The Technology and Construction Court ("TCC") has ruled on a complex dispute between Vivergo Fuels (the "employer") and a contractor, Redhall Engineering Solutions, engaged by it to carry out mechanical and piping works on an engineering project.
The agreement between the two parties contained a two-stage termination procedure under which the employer: (i) notified the contractor of "material" breach and then; (ii) gave the contractor fourteen days to "commence and diligently pursue" rectification of the breach. (Perhaps this dispute could have been avoided if this clause had been drafted with more certainty by, for example, allowing the contractor a specified period in which to rectify the default rather than to "commence and diligently pursue" rectification.)
When the contractor's works were delayed, the employer purported to terminate the agreement, claiming that the contractor was in material breach of its obligation to provide an ongoing programme for the works and to proceed regularly and diligently with them. The contractor, on the other hand, claimed that it was not in breach, it had a right to an extension of time for delay, and the employer's purported termination was itself a repudiatory breach of contract which it had accepted.
Much of the court's detailed judgment focusses on the facts of the case. Ultimately it decided that, on the facts: the contractor was in material breach under the agreement; the employer had given valid notice to terminate and; accordingly, the contractor had 14 days thereafter to commence and diligently pursue rectification of the default. However, contrary to what the employer had claimed, the court held that the contractor had commenced and diligently pursued rectification of its default and accordingly was not in repudiatory breach of contract. Therefore, when the employer barred the contractor's entry onto site after the purported termination, it was itself in repudiatory breach of the agreement. The contractor had accepted such breach and the agreement was therefore terminated.
The court's reasoning in the judgement provides useful guidance on two key issues:
(i) When is a breach of agreement material?
The court said that the question to be asked was why the particular matter that is said to be within the definition of material breach might be a valid reason to end the agreement in question.
Answering this question involves considering a number of factors, including what the breach consists of and the circumstances in which it arose, the clauses in the agreement that indicate the importance of the breach and whether the consequences of the breach were draconian (although the court emphasised that the principal focus should be on how the innocent party was affected by the breach).
(ii) How should a notice of breach be construed?
The court said that a unilateral notice should be construed objectively against the background known to both parties, in the same way that any other contractual document should be construed.
The meaning of the notice should be considered from the viewpoint of a reasonable recipient, who would have the terms of the underlying contract in the forefront of his mind, and it must be sufficiently clear to leave such reasonable recipient in no reasonable doubt as to how and when the notice operates.
The notice should not only notify the other party of the default but should also indicate the seriousness of the situation or make some link to the contractual clause permitting termination, so that the reasonable recipient would realise that it was a notice under that clause.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
