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Key tips to avoid the pitfalls of termination BY Anna McClimonds, Solicitor, Cleaver Fulton Rankin
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onstruction contracts often include a termination provision allowing parties to terminate a contract in certain circumstances by giving written notice. Alongside a contractual right to terminate, the parties also have a common law right to terminate for repudiatory breach i.e. a sufficiently serious breach of contract or demonstrating an intention not to be bound by the contract. The 2013 case of Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd [2013] EWHC 4030 (TCC) highlights the problems a party can face when exercising its right to terminate. In particular, it deals with the situation where another party challenges the validity of a termination notice and claims that the termination is itself a repudiatory breach entitling them to terminate the contract and claim damages. The facts of the case are as follows: Vivergo Fuels Ltd engaged Redhall Engineering Solutions Ltd to carry out works at its biofuel plant. The works were delayed and Vivergo terminated the contract. Under the contract Vivergo could terminate Redhall’s employment if Redhall was in material breach by giving notice of its default (the Warning Notice), stating that if it did not “pursue rectification of that default” within 14 days, Redhall’s employment could be terminated by further notice (the Termination Notice). The Judge held that the Warning Notice Vivergo sent to Redhall fulfilled the necessary contractual
requirements. However, as Redhall had remedied the particular default before Vivergo issued the Termination Notice, the grounds for termination had ceased to exist. Vivergo’s Termination Notice was therefore not valid. As Vivergo had not validly terminated the contract but had barred Redhall from the site, it was Vivergo who was in repudiatory breach. The basic rule for service of a termination notice is that all contractual requirements must be strictly complied with. As Lord Hoffman said in Mannai Investments Co Ltd v Eagle Star Assurance “If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the [party] wanted to terminate.” The following points should be considered before exercising a right to terminate: • Whether you have a right to terminate in the circumstances and whether the circumstances you are relying upon can be proved. • Ensure your right to terminate exists at the time you issue the termination notice and the other party has not remedied its default. • Compliance with all requirements set out in the contract. • Caution must be taken where there is a two stage notice procedure to ensure the notices are connected in both content and time. • The notice must be clear and unambiguous. Consider the following
when drafting a notice: • Title the document as a notice, although a letter may suffice as a warning notice in certain circumstances; • Specifically state in the notice that it is intended to be a warning/ termination notice; and • Refer to the contractual clause the notice is given under and mirror the wording of that clause. In terms of interpreting notices, the following principles laid down in Vivergo Fuels v Redhall Engineering Solutions Ltd should be considered: • Unilateral notices are to be interpreted in the same way as contractual documents. That is,
they are to be looked at objectively, against the relevant background or context known to both parties; • The notice must be sufficiently clear and unambiguous and leave the receiver in no reasonable doubt as to how and when the notice is intended to operate; • Immaterial errors will be ignored if the notice unambiguously delivers the purpose; and • In the context of clauses which require a warning notice followed by a termination notice, the two notices must be connected both in content and time.
Cleaver Fulton Rankin’s market-leading team of lawyers deliver comprehensive commercial and practical advice, designed to achieve the most cost efficient result, to a diverse range of corporate clients. The Construction Team at Cleaver Fulton Rankin specialises in providing advice across the spectrum of non-contentious matters such as drafting and advising on building contracts, appointments, bonds, novation agreements and collateral warranties. If you would like further information or to find out how we can help you please give us a call on: 028 9024 3141 or visit our website: www.cfrlaw.co.uk