Contractual termination

Parties to a contract can agree that under certain circumstances, the contract is open to termination by one or another of them. Such a clause may be relatively simple, providing for termination upon the giving of notice by one party to the other. Other clauses make detailed provision regarding the circumstances in which a party is able to terminate. It is important that such provision is complied with upon exercise of the contractual power to terminate.

A clause that gives the parties the right to terminate at any time is a useful tool in a multi-stage project where it is not known at the time of contracting whether all stages will be undertaken. For example, if 2 parties are negotiating a contract for the construction of a large housing development that has only been granted planning permission for certain parts, the employer will wish to terminate if permission is not obtained for the remaining parts at a later date. While such a clause gives the parties the freedom to bring the contract and their obligations to an end, clearly this freedom comes at the price of uncertainty over the duration and scope of the contract works. For this reason, most parties will wish to protect themselves by incorporating a notice requirement into the termination clause.

Many contracts incorporate more complicated termination clauses that provide for termination only in certain circumstances. Each clause will have to be construed individually and the variety of such clauses makes it difficult to lay down any general principles. However, many standard form contracts contain such provisions and the following aspects of the provision for termination at section 8 of the JCT 2016 Standard Form of Building Contract can be noted:

1. The employer is entitled to terminate upon default by the contractor, but only after having given a notice to the contractor specifying the default and a notice of termination where the contractor continues that default for a further 14 days.
2. The employer is also able to terminate the contractor's employment where the contractor is insolvent (defined within section 8 of the JCT 2016 Standard Form of Building Contract), or where the contractor has committed an offence under the Bribery Act 2010.
3. The section sets out the consequences of termination by the employer pursuant to these provisions, which include the right to employ others to complete the works and remedy any defects. There is an accounting process that enables the employer to recover monies spent completing the works while giving credit to the contractor for monies that would have been received had the contract not been determined.
4. The contractor is itself able to terminate the contract for default by the employer (including for failure to pay amounts due to the contractor) or upon the insolvency of the employer.
5. The section provides for an account to be prepared upon termination by the contractor, which will include the value of work done and materials supplied, together with loss and damage caused to the contractor by the termination.
6. The section further provides for termination by either party in the event that carrying out of the works is suspended for a specified period of time by reason of one or more of an event listed, including force majeure and loss or damage to the works by reason of a defined 'specified peril'. Again, an accounting process takes place following such termination.
7. An important general point to note within section 8 of the JCT 2016 Standard Form of Building Contract relates to the requirement for notices to be given under that section not 'unreasonably or vexatiously'. The Court of Appeal has twice considered the meaning of these words in J M Hill v London Borough of Camden 18 BLR 31 and John Jarvis v Rockdale Housing Association (1985) 5 Con. L.R. 118.
   In Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10 (para 39) Gilliland HHJ summarised previous authorities as to the meaning of 'unreasonably or vexatiously'. 'Vexatiously means the Contractor determines the building contract with the ulterior motive or purpose of oppressing, harassing or annoying the Employer'. He further stated 'The court may ascertain what is an unreasonable determination by reference to how a reasonable contractor would have acted in all circumstances.'
8. Finally, in relation to the express reservation to the parties of their normal rights at common law, in addition to the rights conferred under section 8 of the JCT 2016 Standard Form of Building Contract, a repudiatory breach by one party might allow the other to terminate, but the common law right to elect to accept that repudiation remains open to that party. In such a situation, the innocent party has the option to exercise their contractual rights, common law rights or both. Whether it is more advantageous to do one or the other will depend on any advantages afforded under the contractual procedure and the circumstances of the case (for example, if compensation was available by exercising contractual rights but damages had been excluded at common law under the contract, the contractual right would be favourable). In Newland Shipping and Forwarding Limited v Toba Trading FZC [2014] EWHC 661 (Comm), it was held that the claimant's notice could and did suffice both to enforce its contractual right of cancellation and to terminate the contract for repudiatory breach at common law provided the intention to exercise both rights had been clearly communicated in the notice. Only if the consequences of both conflicted would the claimant have to elect between them.
9. In the case of C&S Associates UK Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757 (Comm), the High Court considered whether a party could later rely on a ground for termination that it did not initially mention at the time of termination. While the general rule enables a party to do so, it will not be permitted to rely on an omitted ground if the circumstances are such that had the relevant failure been pointed out by the terminating party, the other party could have remedied the failure.
10. Vinergy International (PVT) Ltd v Richmond Mercantile Limited FZC [2016] EWHC 525 (Comm) the High Court considered whether a contractual provision requiring that a terminating party give notice and an opportunity to cure the breach applied when a party was terminating at common law for repudiatory breach. It was held that it was a matter of construction whether a clause requiring notice and a cure period applied to a party terminating for repudiatory breach at common law; there was no general principle that it should. In this case, the clause did not expressly so apply and there was no justification for implying wording to the effect that it should. Only the type of breaches that are within the scope of a clause are remediable ones.
11. In Phones 4u Ltd v EE Ltd [2018] EWHC 49 (Comm), the High Court dismissed a common law claim for damages for loss of the contract on the basis that the termination notice relied solely on an express contractual right to terminate rather than, additionally, a common law right to terminate on account of breach.

The position in Scotland

Users should be aware that while the termination provisions of the equivalent set of construction contracts published by the SBCC is broadly similar to section 8 of the JCT suite of contracts, common law aspects of termination in Scotland are different in a number of important ways and therefore separate legal advice should always be sought in that regard.