Contractually invalid termination notices – Do they give rise to a repudiatory breach of contract?

In short, the answer is often ‘yes’….

If a party gives a termination notice which doesn’t comply with the contract, it is usually the case that the notice will not give rise to a lawful termination.  In the wrongful belief that the notice is triggering (or has triggered) a lawful termination, the party serving the notice will often say or do things which evidence an intention to no longer be bound by the contract.  Often the wrongful notice itself will evidence such intention, with the result that the giving of such notice can itself unwittingly amount to an act of repudiation.  As noted in our article ‘Termination of Contracts’, an act of repudiation (unwitting or otherwise) will amount to a repudiatory breach which the other party can choose to accept, thereby enabling that party to treat the contract as terminated.   The consequences of this can be serious, with the party accepting the repudiatory breach of contract entitled to seek damages for breach of contract.  For example, in the case of a Building Contractor, such damages may include a claim for its loss of profit on the balance of any works that it was not able to complete because of the breach.

However…

The recent matter of Thomas Barnes & Sons plc (in administration) v Blackburn with Darwen Borough Council [2022] EWHC 2598 (TCC) presents a rare example of when the answer to the above might be ‘no’. The case is an interesting, albeit highly fact specific, example of the Court finding that the giving of a non-compliant termination notice served by the employer was not a repudiatory act.

The background facts

Blackburn with Darwen Borough Council (the ‘Council’) contracted with Thomas Barnes & Sons plc (in administration) (‘TBS’) for the construction of a bus station in Blackburn.

The contract was entered into on the terms of the JCT Standard Form of Building Contract With Quantities 2011, as amended. It provided contractual dates of 21 March 2014 and 19 January 2015 for commencement and completion of the works respectively, for a contract sum of c.£4.5 million.

During the course of the works the project was beset by significant cost increases and delays. TBS made three separate requests for extensions of time and the contract administrator had served three delay notices under the JCT terms.

On 4 June 2015, the Council sought to terminate TBS’ appointment under the contract on two substantial grounds being (1) TBS’ failure to proceed regularly and diligently with the works and (2) TBS substantially suspending the carrying out of the works. The termination notice identified nine separate allegations, including TBS’ failure to comply with previous default notices.

TBS commenced proceedings on the basis that its exclusion from site and the Council’s termination were both wrongful and repudiatory for the reasons that the termination notice was sent via email (which was not a permitted method for the service of notices under the contract) and the Council had removed TBS from site on the date of said email. Whilst the termination notice was also sent by post, deemed service did not take effect until two business days later – after TBS’ exclusion from site.  TBS sought (i) the true value of its works at the time of termination including loss and expense and (ii) damages for wrongful termination including loss of profit, which together amounted to c.£1.8 million.

The Council disputed the claim in its entirety. The Council’s position was that TBS had failed to carry out the works in accordance with its obligations under the contract in:

1. failing to accept and meet its design obligations under the contract;
2. failing to resource the works adequately;
3. failing to pay its subcontractors, suppliers and consultants on time or at all; and
4. failing to perform the works and remedy defects in a proper and workmanlike manner.

The Council alleged that as a result of the above, significant delay was caused to the project, which entitled it to terminate TBS’ employment under the contract and/or under common law.

The Court’s decision

In determining whether TBS had committed a repudiatory breach, the Court utilised the analysis of Etherton LJ in Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168, which provides:

[61] “First … So far as concerns repudiatory conduct, the legal test is simply stated …  It is whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon and altogether refuse to perform the contact”

[62] “Secondly, whether or not there has been a repudiatory breach is highly fact sensitive. That is why comparison with other cases is of limited value”

[63] “Thirdly, all the circumstances must be taken into account insofar as they bear on an objective assessment of the intention of the contract breaker.  This means that motive, while irrelevant if relied upon solely to show the subjective intention of the contract breaker, may be relevant if it is something or it reflects something of which the innocent party was, or a reasonable person in his or her position would have been, aware and throws light on the way the alleged repudiatory act would be viewed by such a reasonable person”

[64] “Fourthly, although the test is simply stated, its application to the facts of a particular case may not always be easy to apply …”

In applying these principles, the Court found that, as at 4 June 2015, for the reasons of TBS’ delay-related breaches, the Council was entitled to:

1. exercise its termination rights under the contractual provisions; and
2. accept said breaches as repudiatory.

Reference was made by the Court to the fact that on an objective basis, TBS must have known that the Council were entitled to terminate the contract and that it would be taking steps to remove TBS from site. In light of this, the Court acknowledged that TBS were not prejudiced in being removed from site two days earlier than it would have had to leave anyway pursuant to the termination notice served by post.

The Court also noted that the termination provisions in the contract were without prejudice to any other rights and remedies of the Council. As such, it was open to the Council to decide whether to serve a notice of termination pursuant to the contractual provisions and, in the alternative, as a notice of acceptance of TBS’ repudiatory breach.

The Court concluded that although the Council had failed to issue the termination notice in accordance with the contractual provisions (having served the notice by email), this did “not invalidate the effectiveness of its acceptance of repudiatory breach and nor in any event was the termination notice itself repudiatory, so that the termination under the contractual provisions was still effective.”

Our comment on the decision

The Council were successful at trial for the reason that, on the Court’s factual analysis, TBS were in repudiatory breach of contract prior to 4 June 2015 (which is when the termination notice was served, albeit incorrectly).

However, establishing a repudiatory breach of contract is highly fact sensitive. It would certainly have presented fewer hurdles (and less risk) to the Council had it served its termination notice in accordance with the contractual provisions. Indeed, the Court made clear in its judgment that the contractual termination was invalid.

Key takeaways for construction professionals

Termination rights need to be exercised correctly and in accordance with any relevant contractual terms. Particular attention needs to be paid to the form and content of any termination notice as required by the parties’ contract, should there be a written contract in play.

In circumstances where parties do not benefit from contractual termination provisions, a party wishing to terminate needs to rely on the common law position which requires the defaulting party to commit a repudiatory breach of the contract. There is generally a high evidential bar to overcome in establishing a repudiatory breach. Whether a defaulting party’s actions will amount to repudiation is heavily fact specific.

Given the inherent risks in evidencing a repudiatory breach of contract, where a party benefits from express contractual termination provisions, it is preferable for it to rely on those. They will often afford more certainty.

In light of the Court’s decision, a party seeking to exercise its termination rights pursuant to contractual provisions and/or under common law would be well advised to:

• strictly comply with any and all contractual termination provisions – parties should certainly not expect that a right to accept a repudiatory breach on the part of another party will always ‘save’ it from a failure to comply with its contractual requirements; and
• refer to the repudiatory breach(es) as well as any contractual terms relied upon in the termination notice. In the above matter, the Council’s termination notice contained two positions in the alternative – stating that if the contractual notice was ineffective, the notice should be treated as an acceptance of TBS’ repudiatory breach. It was this reference to its rights under common law that ultimately saved the day (its contractual termination efforts having failed).

Further detail on the termination of construction contracts can be found here.

Speak to our specialist Construction and Engineering lawyers

We recommend seeking specialist legal advice prior to any termination rights being exercised to ensure that any contractual provisions are complied with, and notices are served correctly to avoid arguments later down the line and allegations of repudiatory breach arising. Similarly, clients are recommended to seek legal advice should there be any uncertainty about the correct process for properly seeking or granting extensions of time under the contract.

If you have any questions about this blog, please speak to one of our construction team on 03456 381381 or email construction@ibblaw.co.uk