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Termination – give the party in breach an opportunity to remedy first

  • United Kingdom
  • Construction and engineering

22-11-2017

Summary

In Interserve Construction Ltd v Hitachi Zosen Inova AG [2017] (TCC), Jefford J in the Technology and Construction Court (TCC) granted a declaration that a contractor ought to have been given the opportunity to remedy its breach before its employment was terminated. Depending on the construction of the contract, denying a party the opportunity to remedy its breach prior to termination may constitute a repudiatory breach in itself.

Facts

Hitachi Zosen Inova (“HZI”) was the main EPC contractor and entered into a design and build sub-contract with the Claimant, Interserve Construction Limited (“ICL”), where HZI was referred to as the Purchaser and ICL as the Contractor. On July 7 2015, HZI sent a termination letter (the “Letter”) to ICL (dated July 6 2015). In the Letter, HZL said that it was relying on the termination clauses 43.1 and 43.1A (as set out here):

43.1 “If [any relevant termination events occur] then, subject to sub-clause, 43.1A (…) the purchaser may forthwith by notice terminate the employment…..”

43.1A "…may (at its absolute discretion) notify the Contractor of the default and if the Contractor fails to commence and diligently pursue the rectification of the default within a period of seven (7) Days… terminate the employment of the Contractor under the Contract."

In the Letter, HZL stated that termination of the contract was based on several of the listed termination grounds, and did not provide ICL an opportunity to rectify the alleged defaults as required per clause 43.1A. ICL staff were removed and were prevented from returning to the site. ICL replied to the Letter, rejecting HZL’s allegations regarding ICL’s performance and that it breached the contract, and instead alleged that HZI’s attempted termination was a repudiatory breach of contract, which was eventually accepted by HZI. ICL sought a part 8 declaration that clauses 43.1 and 43.1A when read together denied HZI the right to terminate without giving notice under 43.1A after the seven day rectification period had expired.

Decision

The court held that it was a condition precedent to HZI having the right to terminate that HZI first issue a notice pursuant to clause 43.1A and allow a seven-day rectification period, failure of which would trigger the termination.  Jefford J’s decision was based on, inter alia, an objective interpretation of the termination clauses and the contract as a whole due to the fact the contract was carefully crafted and bespoke. Clause 43.1's use of the words "subject to" made it clear that the right to terminate was conditioned (in certain circumstances) by the requirement to give notice and allow a seven day rectification period.

The judge tested HZI’s interpretation of the phrase “subject to” which they argued did not create a requirement of notification and allowance of a period to rectify the breach. Jefford J did so by omitting “subject to” from the clause which she concluded resulted in the clause as HZI had argued it did, this mean the HZI were effectively submitting that the words “subject to” had no meaning and were redundant. HZI also submitted that if Jefford J’s interpretation was correct, the words in clause 43.1A “absolute discretion” would have no effect. Jefford J rejected this and decided that “absolute discretion” referred to the ability of HZI to exercise the ability to give notice and subsequently terminate.   

Comment

Most standard form contracts incorporate clauses which expressly provide the contractor with the opportunity to rectify a defect prior to termination. HZI’s submission in relation to repudiatory breach in contract shows that failing to afford any time to the contractor to rectify could amount to a repudiatory breach of contract. The case is also a good prompt to remember that courts will not look at contractual terms in isolation and inconsistent terms within a contract may produce unexpected consequences.

http://www.bailii.org/ew/cases/EWHC/TCC/2017/2633.html 

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