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Termination in Construction Contracts: Getting It Right

Posted on 12 February 2018 by Alex Barker and Alex Pattihis

Termination in Construction Contracts: Getting It Right

In the wake of the insolvency of Carillion, an event which has sent shockwaves through several supply chains, termination has been thrust into the limelight for the construction industry. 
In the recent case of Phones 4 U Limited (In Administration) v EE Limited, the High Court decided that a party could not recover damages for repudiatory breach of contract, because its termination notice elected to terminate the contract under a contractual provision unrelated to breach rather than for common law repudiatory breach of contract. 

Whilst this particular case did not involve a construction contract, getting the termination notice wrong is a common risk in construction. This decision should serve as a cautionary reminder to any party considering termination of a construction contract that they must, first and foremost, analyse the termination provisions in the contract.

The Background

Phones 4 U (P4U) contracted with EE Limited (EE) to sell consumer pay-monthly contracts. From early 2012, P4U faced increasing financial pressure as numerous other network providers terminated their agreements with them. 

On 12 September 2014, EE informed P4U that it would not renew its contract that was due to expire the following year. As a result, the Board of Directors of P4U met that afternoon and resolved to appoint administrators.

P4U did not open its shop doors on 15 September 2014 and trading ceased that day. On 17 September 2014, EE sent a termination letter to P4U which stated that:

In accordance with clause 14.1.2 of the Agreement, we hereby terminate the Agreement with immediate effect. … .

Nothing in this notice shall be construed as a waiver of any rights EE may have with respect to the Agreement … . 

Without limiting the generality of the previous sentence, nothing herein shall be deemed to constitute a waiver of any default or termination event, and EE hereby reserves all rights and remedies it may have under the Agreement … ."

The Dispute

Following termination, P4U brought proceedings against EE seeking unpaid commission fees. However, EE counterclaimed on the basis that P4U's cessation of trade amounted to a repudiatory breach enabling them to terminate on the grounds of repudiation which, in turn, entitled them to a substantial claim for damages (in the region of £200 million).

P4U argued that EE's counterclaim was 'unsustainable' because the wording of the termination letter clearly referred to a contractual right of termination, clause 14.1.2 of the contract, which therefore precluded the right to terminate on the common law grounds of repudiatory breach of contract (which therefore extinguished any resultant claim for damages arising from repudiatory breach).

The Decision 

In agreeing with P4U, the Court considered that the termination letter was an express and unequivocal communication of contractual termination, quite unrelated to the common law right to terminate arising out of the repudiatory breach. 

This meant that EE could not argue that it had also terminated on common law grounds and as such was precluded from counterclaiming for damages for repudiatory breach.

Comment

The case clarifies that, where there are clear inconsistencies between the effects of utilising either termination right, a terminating party cannot rely upon both contractual and common law termination rights. As such, the termination grounds are mutually exclusive and the termination notice must clearly define which grounds it relies upon for termination. 

In instances where there are both contractual and common law rights to terminate, the aggrieved party must consider whether terminating under either ground will produce a more advantageous outcome. For example, where damages are likely to be merely de minimis or uncertain in amount, the express, contractual grounds for termination may be preferred as they are likely to be simpler to establish.

Termination can be quite technical and the consequences of getting it wrong are often severe. If termination is handled in the wrong way, it may result in the innocent party losing its right to claim damages, or worst still, committing a serious breach of the contract and exposing itself to a costly damages claim. Parties should seek legal advice in the event of any uncertainty, to ensure that any advantageous position is protected and any risks minimised.

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