Repudiation in construction contracts

A refusal by the employer to carry out their part of the contract is a repudiation. The employer will be guilty of repudiation if they unlawfully render completion by the contractor impossible. This may occur through a failure to give possession of the site to the contractor, or unlawful ejection of the contractor.

Employment of other contractors to complete the works for which the contractor is itself responsible is a repudiation.

Where the contractor is entitled to stage payments under the contract or by virtue of Part II of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011, it is possible that the employer's failure to pay such instalments will amount to repudiation. However, whether this is determined will depend on the facts of each case, and the authorities make it clear that failure to pay one instalment out of many will not usually amount to a repudiation (see Valilas v Januzaj [2014] EWCA Civ 436).

It is possible that an employer will be in repudiatory breach where they are aware that the project architect, as their agent, is consistently undercertifying payments to the contractor and they do nothing. However, it is likely that this will only be the case in extreme circumstances and where the contractor cannot resort to arbitration to have the certificates corrected.

Accepting the breach

The innocent party must 'accept' the repudiatory breach in order to be discharged from further obligations under the contract.

Acceptance does not need to be in any particular form; it is sufficient that the innocent party communicates its decision to the party in default. However, such acceptance must be clear and unequivocal and it is not normally sufficient for the innocent party to simply do nothing. A notice would be deemed equivocal if it combined the attempt to terminate with demand for continuing performance (see Force India Formula One Team Ltd v Aerolab Srl [2013] EWCA Civ 780). In some cases, a failure to perform may constitute acceptance of repudiation, but this will depend on the particular contractual relationship and the circumstances of the case. As an example of such a case, Lord Steyn in Vitol SA v Norelf Ltd [1996] A.C. 800 explained that a contractor, having been told by their employer that they are repudiating the contract and that the contractor should not return for work the next day, will be taken to have accepted the employer's breach in their failure to return. This position has been applied in subsequent case law including Hayes (t/a Orchard Construction) v Gallant [2008] EWHC 2726 (TCC).

Upon acceptance of the breach the parties are discharged from any further primary obligations under the contract, such obligations being replaced with a secondary obligation to pay damages. However, the contract does not fall away entirely. The following statement of the law by Dixon J. was approved by Lord Wilberforce in Johnson v Agnew [1980] A.C. 367,

'The contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired ... the contract is discharged so far as it is executory only and the party in default is liable for damages for its breach.'

For example, payments already due will remain, and a full arbitration clause will normally survive. Further, in Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2017] EWHC 1763 (TCC), the Technology and Construction Court held that the employer under an NEC3 construction contract was still able to recover over-payments from the contractor, notwithstanding that it was itself in repudiatory breach of contract in dismissing the contractor alleging widespread defects in its work.

Note that acceptance of the repudiation is irrevocable, although this will not stop the parties from resuming performance of their obligations under a new contract, which may be on the same terms.

Affirming the contract

The innocent party is not obliged to accept the repudiation of the other. It is open to that party to elect to affirm the contract, thereby ensuring that both parties' obligations pursuant to it continue. The following points may be noted about affirmation and its consequences:

• The innocent party must have knowledge of the relevant facts relating to the breach and appreciate their right to choose between affirming the contract or accepting the repudiation.
• Affirmation need not be formal or express. It is sufficient that the innocent party does some act that demonstrates their intention that the contract should remain in place.
• Doing nothing on the part of the innocent party will not usually amount to affirmation except in circumstances where such a length of period has elapsed that a reasonable inference can be drawn that the party intends the contract to remain in place.
• Affirmation must be total and cannot relate to a part of the contract only.
• Affirmation is irrevocable. It is not open to the innocent party to subsequently change their mind. However, one party may, in a particular case, engage in repeated repudiatory breaches, each of which will entitle the innocent party to bring the contract to an end. Affirmation of the contract upon one such breach will not preclude the innocent party from accepting a subsequent repudiatory breach.
• The effect of affirmation is that the contract remains in force, but the innocent party does not thereby give up a right to claim damages against the party in breach in respect of any loss suffered.

The middle ground

The innocent party may take some time to make up their mind what to do. This is often expressed as 'the middle ground', as described by Rix L.J. in Stocznia Gdanska SA v Latvian Shipping Company [2002] EWCA Civ 889. The following points can be made:

• It is a question of fact in each case how long the innocent party is able to maintain the 'middle ground' until they are taken to have affirmed the contract.
• While the innocent party is making up their mind, an anticipatory repudiatory breach can be 'overtaken' by another event, such as frustration of the contract, or even the innocent party's own breach.
• The contract remains in force during this period so that the innocent party is bound to perform their obligations under it, unless prevented from doing so by the other party's breach.

During this period it is open to the party in breach to resume performance of the contract, thereby ending the innocent party's continuing right to accept the former repudiation. As described by Rix L.J. in Stocznia Gdanska, an anticipatory repudiatory breach that has not yet been accepted is 'a thing writ in water'.