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Termination is a situation where no party to a contract wants to be. For the party terminating, the decision is full of risk and will almost certainly cost them more money than it would have, had the original contract been fulfilled. In the case of the terminated party, they lose secured revenue, risk of being open to damages for failing to complete their contractual obligations and reputational damage. However, despite the obvious disadvantages of termination, there are circumstances that require this decision to be made whether it be financial difficulties, poor performance or repudiatory breaches of contract.
If a party to a contract is considering termination, it needs to be treated carefully. The reason for this is simple. If you successfully terminate a contractor’s employment under a JCT contract for example, then you will be entitled to recover any additional costs incurred as a result of the contractor failing to fulfil their contractual obligations i.e. any overspend on remaining works. However, if you terminate a contract incorrectly, the outcome does a complete 180. Not only will you not be able to recover any additional overspend, but you will also be liable for the contractor’s loss of profit as you have denied him the opportunity to complete the remaining work. It is a complete shift in liability. Therefore, the decision to terminate requires significant consideration and not just contractual considerations which I will come on to later.
The starting point when contemplating any termination is the actual ground for termination. In the JCT suite of contracts there are numerous grounds such as non-payment, insolvency and failing to proceed regularly and diligently. This section of advice may seem simple, but it can so often be where parties get into difficulties. Whatever the ground you choose as the basis of termination, make sure you get it right! In a recent case I represented a referring party in an adjudication who had been terminated for failing to proceed regularly and diligently. At the time of termination there were still personnel on site on a regular basis and there was clear progression of works, albeit the works were delayed. For people in the dispute realm, it is commonly known that failing to proceed regularly and diligently is a tricky ground to prove if challenged and so it was found in this case. The delay didn’t amount to failing to proceed regularly and diligently and the termination was deemed wrongful. So, make sure you do your homework. Test the ground you are terminating on and make sure you have the evidence to prove it, particularly if you are terminating on a less black and white ground such failing to proceed regularly and diligently as opposed to the yes or no type grounds such as insolvency or non-payment.
The next consideration is what are the contractual steps for termination i.e. what are the contractual notification requirements. Again, this sounds simple, but so, so often parties get this wrong. A recent case of Thomas Barnes & Sons Plc v Blackburn with Darwen Borough Council is a great example of how the courts interpret these clauses. Termination is a significant event which is why heavy emphasis is placed on following the contractual requirements. If the Contract stipulates a notice has to be posted by recorded delivery or hand delivered to a specific address, ensure you deliver the notice by recorded delivery or by hand to the specific address! Delivering it to site or emailing it will not cut it regardless as to whether the message has been received. Failing to follow the contractual procedures to a T is a recipe for a wrongful termination. Read your contract, understand the termination provisions, and execute them exactly as they say.
Another method of terminating a contract is through the use of common law. This principle is when a repudiatory breach of contract has occurred this will entitle a party to terminate the contract. A repudiatory breach has a couple definitions but can be summarised as a breach of contract such that the acts or conduct of the party shows an intention to no longer be bound by the contract. In construction this could be a wrongful client stating they are no longer going to make further payments for works carried out.
When considering this route, you need to understand what the breach of contract is and whether it is significant enough to be deemed a repudiatory breach of contract. If you are choosing this method, you need to ensure your contract allows you to terminate at common law and that your ground is a significant enough breach of contract to be deemed repudiatory in nature. If you terminate at common law and the breach of contract is not deemed repudiatory, then any termination will likely be deemed wrongful.
Additionally, when opting for a common law termination, even though not necessarily required, we would always advise issuing a notice of your intention to terminate on these grounds with your explanation. By doing so, you give the opportunity to the other party to dispute their breach which will give you further insight into their conduct and whether they intend to be bound by the contract.
So, you have your grounds of termination solved and understand the exact manner by which the contract can be terminated. Nothing left to think about, right? Wrong! What often can be at the back of people’s mind is the practical implications of termination and these are real points which need to be given considerable thought.
Firstly, you terminate a contract and get the poor performing party off the project…Now what? You have to find a replacement and trust them to complete the job that was failed by the earlier party. Football management is a fantastic example of this thought process. The fans go ballistic calling for the sack, the manager gets fired and then there is no idea of what comes next! This is a crucial consideration. What is the point of terminating an underperforming party if the replacement is no better. So, before the decision is made to remove a party to a contract, make sure you know what the next steps are once that first step is made.
Secondly, what is your appetite for risk? Ultimately, there is very few termination decisions that carry little to no risk. Due to the contractual tightrope, you are walking, the potential for disputes and the likely delay and cost increase of finding a replacement, the termination scenario is full of risk. So, you need to balance the performance of the potential terminated party with the risk of terminating them, disputing said termination and the costs of finding a replacement. Each of these risks have the potential to outweigh the present situation. Even if a party wrongfully challenges a termination at adjudication, you could expend significant fees in defending your decision that will likely be non-recoverable. The replacement will likely not be able to commence immediately, and their costs will in most circumstances be higher. So, you need to calculate what these risks are and make an informed decision.
Finally, as said at the outset, termination is not a place where parties want to be. So, is there any way in which we can avoid this with the present party? Assistance may be required to get a party over the line. As explained above, termination is going to be costly in almost all circumstances and so helping a struggling party may be the cheapest and most efficient way of getting what you want i.e. the fulfilment of the contractual obligations. Now, this is caveated in that you need to ensure any assistance you provide is ring fenced based on performance, but this may be the most cost-effective way to proceed. However, this too needs to be given thought as you do not want to give assistance if you think there is no way their performance will improve.
So, when it all comes together, termination is a significant step and one that should not be done hastily. Serious thought needs to be given to the practical situation in front of you and possible outcomes of making that decision. Ill prepared terminations without thought given to future consequences is a sure-fire way to get at best an expensive replacement or worse a wrongful termination with significant damages being owed by you or your client. Whatever you decide, make sure you tread carefully and always follow the rules.
