Getting termination right: lessons from the courts

by Jeremy Glover, Partner

It is regularly said, and for good reason, that termination is a serious step, and is not to be taken lightly. As Jeremy Glover discusses, there are many reasons for this, including commercial, contractual, and legal. Legally and contractually, parties often find that exercising a contractual right of termination under any contract is not as straightforward as you might expect. To be valid, termination notices must comply strictly with the conditions set out in the contract. As a result, the safest, indeed, only, course of action for the employer or contractor is to carefully follow the terms of the contract in question.

There have been a number of “termination” cases which have come before the TCC over the past couple of years, and often, the party trying to terminate was found to have failed to comply with the contractual requirements.

Instances such as these can have quite serious consequences. A failure to follow those contractual requirements may in itself amount to a repudiatory breach of contract.1 If a dispute arises, those requirements, particularly in relation to the form of notices, where they are to be served, and how, and time limits will be carefully considered and strictly applied. Even where a termination notice is correctly drafted and validly served, a right of termination can inadvertently be lost where a party acts in a manner which is inconsistent with the termination of the contract.

Send the notice to the right person

In Struthers & Anor v Davies (t/a Alastair Davies Building) & Anor, [2022] EWHC 333 (TCC), it was agreed that the first defendant could not be liable for the costs of completing the works unless the contract was validly terminated.Struthers said that they had terminated the contract in accordance with the contractual machinery.

On 23 December 2015, Struthers sent a document, a Notice of Intention to Terminate, to the first defendant's home address by email and recorded delivery. At that time, the first defendant was visiting their home in France for the holidays. On 11 January 2016, Struthers sent a Notice of Termination by recorded delivery arriving on 12 January 2016 and sent the notice by email on the same day. The first defendant pointed out, correctly in the mind of the judge, that the contract required the contract administrator (rather than the client) to issue the Notice of Intention, but Struthers had not done this. Without a valid Notice of Intention, no further notice to terminate can be sent.

Struthers relied on the decision of Akenhead J in Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2015] EWHC 1028 (TCC) where, despite a notice being sent to the incorrect address (it was sent to the site office, rather than the head office), the judge had upheld the validity of the notice.

Here, the judge disagreed, noting that there were sound reasons for requiring the initial notice to come from the contract administrator rather than the client. Further, the judge was not referred to any authority where the wrong person had sent a contractual notice triggering termination where, nevertheless, the notice was held to be valid. In the Obrascon case, it was the address which was incorrect.

Further, the judge was not satisfied that the first defendant did receive the Notice of Intention a clear 14 days before the Termination Notice was sent to and received, as required by the contract. There was no first-hand factual evidence from Struthers to demonstrate that the Notice of Intention was, in fact, received and when.

However, that was not the end of the matter. The judge found that the first defendant was in a repudiatory breach of contract2 by 12 January 2016. The result of that here was that the Termination Notice could operate as an acceptance of that repudiatory breach, even though it was not a contractually valid notice. And the first defendant was, therefore, liable for the additional reasonable costs of completing any of the works which were incomplete as of that date.

The question of ensuring that the right entity has served the notice cropped up again in the case of Manor Co-Living Ltd v RY Construction Ltd [2022] EWHC 2715 (TCC). Here, Manor served a default notice on 11 November 2021, under clause 8.4.1 of a JCT Standard Form Building Contract 2016. The notice was sent by email on 11 November 2021, and by post on 17 November 2021 (received two days later). The contract administrator then sent a notice (by letter dated 30 December 2021) but sent by email the following day terminating the contract under clause 8.4.2. Under the terms of the contract, the contract administrator was able to serve the first notice under clause 8.4.1, but the employer had to serve the second notice under clause 8.4.2.

An adjudicator held that Manor had prematurely tried to terminate the contract before the 14-day period required under clause 8.4.2. Manor was, therefore, in breach of contract as it had prevented the contractor from accessing the site (Manor changed the locks as a means of blocking site access) and this repudiatory breach of contract had been accepted by RY Construction.

Follow the timing laid down by your contract

Even if you ensure that the correct person serves the notice, you must get the timing right. For example, clause 8.4.1 of both the JCT Standard Building Contract and the JCT Design and Build form sets out an employer’s right to terminate for certain specified defaults. Under clause 8.4.1, the architect/contract administrator or the employer (depending on the form) may serve an initial notice on the contractor setting out the defaults relied on. Under clause 8.4.2, the contractor then has 14 days from this initial notice to cease the specified default(s). If it fails to do so, the employer may on, or within 21 days from, the expiry of the 14-day period serve a further notice on the contractor terminating its employment.

Clause 1.7 of the JCT Forms sets out requirements for service of notices. In particular, this clause specifies that notices should be in writing (clause 1.7.1) and, unless otherwise agreed between the parties (in accordance with clause 1.7.2), be served by hand or pre-paid post to the recipient’s address in the Contract Particulars, or their registered or principal business address. Clause 1.7.4 states that, when sent by post, a notice should be sent by Recorded, Signed For or Special Delivery.

In Thomas Barnes & Sons Plc v Blackburn with Darwen Borough Council [2022] EWHC 2598 (TCC), HHJ Davies confirmed that what clause 1.7.4 required was service at the claimant’s registered office either by hand or by recorded or special delivery post. The fact that clause 1.7.4 contained specific and more onerous requirements which only apply where the contract expressly required that they should, meant in the view of the judge that any non-trivial departure should invalidate the notice.

The claimant was aware that the defendant was exercising its right of termination under clause 8.4, as the claimant’s managing director, commercial manager and its solicitors had all received notice of termination by email. Further, a notice was handed over on site. However, these “notices” were all contractually ineffective. At the same time, the claimant sent notice by post in a contractually effective manner. However, this only took effect two business days later on the following Monday, but after the claimant had been excluded from the site.

What if the other party is in repudiatory breach of contract?

The question for HHJ Davies in the Thomas Barnes case was, therefore, whether the ineffective contractual termination and the removal from site in reliance on the ineffective contractual notice was repudiatory, in circumstances where the defendant was entitled to terminate and had communicated its decision to do before it excluded the claimant from the site, albeit in a legally ineffective manner. The judge decided it was not for the following reasons:

1. The claimant had by then 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 extension of time (“EOT”) had one been granted;
2. The claimant must be taken to have known, objectively, that the defendant was entitled to terminate under the contract;
3. The claimant knew that the defendant was intending to terminate the contract by receipt of the termination notice before it was excluded from site;
4. 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; and
5. There was no adverse impact upon the claimant in being removed from site two days earlier than it would have had to leave anyway.

Indeed, the judge commented that the:

“clear impression conveyed by the claimant’s solicitors’ email in response, stating that the claimant was accepting the alleged wrongful termination as repudiatory, was that the claimant was very pleased to be given the opportunity to leave site and to be able to advance a case founded upon repudiation”.

Therefore, although the claimant had had failed to terminate the contract in accordance with the contractual provisions, on the particular facts of the case, and the particular failings of the contractor, the claimant was not entitled to accept the defendant’s precipitate termination as repudiatory. The result was that the defendant was entitled to terminate under the contract at the point when its termination notice was deemed served and took effect.

Always follow the contract procedures

Whilst the employers who failed to follow the contract, in two of the three examples, in effect got away with their mistake, do not assume that is always going to be the likely outcome.

To take one further example, this time from 1995. In Lockland Builders v Rickwood (1995) 77 BLR 42, the owner was not able to rely upon the alternative argument of repudiation under common law. Here, under a contract for the building of a house, clause 2 provided a mechanism whereby, if the owner was dissatisfied with the rate of building progress, then they could apply to the president of the Southend-on-Sea District Law Society to appoint an architect and/or a surveyor, and subject to the certificate of that architect or surveyor, determine the agreement. The provision provided not merely for the determination of the contractor’s employment, but for determination of the agreement as a whole. The employer was dissatisfied with the rate of progress but, instead of invoking clause 2, relied upon a common law right of repudiation.

The Court of Appeal held that an express determination clause even of this type, and the common law right to repudiate can exist side by side, but the common law right only arises in circumstances where the contractor displays a clear intention not to be bound by the contract. Mere delay in this case did not amount to grounds for repudiation at common law, and the owner had only themselves to blame for not following the contractual procedure.

Conclusions

When it comes to terminating a contract: if a party incorrectly terminates, then they will, in general, be liable to the other party for the losses resulting from that incorrect termination on a repudiatory basis. Whilst the courts may construe a termination clause in accordance with its commercial purpose, always assume that they will require strict compliance with any conditions precedent as to where and how to serve the notice, who to serve it on and when such a notice can be served and/or takes effect.

The case of Brown & Docherty Ltd v Whangarei County Council [1990] 2 NZLR 63 may be over 30 years old, but it provides a sound and helpful example of the principles that apply when considering termination clauses:

1. Termination clauses must be interpreted strictly.
2. For a termination to be valid under the contract, the correct procedure must be complied with.
3. A professional consultant (such as an engineer or architect) must act fairly and impartially in the exercise of any discretion to issue a contractual certificate or notice that may be relied upon by the employer as grounds for determination.
4. The contractor must be given fair warning that continuation of his conduct may result in termination and should not be lulled into assuming that he would be permitted to continue with the work.
5. A certificate or notice issued by the architect or engineer in reliance upon incorrect or irrelevant information or grounds (such as claims for additional payment and requests for further extensions of time) will be invalid.

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• 1. And conduct will be considered to be repudiatory if it “deprives the innocent party of substantially the whole of the benefit” of the intended to be received for performance of the obligations under a contract.
• 2. Here, Struthers relied on first defendant's conduct in refusing to purchase materials for the works; using materials they had paid for on other jobs; failing to progress the works and confirming he would not and indeed could not progress the work for the Struthers until finalising other works, as together and separately being repudiatory breach of the contract.