Contract Termination: Hasta la vista…Maybe

Two recent TCC cases provide the answers to two important questions relating to the termination of contracts:

• If a contractor wrongfully suspends its works, does that conduct amount to a repudiatory breach of contract (which entitles the employer to terminate)?
• When (if ever) will the courts grant an injunction to restrain the (wrongful) termination of a contract?

Wrongful Suspension

In Mayhaven v Bothma, the contractor suspended its works because it genuinely believed it had not been paid what was due to it. As it turned out, the contractor was mistaken - it had actually been paid what it was due. But the court held that this was not a repudiation of the contract. The contractor had not abandoned the project (which would have been a repudiation). It intended to complete the works, and would have ended its suspension if it had been authoritatively pointed out that it had been fully paid.

The decision is important because it is often assumed by many that a wrongful suspension (in any circumstance) amounts to a repudiation, which entitles the owner to terminate. Contractors do not have a general right to suspend their works, although section 112 of the Construction Act gives them the right to do so in certain circumstances, where they are unpaid and have given proper notice of their intention to suspend.

The amendments to the Construction Act (which have now obtained Royal Assent, although it is unclear as to when - if ever - they will take effect) will widen the power to suspend for non-payment, so that a contractor will be allowed to suspend performance of part (rather than all) of its works, and it should become clearer as to when a contractor is actually entitled to suspend.

Injunction to Restrain Termination

In Ericsson AB v EADS Defence and Security Systems Ltd the court refused to grant an injunction to restrain the termination of an IT contract.

• EADS was the main contractor on a contract to supply a communication system.
• Ericsson was employed by EADS as a subcontractor to supply software in relation to the system. It was obliged to meet certain milestones. However, during the project Ericsson indicated that it would fail to meet these milestones.
• EADS gave a notice pursuant to the contract that unless Ericsson rectified its alleged default, EADS would terminate the contract. On the same day, Ericsson referred the dispute to adjudication.
• Ericsson went to court to seek an injunction preventing EADS terminating the contract prior to the outcome of the adjudication. An injunction was refused.

The courts will generally (as here) not grant an injunction to stop a party from attempting to terminate a contract. An injunction will only be granted where damages will not provide an adequate remedy to the person seeking the injunction (should an injunction not be granted). In this case (as in many construction cases), damages would have been an adequate remedy to Ericsson, assuming that EADS was not justified in terminating the subcontract.

Conclusion

Attempting to terminate a contract where you are not entitled to do so may itself be a contractual repudiation - in which case your attempted termination may blow up in your face. The Mayhaven case tells us that wrongly suspending the works does not necessarily amount to a repudiation, so great caution is required before seeking to terminate a contractor that has downed tools for non-payment (rightly or wrongly). Ericsson demonstrates the reluctance of courts to interfere in the termination process - the rights and wrongs of a termination will be worked out afterwards, and damages will compensate the party who was in the right. The lesson here is that terminating a contract is just as serious as entering into one, and if you are proposing to terminate, you must be close to certain that you are entitled to do so.

References:
Mayhaven Healthcare Ltd v Bothma [2009] EWHC 2634 (TCC)
Ericsson AB v EADS Defence and Security Systems Ltd [2009] EWHC 2598 (TCC)