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Contract termination: the importance of getting termination right

August 2017 - Issue 96

Contract terminations are often laden with legal risk, and therefore parties often rely upon as many grounds as possible to justify a termination. The recent case of Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2017] EWHC 1763 (TCC) highlights the risk associated with terminating solely on the basis of a common law right where a contractual right to terminate may also exist.

Facts of the case

In Imperial Chemical Industries Ltd (ICI) v Merit Merrell Technology Ltd (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 Northumbria (the “Project”).

In February 2015 ICI sent a termination notice to MMT, accepting an alleged repudiatory breach of the contract by MMT and ordering them to leave the site. MMT disputed the factual and legal basis upon which ICI’s termination was based, alleging repudiation by ICI itself. The Judge described this situation as “a classic who repudiated the contract scenario”.

The Decision

The court decided that none of the breaches relied on by ICI were repudiatory breaches of the Contract. ICI was simply trying to use repudiation as a means of removing MMT from the project. ICI sought to characterise its termination letter as a contractual termination in order to avoid being found in repudiatory breach itself. The court however held that the letter could not be construed in such a way as it was not drafted as such. 

As the Judge dismissed all the alleged breaches relied upon by ICI, this meant that the letter of February 2015 was not the exercise of a contractual right to terminate, but was itself a repudiatory breach of the contract by ICI.  Consequently, ICI was liable to MMT for damages arising from that breach.

Comment

On any construction project the employer may wish to bring the relationship with the other party to an end for a variety of reasons – financial; a breakdown in relationships; or a genuine disagreement regarding the work being performed.  If rights to terminate exist under both the contract and at common law, they can be exercised. However, the contractual right to terminate should be relied upon as the primary basis for termination. A common law right to terminate should only be used as a fall back in the event that a contractual termination fails.

ICI’s attempt to frame the purported termination as contractual in nature was not a substantive 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 unfounded allegation of repudiatory breach, 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.

Anna Mulholland

Trainee Solicitor

e amulholland@prettys.co.uk

t 01473 298218

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