22Suspension and termination of contracts
As noted in Chapter 20, the legal remedy of damages can be awarded for any breach of contract, whether major or trivial. This Chapter deals with other remedies that may be available for serious breaches of contract, or in other situations where events fundamentally change the contractual environment. In particular, we are concerned with the circumstances in which the contract work may lawfully be stopped, either temporarily or permanently. This requires consideration of the remedies of suspension of work, termination of the contract for breach and termination of the contractor’s employment. There is also the possibility that the contract may be brought to an end under the doctrine of frustration.
22.1SUSPENSION OF WORK
At common law (unlike French law), one contracting party (A) has no right to suspend performance of contractual obligations on a temporary basis, on the ground that the other party (B) is in breach of contract.1 Unless B’s breach is sufficiently serious to justify A in terminating the contract altogether, A’s only remedy is to claim damages, in the meantime continuing with the contract. This means that, unless the contract specifically provides for suspension of work as a remedy for non-payment (as do JCT, NEC, ICC and FIDIC forms of main contract), a contractor who suspends work on the ground of not having been paid will be guilty of a breach of contract in failing to maintain regular and diligent progress.
As far as construction contracts are concerned, the common law position has been reversed by statute. Section 112 of the Housing Grants, Construction and Regeneration Act 1996 provides that where any sum due under a construction contract has not been paid in full by the final date for payment (see Section 15.1.2), and no effective notice to withhold payment has been given (see Section 20.4.4), the payee has the right to suspend work until full payment is made. This right may not be exercised without giving the other party at least seven days notice of the intention to suspend, stating the grounds on which this action is based.
The Act provides that any time during which work is suspended in this way is to be disregarded in working out the length of time taken to complete the contract work, and any other work which is directly or indirectly affected (for example under a sub-contract). This means, in effect, that the contractor and any affected
1 Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1992] 2 All ER 609.
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sub-contractor is given an extension of time for the period of suspension. However, it is worth noting that nothing in the Act itself gives either the contractor or any sub-contractor the right to claim for loss and/or expense in respect of costs arising out of the delay. Not surprisingly, many contracts provide specifically that the contractor is entitled to recover such loss and/or expense (see for example JCT SBC 11, clause 4.24).
22.2TERMINATION FOR BREACH AT COMMON LAW
Termination in construction contracts is frequently the source of significant or high-value disputes. The decision to exercise a termination may be taken by the employer removing the contractor from a project or by the contractor abandoning a project before its completion. The decision may be taken at short notice, only to be followed later by arguments as to whether the termination was invalid. The financial consequences for either party, particularly if it is found at law that the termination was wrongly exercised, can be very large.
Termination of a contract for breach refers to the situation where the misconduct of one of the parties is so serious that the law gives the other party the option to bring the contract to an end. This Section explores the issue of termination for breach, contrasting it with termination of the contractor’s employment, and examines the circumstances in which termination commonly happens in construction contracts. It may be noted at this stage that, while modern contracts such as JCT SBC 11 and ICE 7 speak of ‘termination’ of the contractor’s employment, many older contracts (and therefore cases arising out of them) used the word ‘determination’. In this Chapter we use the word ‘termination’.
22.2.1Termination for breach and termination of employment distinguished
It is important at the outset to understand the distinction between the two concepts of termination for breach at common law and termination under the agreement. The common law right to terminate or ‘repudiate’ a contract can arise in either of two situations. First, one party may make clear that it has no intention of performing its side of the bargain. Secondly, that party may be guilty of such a serious breach of contract that it will be treated as having no intention of performing. A breach of either kind is known as a ‘repudiatory breach’. In both cases, the innocent party has a choice; either to ‘affirm’ the contract and hold the other party to its obligations (while claiming damages as appropriate for the breach), or to bring the contract to an end. If repudiation is opted for, then both parties are released from any further contractual obligation to perform. However, the terms of the contract remain relevant to such matters as establishing liability (for example where there is an exemption clause), assessing damages (including liquidated damages) and resolving disputes (for example where there is an arbitration clause).
By contrast, many building contracts make express provision for termination in specified circumstances. Not all of these circumstances amount to sufficiently serious breaches of contract to justify termination; indeed, some of them are not
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breaches at all. Such clauses normally lay down procedures (the giving of notice and so on), which must be followed if the termination is to be effective. They also deal with the consequences, financial and otherwise, of the termination. Most importantly, while common law termination brings the contract to an end altogether (subject to what was said in the previous paragraph), the contractual remedy of termination only terminates the contractor’s right and obligation to carry out the contract works, but does not release the parties from any further obligation.
Some events would justify termination of the contract at common law as well as triggering a termination clause in the contract. Where this is so, it was for many years assumed that the innocent party would have a completely free choice as to which remedy to pursue. However, it was held by the Court of Appeal in Lockland Builders Ltd v Rickwood 2 that, where a contract lays down a clear procedure for termination, this may by implication exclude any common law right of termination, except where the other party demonstrates a clear intention not to be bound by the contract (that is, where the guilty party commits the first type of ‘repudiatory breach’ identified above). While this decision has not been overruled, it is somewhat difficult to reconcile with the subsequent decision of the House of Lords in Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd,3 and may therefore not be followed in future. In any event, JCT SBC 11 makes clear in clause 8.3 that the contractual provisions for termination of the contractor’s employment are in addition to any other legal rights or remedies of the parties.
Where the Lockland decision does not apply (so that both remedies are in principle available), the innocent party must elect for one remedy or the other, and cannot combine the best elements of the two remedies in some complex way. Thus, for example, a party who seeks the favourable remedies provided by a contractual termination clause must follow the specified procedures. Failure to do so may result in the innocent party having to rely on its common law rights instead, but this can only be done if the contractor’s breach is a sufficiently serious one.4 Likewise, where a clause of the contract provides for termination in circumstances where the common law does not, the innocent party can only take whatever remedy the contract offers. This situation is exemplified by a case5 in which a local authority contract provided that, in the event of unauthorized sub-contracting, the authority could either terminate the contractor’s employment or claim £100 liquidated damages. When the contractor breached this provision, the local authority gave notice of termination, engaged another contractor to complete the work and then claimed against the original contractor for the extra cost incurred (a total of some £21,000). However, it was held that, since the contractor’s breach would not have justified termination of the contract at common law, the local authority was limited to those remedies specifically given by the contract. These did not include unliquidated damages, and so the local authority’s claim failed.
2 (1995) 77 BLR 38.
3 (1998) 88 BLR 1.
4 Architectural Installation Services Ltd v James Gibbons Windows Ltd (1989) 46 BLR 91. 5 Thomas Feather & Co (Bradford) Ltd v Keighley Corporation (1953) 53 LGR 30.
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22.2.2Nature and effect of repudiation
As mentioned above, repudiatory conduct by a contracting party does not of itself bring that contract to an end. This will come about only when the innocent party chooses to exercise its right to terminate the contract and notifies the guilty party to that effect. Such notification, once made, is irrevocable. Indeed, notification by the innocent party of intention to ‘affirm’ the contract is also irrevocable. Since intentions may be implied from conduct as well as expressed in words, it is very important for the innocent party to make clear decisions and to act promptly upon them. In the Canadian case of Pigott Construction v WJ Crowe Ltd,6 for instance, plastering sub-contractors were told in September that they would soon be required. However, due to delays arising because the main contractor failed (in breach of the main contract) to provide temporary heating, they were not called upon until the following April. It was held that, even if this delay could have been treated as sufficiently serious to justify termination, the sub-contractors’ failure to complain about it (despite inspecting the site in March) deprived them of the right to terminate the sub-contract. As a result, the sub-contractors were not in a position to demand a renegotiation of their prices.
An even stronger case is Felton v Wharrie7 where, under a 42-day demolition contract with a liquidated damages provision, the contractor delayed beyond the completion date and, on being asked when he expected to finish, replied that he could not say. Thirteen days later, the employer without warning entered the site and refused to allow the contractor to continue with the work. It was held that this purported exercise of the right to terminate the contract came too late.
One particular problem which the law has not yet satisfactorily resolved is whether an innocent party who ‘affirms’ a contract can insist on carrying out that contract in the face of the other party’s clear (though wrongful) wish to terminate it. The innocent party’s right to act in this way was upheld by a bare majority of the House of Lords in the non-construction case of White & Carter (Councils) Ltd v McGregor,8 albeit with the proviso that the innocent party must have a ‘legitimate interest’ in performing the contract instead of claiming damages.
The particular difficulties that this raises in the construction context were recognized in Hounslow LBC v Twickenham Garden Developments Ltd,9 where a contractor claimed to be entitled to continue with a JCT 63 contract that the employer had purported to terminate. Megarry J was firmly of the opinion that the White & Carter principle did not apply where performance of the contract required the co-operation of the other party, especially where it consisted of work done on the other party’s property. If this view is correct, it means that the White & Carter principle will seldom apply in the context of a building contract.
The Hounslow case raised another issue of enormous practical importance, and unfortunately dealt with it in a way that has attracted considerable criticism. It was there held that, where an employer purports either to terminate a contract for breach or to operate a contractual provision for termination, but the contractor
6 (1961) 27 DLR (2d) 258.
7 HBC 4th ed, Vol 2, 398.
8 [1962] AC 413.
9 [1971] Ch 233.
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disputes the validity of the employer’s act, the employer will not be entitled to an interim injunction compelling the contractor to leave the site. If this is correct, it means that the contractor can effectively prevent the employer from getting in another contractor to complete the work, even if it is later found that the employer’s actions were perfectly valid. Such a conclusion creates an intolerable situation in practical terms, and it is significant that, while the decision has not been overruled, courts in both England10 and New Zealand11 have refused to follow it.
22.2.3Breach of contract justifying termination
It sometimes happens that one contracting party (‘A’) is in breach of contract and the other party (‘B’) treats this as a repudiatory breach, but it is later held that A’s breach was not sufficiently serious to justify this. The question which then arises is whether this mistake means that B, who clearly intended no longer to be bound by the contract, is now guilty of a repudiatory breach, so that A is entitled to terminate the contract. There are good reasons for suggesting that this should be the result, since it enables the parties to know where they stand. However, the courts have shown some reluctance to punish a party for an honest but mistaken belief as to the rights and remedies available, and it has thus been held by a majority of the House of Lords that to invoke a contractual remedy in error, unless it is totally abusive or in bad faith, does not in itself constitute a repudiation of the contract.12
Employer’s breach
Various acts by the employer can result in a repudiatory breach and thus entitle the contractor to terminate the contract. These are listed and explained below:
Failure to give possession of the site: While minor interference by the
employer with the contractor’s possession of the site is not a repudiatory breach,13 an outright refusal to give possession in the first place will be so.
Similarly, wrongful ejection of the contractor from the site is such a breach.14 As to mere delay in giving possession, the crucial question (and it is one of degree) is whether the employer’s conduct indicates an intention no longer to be bound by the contract. For example, where an employer delayed giving possession of the site for two months despite repeated requests from the contractor, and also announced that part of the contract work was to be omitted and given to another contractor, it was held that
these two breaches, taken together, amounted to a repudiatory breach of contract.15
Non-payment of sums due: As a general principle of law, failure to pay on time what is due under a contract will not normally be treated as a sufficient
10Tara Civil Engineering Ltd v Moorfield Developments Ltd (1989) 46 BLR 72.
11Mayfield Holdings Ltd v Moana Reef Ltd [1973] 1 NZLR 309.
12Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571.
13Earth & General Contracts Ltd v Manchester Corporation (1958) 108 LJ 665.
14Roberts v Bury Commissioners (1870) LR 4 CP 755.
15Carr v JA Berriman Pty Ltd (1953) 89 CLR 327.
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breach to justify the other party in terminating that contract.16 Failure to pay on time what is owed on another contract is even less likely to be a repudiatory breach.17 This is why contracts commonly provide express rights of termination for non-payment. However, while late payment (or short payment) is not in itself repudiatory, a continued refusal to pay may become so.
The practical problems which may arise in this area are exemplified by the case of DR Bradley (Cable Jointing) Ltd v Jefco Mechanical Services Ltd.18 That case concerned a £113,000 sub-contract for electrical work which was made by word of mouth, with no express agreement as to time or methods of payment (although it was accepted on all sides that the parties intended interim payments to be made). After a succession of five payments which were both late and short, the claimant sub-contractors withdrew from the site, whereupon the defendant contractors threatened that after seven days they would treat this as a repudiatory breach and would then employ a substitute at the claimants’ expense. The claimants then submitted a claim for £31,000, to which the defendants offered a mere £5,000.
On these facts it was held that the claimants were not entitled to terminate the contract for the original failures to pay, and that they would thus have been guilty themselves of a repudiatory breach, had not the defendants waived this by giving them seven days to return to work. However, the defendants’ subsequent derisory offer was sufficient to shatter the claimants’ confidence in ever getting paid, and it thus justified them in bringing the contract to an end at that stage.
Withholding of certificates: If the contract administrator refuses to certify at the appropriate time, or negligently under-certifies, this may well constitute a breach of contract on the employer’s part. It certainly will do so if the contract administrator’s conduct is due to positive interference by the employer. Such events will undoubtedly enable the contractor to claim
damages, or possibly to recover what is due without the necessity of a certificate.19 Whether they will justify termination of the contract will once again depend on whether the breach is sufficiently serious to be regarded as repudiatory.
Hindrance of the contractor: A breach by the employer of the duties of non-hindrance and positive co-operation may be so serious as to indicate an
intention not to be bound. This has been held to be the case where an employer wrongfully ordered the contractor not to complete the work,20
where an employer failed to provide the necessary drawings as required by the contract21 and where an employer, concerned that work was falling
behind schedule, employed other workmen to carry out part of the contractor’s work.22 Termination cannot legally occur if the contractor had
16Mersey Steel & Iron Co v Naylor, Benzon & Co (1884) 9 App Cas 434.
17Small & Sons Ltd v Middlesex Real Estates Ltd [1921] WN 245.
18(1988) 6-CLD-07-19.
19Perini Corporation v Commonwealth of Australia (1969) 12 BLR 82.
20Cort v Ambergate, Nottingham, Boston & Eastern Junction Railway Co (1851) 17 QB 127.
21Kingdom v Cox (1848) 5 CB 522.
22Sweatfield Ltd v Hathaway Roofing Ltd [1997] CILL 1235.
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been prevented or hindered by the employer from remedying the failure within the specified time, since a party cannot rely on its own wrong.23
Contractor’s breach
Acts by a contractor that may constitute a repudiatory breach fall into the following groups:
Abandonment or suspension of the work: Perhaps the most obvious
example of ‘repudiatory breach’ by a contractor is total abandonment of the work in circumstances where this is unjustified.24 Whether less extreme action by the contractor will have this effect is, as usual, a question of fact and degree. For instance, contractors who were complaining of late payment retaliated by withdrawing their labour and most of their plant from the site and thus slowed down progress considerably. However, they retained a presence on site through their supervisory staff, and they did nothing to discourage sub-contractors from continuing with their work. It was held by the Court of Appeal that the contractors’ tactics, though clearly in breach of
their duty to maintain regular and diligent progress, were not sufficient to justify the employers in terminating the contract.25
Defective work: As a general principle, defects in the work do not entitle
the employer to terminate the contract and refuse payment altogether. The employer’s remedy is to claim damages for the cost of rectification.26 However, very serious defects may justify the conclusion that there has not been ‘substantial performance’ by the contractor. Where this can be established, the employer need pay nothing. For example, the installation of a central heating system at an inclusive price of £560 was defectively carried out. The system was only 90% efficient (70% in some rooms) and gave off fumes in the living room. The Court of Appeal held that the
claimant was entitled to nothing for this work; the defendant was not limited to setting off the £174, which it would cost to put right the defects.27 It is even possible that an accumulation of lesser defects may amount to a
repudiatory breach of contract, even though none of them would be sufficient on its own. It was thus held in one case28 that the contractors’ ‘manifest inability to comply with the completion date requirements, the nature and number of complaints from sub-contractors and their own admission that ... the quality of work was deteriorating and the number of defects was multiplying’ entitled the employer to terminate the contract and to order the contractors to leave the site. The employer had justifiably concluded that the contractors had neither the ability, competence nor the will to complete the work in accordance with the contract.
23Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) (16 April 2014).
24Marshall v Mackintosh (1898) 78 LT 750.
25JM Hill & Sons Ltd v Camden LBC (1980) 18 BLR 31.
26Hoenig v Isaacs [1952] 2 All ER 176.
27Bolton v Mahadeva [1972] 2 All ER 1322.
28Sutcliffe v Chippendale & Edmondson (1971) 18 BLR 149.
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Delay: At common law, there are only three situations in which delay by a contractor will justify the employer in terminating the contract. First, the delay may be so great as to demonstrate the contractor’s intention not to be bound by the contract. Second, the contract itself may make clear that the time of completion is of fundamental importance (the legal phrase is that ‘time is of the essence’). This can be done by express words; it can also be done by implication, although this is unlikely to be the case in a construction contract. Third, once delay has occurred, the non-delaying party may make time of the essence (where it is not already so) by giving reasonable notice to the other party. Interestingly, where a contract provides that the contractor is to proceed regularly and diligently with the work, the
failure to proceed will not be limited to cases where there has been delay. In
Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd29 the judge found that Redhall’s breach in not revising and resubmitting a programme in accordance with contractual obligations, when required to do so by the client’s contract manager, was a material breach. It was not a minimal or inconsequential breach, nor was it an accident or mistake but was a breach committed over a substantial period of time as a result of a ‘deliberate commercial decision’ to await the result of its claim for an extension of time and money.
Miscellaneous: Whether or not a contractor’s breach of contract is sufficiently serious to justify the employer in terminating is always a question of fact and degree. Thus, where a contractor sub-contracted in
contravention of an express term in the contract, it was held that this did not amount to a repudiatory breach.30 However, in a case where a contractor
failed to obtain a performance bond as required by the contract, a court came to the opposite conclusion and decided that this was repudiatory.31
22.2.4Failure to proceed regularly and diligently
As noted under Chapter 14 (Time), in the absence of any indication to the contrary, the contractor has absolute discretion as to how the work is planned and performed, provided only that it is completed on time.32 In practical terms, this means there is no obligation generally to progress at a steady pace. One of the more common grounds upon which employers seek termination is on the grounds that the contractor appears to have fallen heavily into delay. Accordingly, most standard forms incorporate a requirement that the contractor is to proceed regularly and diligently with the work with a corresponding provision that failure to proceed regularly and diligently is an express ground for termination.
The question sometimes arises, when assessing whether the contractor’s progress is sufficiently poor as to justify termination, whether the obligation to proceed diligently relates to the contract overall or merely to the few weeks before
29[2013] EWHC 4030 (TCC).
30Thomas Feather & Co (Bradford) Ltd v Keighley Corporation (1953) 53 LGR 30.
31Swartz & Son (Pty) Ltd v Wolmaranstadt Town Council 1960 (2) SA 1.
32GLC v Cleveland Bridge and Engineering Co Ltd (1984) 34 BLR 50.