Wrongful Termination of the contract relieves Contractor of obligation to complete the Works

Wrongful Termination of the contract relieves Contractor of obligation to complete the Works

The second defendant was a director of the first defendant company, Sunshine Ventures Ltd, which engaged HDK Ltd contractor to undertake three building projects. Sunshine Ventures Ltd claimed for damages for non-completion and defects in the works, whilst HDK Ltd sought payment of sums owed for undertaking the works. The defendants decided to treat the contracts as having been repudiated by HDK Ltd because of delays to the works. HDK Ltd submitted that the contracts provided for the interim payments on account of the cost of the works, and these were not made. HDK Ltd alleged that this failure to pay entitled it to treat time as being at large. The court, therefore, had to determine what the terms of the contracts were without any reliable documentation.

The court found that there had been no agreement that regular payments would be made as alleged by HDK Ltd, but even if there had been such an agreement, that had not entitled HDK Ltd to take as long as it liked to complete the works. A persistent failure to make agreed regular payments could amount to a repudiatory breach. In that event, however, the contractor would have had the option of treating the contract as being at an end. If he doesn’t, then the contract continues, and all its terms are still effective, including any completion dates in it.

A fax urging HDK Ltd to complete the outstanding works “as soon as possible” and “as a matter or urgency” was not sufficient to amount to a notice making time of the essence. It was not enough to write to the party in default without giving any particular indication of what the communication is supposed to be about or what consequences may follow depending upon what happens after receipt of the communication. At the very least, such a notice must spell out the consequences if the notice is not complied with i.e. that the party giving the notice will treat the contract as being at an end.

The second defendant then instructed a consultant who sent HDK Ltd what purported to be a letter terminating the contract. HDK Ltd had not abandoned the works, as the letter stated, and although it had not been doing much work, its conduct did not suggest to the court that it was evincing an intention to be no longer bound by the contract. The court rejected the other allegations made against HDK Ltd in the letter as being breaches of implied terms that HDK Ltd would act towards the second defendant in good faith. Whilst such a term was often implied into a contract of employment, there was no justification for implying it into a commercial contract between client and builder.

Although there was an implied term in the contract that HDK Ltd would undertake the works in a good and workmanlike manner and would supply good and proper materials, there was no contractual obligation prior to completion, to avoid defects in the works. Whilst the court accepted that some of the work was defective, the extent of those identified did not justify the conclusion that HDK Ltd had evinced an intention to be no longer bound by the contract. Consequently, the letter sent to HDK Ltd amounted to a repudiation of the contract relating to the works to the flat, which HDK had accepted by leaving the premises. No sensible reason for determining the contract had been put forward by the defendants.

The defendants had wrongly repudiated the contracts, and they could not complain that the works were incomplete or defective at the date of the termination. If the contracts had not been terminated, HDK Ltd would have been bound to complete all the works, but had been relieved of that obligation because of the wrongful termination. HDK Ltd had failed to show that it was entitled to be paid more for the varied work than he had already been paid, and the claims of all parties was dismissed.

HDK Limited v Sunshine Ventures Limited EWHC 2866 [2009]

Review

The courts will consider all relevant circumstances in determining what is a reasonable time for the completion of the Works, including any originally contracted-for delivery dates, the effect of variations and the conduct of the parties. A provision that time is to be of the essence enables the party relying upon the clause to terminate the agreement and claim damages if the other party fails to perform an obligation in the time specified in the agreement. Time will only be considered to be of the essence where:

(i) the parties have expressly agreed that it should be so;

(ii) the nature of the subject matter of the contract or the surrounding circumstances show that time should be considered to be of the essence, such as where timely performance of the contract in question is necessary to fulfil obligations which a party has to any third-party; or

(iii) a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence. The notice should expressly and clearly articulate an intention to terminate if the dates set are not met. Further the party making time of the essence must be sure that the deadlines set out are entirely reasonable.

MALCONLAW 2011