Key Tips to Avoid the Pitfalls of Termination

October 5, 2015

The 2013 High Court case of Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd1 highlights the problems a party can face when exercising its right to terminate. In particular, it deals with the situation where another party challenges the validity of a termination notice and claims that the termination is itself a repudiatory breach entitling them to terminate the contract and claim damages.

Facts of Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd

Vivergo Fuels Ltd (“Vivergo”) engaged Redhall Engineering Solutions Ltd (“Redhall”) to carry out work at its biofuel plant. The work was delayed and Vivergo terminated the contract. Under the contract Vivergo could terminate Redhall’s employment if Redhall was in material breach by giving notice of its default (the “Warning Notice”), stating that if it did not “pursue rectification of that default” within 14 days, Vivergo could terminate Redhall’s employment by further notice (the “Termination Notice”).

The Judge held that the letter Vivergo sent to Redhall dated 22 February 2011 fulfilled the contractual requirements of a Warning Notice. Whilst the letter did not specifically refer to the relevant termination clause of the contract, it did use a phrase that was taken directly from the relevant clause, linking it to a relevant default.

However, as Redhall had remedied the particular default before Vivergo issued its Termination Notice, the grounds for termination had ceased to exist. Vivergo’s Termination Notice was therefore not valid. As Vivergo had not validly terminated the contract but had barred Redhall from the site, it was Vivergo who was in repudiatory breach.

The Right to Terminate

Construction contracts often include a termination provision allowing parties to terminate a contract in certain circumstances by giving written notice.

Alongside a contractual right to terminate, the parties also have a common law right to terminate for repudiatory breach i.e. a sufficiently serious breach of contract or demonstrating an intention not to be bound by the contract.

The basic rule for the service of a notice to terminate is that all contractual requirements must be strictly complied with, otherwise the termination may be deemed wrongful. As Lord Hoffman said in Mannai Investments Co Ltd v Eagle Star Assurance2 “If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the [party] wanted to terminate.”

In addition to satisfying all the contractual requirements, an effective and valid notice “must be sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when the notice is intended to operate.”3

In the recent case of Vivergo, the Court adopted the following principles in interpreting notices:

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1 [2013] EWHC 4030 (TCC)

2 [1997] UKHL 19

3 Delta Vale Properties Ltd v Mills [1990] 1 W.L.R. 445

  • Unilateral notices are to be interpreted in the same way as contractual documents. That is, they are to be looked at objectively, against the relevant background or context known to both parties;
  • The reasonable recipient would consider the terms of the relevant underlying contract when reading the notice;
  • The notice must be clear and unambiguous and leave the receiver in no reasonable doubt as to how and when the notice is intended to operate;
  • Immaterial errors will be ignored if the notice unambiguously delivers the purpose; and
  • In the context of clauses which require a warning notice followed by a termination notice, the two notices must be connected both in content and time.

Termination Checklist

The following points should be considered before exercising a right to terminate:

  1. Consider whether you have a right to terminate in the circumstances. Can the circumstances you are relying on to terminate be proven?
  2. Ensure your right to terminate exists at the time you issue the notice of termination. Has the other party remedied its default by this stage?
  3. Comply with the any and all requirements set out in the contract. Many wrongful terminations occur as a result of the correct procedures not being followed.
  4. Caution must be taken where there is a two stage notice procedure to ensure the notices are connected in both content and time.
  5. The notice must be clear and unambiguous. Consider the following when drafting a notice:
  • Title the document as a notice, although as Vivergo has shown a letter may suffice as a warning notice;
  • Specifically state in the body of the notice that it intended to be a warning/termination notice;
  • Refer to the contractual clause the notice is given under and mirror the wording of that clause; and
  • For warning notices, give details of the specific default, state that the party in default has to take steps to remedy its default within the specified timeframe, if applicable, and clearly state the consequences of failing to comply with this.

Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.

Please contact Cleaver Fulton Rankin on 028 9024 3141 or alternatively visit www.cfrlaw.co.uk