from the site which meant they were not able to continue with the works.
- V submitted that R was in breach of its obligations as to time, sequencing and quality of the works. V also contended that R was in repudiatory breach of contract when the termination notice was sent and that its termination letter and/or its actions in barring R from site were an acceptance of R's repudiatory breaches.
- V effectively accepted that if its other arguments failed then its purported termination and locking R out from the premises was itself a repudiatory breach of contract which had been accepted by R.
Decision:
The main issues for the TCC were:
- Was R in material breach for the purposes of the express contractual termination right? The TCC said that:
- Taking into account all the circumstances relating to the breach of the obligation to resubmit a programme of work and the obligation to pursue the work ‘regularly and diligently’ including the scope, nature and extent of the breach, the circumstances in which the breach arose and, particularly, the effect of the breach on V, R's breach was considered material for the purposes of the termination clause. The TCC commented that it was not a minimal or inconsequential breach, nor was it an accident or mistake or caused by some other similar factor but it was a breach committed over a substantial period of time. An up-to-date programme of work was necessary for V to be able to assess the progress of the project.
- Was V’s letter a valid notification, had it been complied with within the specified 14 day period and did V have the right to terminate? The TCC considered that:
- although V’s letter did not expressly refer to the relevant contractual provisions, it was (in contrast to the decision in the Friends Life v Siemens Hearing Instruments (CA) [2014] case) a valid notification under the contract as it linked a phrase taken directly from the relevant clause to a relevant default under the contract and in context R was aware that if it did not rectify its defaults, V could exercise its right to terminate the contract;
- R had fully complied with the request to commence and diligently pursue rectification of the default within 14 days by producing a programme albeit it was incomplete;
- when V issued its termination notice, although there had originally been a material breach which led to the default notice, the grounds for termination no longer existed and so its termination notice was not valid.
- Was R in repudiatory breach and had that breach been accepted by V? The TCC held that:
- R's failure to proceed regularly and diligently did not amount to a repudiatory breach. R was continuing to proceed with the works and this would ultimately have led to the works being completed. R had not stopped or abandoned the works and its failings did not show an intention not to be bound by the terms of the contract or go to the root of the contract;
- in any case V had not accepted any such breach as repudiating the contract:
- the termination notice referred to the contractual breach and could not therefore amount to an acceptance of a repudiatory breach; and
- where there is no repudiatory breach there is nothing to ‘accept’ so the conduct of shutting R out could not amount to acceptance.
Points to note:
- The decision referred to some helpful guidelines in relation to termination notices:
- notices are to be construed in the same way as other contractual documents ie objectively against the background known to both parties;
- the relevant meaning of the notices is one that a reasonable recipient would have understood, having the terms of the underlying contract in the forefront of his mind;
- the purpose of the notice is relevant to its construction and validity. If a notice unambiguously conveys the purpose, a Court will ignore immaterial errors which would not have misled a reasonable recipient (again contrast the outcome in Friends Life v Siemens Hearing Instruments (CA) [2014]);
- the notice must be sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when the notice is intended to operate. Where a clause requires a default notice and then a termination notice, the two notices must be connected both in content and in time;
- in this case the notice must specify the matters alleged to constitute the default. Something is also needed either indicating the seriousness of the situation or making some link to the termination clause so that the reasonable recipient would realise that it was a notice under that clause.
- In relation to sending a termination notice, ensure that:
- there is a right to do so either under the terms of the contract or because there is a repudiatory (serious) breach at common law;
- the right still exists at the time the notice is sent and if a warning or notice has been sent to the other party to remedy a default within a specified timescale, failure of which would otherwise lead to termination, that the default has not in fact been remedied within that timescale;
- any contractual requirements for the termination notice are followed (see also Friends Life v Siemens Hearing Instruments (CA) [2014]) and that the notice expressly refers to every event or default which it is intended to cover.
- Following the above guidelines gives a much better chance of ensuring a termination notice will be valid as which party legitimately terminates a contract is very important - this will determine which party may be entitled to compensation (damages) as a result of the termination; if the party which was originally ‘innocent’ wrongfully terminates, it could end up being the party in breach and having to compensate the original ‘wrongdoer’.
- In relation to whether a breach is material, the primary focus is on the impact on the innocent party although a wide range of factors will be considered.
- For more information on termination rights, see our publication A Comparison of Termination Rights.