Contract terminations are often loaded with legal risk, and therefore parties often rely upon as many grounds as possible to justify a termination. A recent English case highlights the risks associated with terminating solely on the basis of a common law right, where a contractual right to terminate may also exist.

Background

In Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2017] EWHC 1763 (TCC) MMT, a specialist engineering piping manufacturer was employed by ICI by way of an amended NEC3 contract (the “Contract”). MMT was to provide piping works associated with the construction of a new paint manufacturing facility for ICI in Northumberland (the “Project”).

ICI sent MMT a termination notice in February 2015, accepting what it said was a repudiation of the Contract by MMT, and ordering MMT to leave the site. MMT responded by disputing the factual and legal basis upon which ICI’s purported termination had been based, and alleged repudiation by ICI itself.

Mr Justice Fraser described this situation as “a classic “who repudiated the contract?” scenario”, and noted an added layer of complexity as ICI also relied on what it said was a valid contractual termination.

The Decision

  • The court decided that none of the breaches relied upon by ICI were, in fact, repudiatory breaches of the Contract. The contemporaneous evidence supported MMT’s case that ICI had no proper grounds for making an allegation of repudiatory breach and that ICI was simply trying to use repudiation as a device designed to remove MMT from the Project.

  • ICI sought to characterise its termination letter as being primarily a contractual termination, seeking to avoid being found in repudiatory breach itself. The court held that the termination letter could not be construed as the exercise of a contractual right to terminate and was not drafted as such.

  • Therefore, having found that MMT had not committed any breaches of the Contract which could be considered repudiatory and that ICI had not terminated under the terms of the Contract, the court held that the sending of the termination letter ordering MMT to leave site was itself a repudiation of the Contract. As a result, ICI was liable to MMT for damages arising from that breach.

Comment

On any construction project of any size, the employer (or indeed the contractor) may wish to bring the relationship with the other party to an end due to any variety of reasons including: (i) financial, (ii) a breakdown in the relationship between the parties or (iii) a genuine disagreement as to the quality of works being performed.

If rights to terminate exist under both the contract and at common law, they can be exercised (including potentially one in the alternative to the other), but this usually requires that the contractual right to terminate should be relied upon as the primary basis for termination, with common law rights as the alternative. For example, a party seeking to terminate using the contractual termination provisions who issues what is found later to be a defective termination notice may allege that one or more of the breaches relied upon was a repudiatory breach, such that the contractual notice requirements need not be followed. In other words, a common law right to terminate may be used as a fallback in case a contractual termination fails.

In this case, ICI’s attempt to reframe the purported termination as contractual in nature was not a sustainable argument, particularly when considering the practical implications such an interpretation would have. The party purporting to terminate could simply allege a repudiatory breach and avoid all notice and form requirements under the contract and then say it was, in fact, a contractual termination should its grounds of repudiatory breach fail.

ICI had a contractual right to terminate the contract for convenience, but by seeking to avoid the financial repercussions this would have, and seeking to rely on an allegation of repudiatory breach that was unfounded, ICI found itself in repudiatory breach. This case highlights the tension between rights to terminate under a contract and rights to terminate at common law, and above all the importance of getting termination right.