Contractual termination – a 'common law' v 'contract' battle
The importance of adhering to contractual notice provisions when seeking to terminate construction contracts has long been emphasised by the Courts; no more so than in a recent judgment concerning Manor Co Living Limited ("MCL") v RY Construction Limited ("RYC") .
MCL engaged RYC to complete various works under a JCT Standard Building Contract (2016 edition) (without quantities) with bespoke amendments ("the Contract").
By email on 11 November 2021, the Contract's named Contract Administrator served a notice on RYC, which specified RYC's contractual defaults and warned of MCL's intention to terminate unless remedied within 14 days. A hard copy of the notice was not received by RYC until eight days later.
By letter dated 30 November 2021 (sent under email cover), the Contract Administrator terminated the Contract on MCL's behalf ("the Termination Notice").
RYC disputed the validity of the Termination Notice. It argued that the Termination Notice amounted to a repudiatory breach of the Contract by MCL, which triggered RYC's common law entitlement to terminate the Contract itself in reliance upon that breach.
RYC commenced an adjudication against MCL regarding the validity of the Termination Notice based on its service (by the Contract Administrator; not MCL as Employer), and a failure to comply with applicable notice requirements in the Contract.
RYC sought five declarations, namely;
- MCL terminated RYC's employment prematurely (without leaving enough time between RYC's receipt of the notice specifying alleged defects and service of the Termination Notice);
- MCL did not comply with applicable notice requirements in the Contract when seeking to terminate;
- MCL termination was wrongful and invalid;
- MCL breached terms of the Contract by wrongfully terminating, and/or preventing RYC from accessing site to carry on with the works, and/or by appointing others to complete the works in place of RYC;
- Some or all MCL's actions amounted to repudiatory breaches of the Contract, which were expressly or impliedly accepted by RYC, bringing the Contract to an end.
MCL maintained that its contractual entitlement to terminate the Contract was validly exercised through service of the Termination Notice.
If the Adjudicator did not accept that, MCL put forward an alternative defence, arguing that it had a parallel common law entitlement to terminate the Contract through acceptance of RYC's repudiatory conduct. In support of this, MCL argued that the Termination Notice operated as evidence of MCL's acceptance of RYC's repudiatory breach, and brought the Contract to an end ("the Alternative Defence").
Deciding in RYC's favour, the Adjudicator declared that:
- the Termination Notice was a contractual notice;
- MCL did not allow the contractually required period to elapse between service of the default notice and the Termination Notice, which meant any purported contractual entitlement to terminate was exercised prematurely; and
- MCL prevented RYC's access to site in repudiatory breach of the Contract.
In an attempt to resist enforcement of the Adjudicator's decision, MCL commenced court proceedings against RYC (under Part 8 of the Civil Procedure Rules).
MCL sought a declaration that the Adjudicator's decision was invalid because the Adjudicator had breached the rules of natural justice by failing to consider all elements of its Alternative Defence, which it alleged required consideration of:
- Whether RYC's conduct was repudiatory ("the First Limb"); and
- Whether MCL accepted RYC's repudiatory breach ("the Second Limb").
MCL argued that the Adjudicator's failure to consider the First Limb breached requirements of natural justice and invalidated the decision. The Court disagreed and upheld the Adjudicator's decision.
By reference to the Second Limb, the Adjudicator decided that the Termination Notice could only be reasonably interpreted as a notice served in accordance with a specific provision of the Contract. The Court noted that the Adjudicator's decision on that meant that the Termination Notice could not serve as evidence of any common law right to terminate being exercised, and there was nothing further for the Adjudicator to consider under the Second Limb based on the case advanced at adjudication.
As the Second Limb failed, the Court decided that it was unnecessary for the Adjudicator to consider MCL's Alternative Defence any further as it could not succeed based on the First Limb alone.
This judgment serves as a reminder that fails to comply with contractual notice provisions when terminating can lead to invalid termination attempts and may leave a party (who may have otherwise had a potential entitlement to terminate and seek damages) without recourse.
Perhaps more crucially, this judgment also highlights that failures to properly exercise termination rights may also place a party in repudiatory breach of contract themselves, which, if validly accepted, will not only bring the contract to an end, but will leave them vulnerable to a claim for damages from the other party.