Construction law terms: termination at common law and under contract

There is widespread confusion between the two different ways to terminate: termination at law, which involves general legal principles, and termination under contract. On top of this, the draconian consequences of termination mean that courts require strict compliance with contractual procedures on termination, and apply a ‘high bar’ to common law termination.

This guide examines the meaning of termination at law and termination under contract, explains important differences, looks at how these differences have been illustrated in recent case law and offers some key practical takeaways

Termination

Termination relates to the ending of the parties’ obligations to carry on performing their primary contractual responsibilities. In a construction context this usually means the obligation on a contractor to carry out works and the employer to pay for those works. The contract does not cease to exist and there may be contract terms which continue to operate – for example, confidentiality or dispute resolution provisions.

As a matter of English law, termination of a contract can usually be achieved by one party either accepting a common law ‘repudiatory’ breach, or by exercising a contractual termination right in accordance with the contract terms.

Common law termination

The laws of the relevant jurisdiction will determine whether a right to terminate a contract has arisen at law. The English law position is that where there is a repudiatory breach by one party, the other party to the contract will have the right to terminate the contract under common law, by accepting this breach.

In terms of demonstrating whether a common law right to terminate has arisen, one of the reasons why termination so often goes wrong is that, unhelpfully, there is no specific definition of what amounts to a repudiatory breach. It is commonly said that the breach must be sufficiently serious: to “go to the root of the contract” or “deprive the innocent party of the benefit of the contract”. Some examples of what might be considered a repudiatory breach of a construction contract include a contractor abandoning its works, or an employer preventing access to a site.

Read more in our construction law terms series

• Construction law terms: general and liquidated damages
• Construction law terms: design development and design change
• Construction law terms: claims under contract vs breach of contract claims
• Construction law terms: assignment and novation
• Construction law terms: contractual notices and condition precedent notices
• Construction law terms: set off, abatement and counterclaims

Perhaps surprisingly, a failure to pay by the employing party may not be held to be a repudiatory breach – although a contractor would feel that this is the ‘benefit of the contract’ they are most interested in. Similarly, what amounts to ‘abandonment’ of the works – rather than a temporary slow down or one caused by the other party – may not always be clear. Such minor or even excusable breaches will usually not be enough to justify terminating at common law.

Because there is no one definition of repudiatory breach, and establishing such a breach depends on the specific circumstances, this creates a risk that the terminating party will be held itself to have wrongfully terminated the contract, for the other side then to be able to accept.

The consequences of getting it wrong can be serious. If there is no right to terminate under common law then the party attempting to terminate could themselves be found to be in repudiatory breach of contract. This means they will be liable to the other party for damages – for example any ‘extra over’ cost of completing the works or the lost profit on the balance of those works wrongly taken away.

This is sometimes referred to as “knife edge of termination”. if you get it right you are on the side of the knife where you recover your loses; if you get it wrong you are on the other side of the knife and have to pay out substantial damages.

Termination under contract terms

Standard form construction contracts such as JCT, NEC and FIDIC, and usually other well-drafted bespoke contracts, all contain additional rights to terminate under express termination clauses. Helpfully, these more clearly explain the circumstances and procedural requirements in relation to termination.

Some common grounds for termination found in construction contracts include:

• material breach;
• failure to regularly and diligently progress the works;
• failure to complete by a certain completion or ‘longstop’ date;
• insolvency – and often widely defined to enable an earlier termination that when works fully stop.

Some construction contracts even allow termination at will where a party can choose to terminate for its own convenience. This is the case in FIDIC for example, but not the standard form JCT. These provisions sometimes provide for generous demobilisation payments and even loss of profit on the balance of the works.

The key difference from common law termination is that contractual termination almost always requires compliance with requirements for termination, such as notice provisions. These often require a ‘warning’ notice to give the defaulting party the chance to put things right. This causes delay to termination. As a result, impatient parties often instead go down the common law termination route – with the uncertainty and risks highlighted above.

The other main risk with contractual termination is that the courts have repeatedly held that contractual notice and procedural requirements must be closely followed. The consequences of not following the specified procedures, such as on timing, format and service of notices, can be serious. As mentioned in relation to termination at common law, wrongful termination of contract could itself constitute a repudiatory breach of contract.

Differences between common law and contractual termination

In order to rely on the contractual termination rights, specific drafting is needed in the contract. In contrast, rights to terminate under common law do not need to be stated or preserved in a contract – the contracting party has such rights if they are not specifically excluded.

Case law on termination at common law and under contract

The following are examples of recent cases which illustrate the practical differences as to how the two operate in practice, and the outcome in situations where a party entitled to terminate under the contract fail to follow the precise contractual procedure for termination. The cases also highlight the possibility of relying on common law termination rights in parallel to attempting contractual termination.

Energy Works Ltd v MW High Tech Projects UK Ltd

Energy Works engaged MW High Tech Projects as the contractor to design and build an energy-from-waste plant. The EPC contract was based on the IChemE Red Book, with bespoke amendments.

There were significant delays to the project. After almost 11 months after the contractual date for completion, the plant had still not been commissioned and the contractor had suspended commissioning work. Energy Works then purported to terminate the EPC contract pursuant to clause 44.1(c) of the contract for the contractor exceeding the delay damages cap.

It was held that the employer had been entitled to terminate the EPC contract for contractor's default pursuant to clause 44.1(c). The contract expressly preserved the employer's common law right to terminate - the employer was also entitled to terminate the contract at common law for the contractor’s repudiatory breach for its wrongful suspension.

Thomas Barnes & Sons v Blackburn with Darwen Borough Council

Blackburn with Darwen Borough Council engaged Thomas Barnes & Sons plc to construct a bus station. The contract was an amended JCT standard form of building contract with quantities 2011 edition. There were significant delays and cost increases to the project. The contractor substantially suspended the carrying out of the works for a significant period.

The council then issued a termination notice to the contractor relying on its contractual right to terminate under clause 8.4 of the contract, and removed the contractor from site on 4 June 2015. The termination notice was served on 4 June 2015:

• by hand to the site address – rather than the contractor’s registered office, as required by the contract;
• by email – which was not allowed under the contract; and
• by recorded delivery, which arrived on 8 June.

The contractor claimed that its removal from site on 4 June 2014 before the validly delivered termination notice in fact constituted a repudiatory breach of the contract by the council. It was decided that by 4 June 2015, the council was entitled to exercise both its contractual right to terminate and its common law right to terminate for repudiatory breach. As a result of its failure to follow the correct procedure under the contract, the council failed to terminate the contract in accordance with the contractual termination.

However, the failure to follow the correct procedure by the council did not invalidate the effectiveness of its acceptance of repudiatory breach of the contractor. Although a mistaken termination may amount to repudiatory breach, in this case the council’s failure to exercise the correct contractual termination procedure didn’t amount to a repudiatory breach as there was no adverse impact on the contactor as it had already ceased all meaningful activity on site.

Manor Co-Living v RY Construction

Manor Co-Living and RY Construction entered into a contract in the form of the JCT Standard Building Contract 2016, without quantities. A default notice had been sent to the contractor by email and by post. The contract administrator purported to terminate the contract on behalf of Manor Co-Living and barred the contractor from the site.

RV Construction asserted that Manor Co-Living had not properly exercised its contractual right because the notice needed to be issued by Manor Co-Living and by not the contract administrator. RY Construction said the wrongful termination itself amounted to a repudiatory breach of contract. The dispute was referred to adjudication and Part 8 court proceedings were brought after the decision. 

The judge held that there had been no breach of natural justice in the adjudicator reaching its decision that the employer had failed to properly exercise its contractual termination right. The adjudicator had considered the employer’s common law termination defence and the letter sent by the contract administrator had not amounted to an acceptance of repudiatory breach at common law. Manor Co-Living was therefore in repudiatory breach.

Key takeaways

Termination has serious practical, legal and financial consequences – especially if it is done wrongly. Termination at common law can be quicker, but only applies to fundamental breaches. It also needs to be done quickly after such breach or the terminating party will lose that common law right by ‘affirming’ the contract. The options available should always be carefully considered before any steps are taken to terminate a contract.  

Contractual termination can be more certain and can apply in wider circumstances. However contractual termination often requires prior notice, and the courts require strict compliance with notice requirements and periods. Getting it wrong may put a party in repudiatory breach of a contract.

It will depend on the specific circumstances whether termination at common law or under the contract is available, and which type of termination is most advantageous. It might also be possible to rely on both methods of termination in the alternative.

Just because a right to terminate has arisen, it does not mean that this route has to be taken. The innocent party may prefer to continue performing the existing contract, or even re-negotiate contract terms, with the continuity advantage of the same parties finishing the project. For example, practically speaking, it may be better to ‘nurse’ and support a failing subcontractor through to completing their works than trying to procure an alternative and seek to recover the extra direct and delay costs down the line, whatever your strict legal rights.

Given the complexities involved in termination and its serious consequences if wrongly executed, the options available and how to execute them validly should always be carefully considered and specialist advice taken before any steps are taken to terminate a contract.