Opportunity to remedy breach before termination
INTERSERVE v HITACHI [2017]
The Court granted a declaration that a contractor ought to have been given the opportunity to remedy its breach of contract before its engagement was ended.
Facts:
- Hitachi (“H”) had been appointed to construct an ‘energy from waste’ plant who then appointed Interserve (“I”) as its sub-contractor.
- Clause 43 of the contract, headed ‘Termination for Contractor Default’, provided that upon the occurrence of a range of stated events, including material breach, H could terminate I’s engagement, “subject to Sub-Clause 43.1A”.
- Work proceeded until one of the stated events occurred and H sought to end I's employment with immediate effect without giving I any opportunity to remedy the breach.
- Clause 43.1A stated that in the event of certain specific defaults by I, “[H] may (at its absolute discretion) notify [I] of the default and if [I] fails to commence and diligently pursue the rectification of the default within a period of seven (7) Days after receipt of notification, [H] may by notice terminate the employment of [I] under the Contract".
- The termination notice said, “For the avoidance of doubt, [H] does not exercise its discretion to provide a 7 day period for rectification under Clause 43.1A of the Conditions”. H argued that the ‘absolute discretion’ wording related only to its decision whether or not to serve notice under clause 43.1A. It maintained that if it chose not to give notice under clause 43.1A, it could instead simply give notice to terminate immediately under clause 43.1 without having to give I any opportunity to remedy.
Decision:
- The Court did not support H’s argument, deciding that the right to terminate was ‘subject to’ or conditional upon the clause 43.1A procedure having been followed. In the instances covered by clause 43.1A, the right to terminate only existed if notice had first been given under clause 43.1A and I had to be given an opportunity to rectify its default. In other words clause 43.1A was given priority by the ‘subject to’ wording.
- Then the Court turned to the meaning of the words ‘at its absolute discretion’ in clause 43.1A. It said that these words emphasised that the decision whether or not to commence the termination process was entirely a matter for H and that failure to do so would not have adverse consequences, such as an argument that the lack of a notice suggests the absence of a default or the waiver of its right to rely on the default. The reference to ‘absolute discretion’ did not make the seven-day remedy period optional if H wanted to go down the termination route.
Points to note:
- The decision seems entirely unsurprising given the drafting. What it does re-affirm is the fact that the Courts are relatively cautious when allowing contracting parties to terminate commercial contracts whether for breach or otherwise. That is particularly the case in situations where a party is seeking to end a significant contract without allowing any opportunity to remedy.
- Crucially in reaching its conclusions, the Court paid particular attention to the sense in which the same phrases which the Court was being asked to interpret had been used elsewhere within the Agreement. Clearly, such assistance will only rarely be available but if the phrase in question is one that features in other parts of a document, it would be well worth considering whether such use supports your favoured interpretation.