Case offers warning for terminating contracts

Termination of a construction contract is a risky business. Get it wrong and the terminating party can find itself subject to a breach of contract claim – as Manor Co-Living Ltd did recently.

Manor and RY Construction Ltd were parties to a JCT Standard Building Contract 2016, without quantities, with bespoke amendments for the particular project.

The project involved the construction of 38 bedrooms with en-suite bathrooms, communal kitchens, dining and living rooms, a cinema and library at Clare Hall Manor in South Mimms, Hertfordshire. The contract sum was £2,018,014.35, subject to adjustment.

The first stage of the process was sending notice of default to RY, advising RY that Manor considered it was failing to proceed with the works regularly or diligently and had made failings in relation to the Construction, Design and Management (CDM) Regulations 2015.

The notice further stated that Manor would terminate the contract unless RY remedied the defaults within 14 days. The contract administrator's notice of default was sent to RY by email on 11 November 2021 and then in hard copy by post on 17 November.

The next stage in Manor's attempted contractual termination was a further letter to RY, dated 30 November, which the contract administrator sent by email on 1 December.

This letter stated that RY had failed to remedy the defaults identified in the notice of 11 November and purported to serve notice of Manor's termination of the contract. Manor then arranged to secure the site and prevent further access to the site by RY.

When posted in that manner, the contract provided that the relevant document shall be deemed to have been received by the recipient the second business day after posting.

The purported termination notice – the contractor administrator's email of 1 December, attaching the letter dated the day before – was notably 13 days after the date of posting the initial notice of default, and thus less than 14 days after the deemed date of receipt of the notice of default.

When prevented access to the site, RY argued that Manor had purported to terminate the contract before it was entitled to do so because 14 days had not passed since the default notice would have been deemed to have been received.

Furthermore, RY argued that Manor had not terminated the contract in a valid manner as it had not served notice in the way required by the contract. Therefore, the purported termination was wrongful and invalid, and by locking RY out of the site, Manor was itself in breach of contract.

Manor argued that it had either terminated the contract in a valid way or, alternatively, that, if it hadn't, that it was nevertheless entitled to terminate the contract at common law.

On the other hand, RY argued that Manor had not validly terminated the contract and were themselves in repudiatory breach by bring the contract to an end and preventing RY's access to the site. The dispute was referred to adjudication.

In this case, RY's referral sought to do so by stating in its referral that the adjudicator should only consider the validity of Manor's notices, and that the adjudicator need not consider the alleged underlying breaches of RY itself.

In its defence, Manor had argued that it had a common law right – that is, a right outside and in addition to its contractual rights – to terminate the contract.

If the notice the contract administrator had sent to RY was invalid because it did not adhere to the contractual requirements concerning termination, then it was still sufficient in terms of notice of acceptance RY's breaches at common law, and thus allowed Manor to bring the contract to an end.

The adjudicator decided that the notice of termination was premature and was therefore of no effect under the contract; that is, Manor had not served a valid contractual notice of termination.

He also found that the notice was not a sufficiently effective means of communication to establish termination at common law either; he therefore concluded that he did not need to consider the breaches RY had allegedly committed in relation to the underlying contract.

Furthermore, as there had been no valid contractual termination or effective communication of acceptance of RY's breaches at common law, Manor's actions by preventing RY's access to the site were themselves a serious breach of contract.

Manor did not seek to argue that locking RY out of the site was an alternative means to communicate acceptance of RY's breaches thus bringing the contract to an end at common law.

As such, there was no finding as to whether Manor's actions locking RY out of site may have been an acceptable alternative method of communicating termination at common law.

In response to this decision, Manor issued proceedings in the courts on the grounds that the adjudicator had been wrong not to consider whether it had an entitlement to terminate the contract due to RY's alleged underlying breaches.

Manor claimed that in doing so, he had deprived Manor of a potential full defence, which amounted to a material breach of natural justice that may render the decision null and void.

On careful factual analysis of this specific case, the court held that the adjudicator had not acted in breach of the rules of natural justice.

Manor had advanced no argument in the adjudication that it had clearly communicated acceptance of RY's breaches, thus terminating the contract at common law by some means other than the written notice, i.e. that it had communicated termination by preventing RY access to the site.

As such, there was no need for the adjudicator to consider the alleged underlying breaches of contract and his failure to do so did not automatically breach the rules of natural justice.

On the other hand, had the adjudicator found Manor had validly communicated acceptance of RY's breaches at common law then analysing the underlying allegations would have been both necessary and indeed within his jurisdiction.

This would be the case even though RY's referral to the adjudicator had stated it was not necessary for him to do so because those matters had been raised in Manor's defence.

However, on close analysis of the arguments Manor had raised in the adjudication the TCC found that it was not necessary for the adjudicator to analyse the underlying allegation of breach and thus by failing to do so, the adjudicator did not breach the rules of natural justice.

On a practical level, this case serves as an important reminder to construction contract parties to tread carefully when it comes to termination.

To ensure they do not end up on the wrong end of a breach of contract claim, they and contract administrators, must ensure they are familiar with and abide by the strict contractual requirements.

Legally, Manor is noteworthy because it highlights that cases concerning alleged breaches of the rules of natural justice will be determined based on careful analysis of the specific facts.