The use and abuse of termination provisions

The use and abuse of termination provisions

What are the challenges when drafting or using termination provisions in construction contracts? Victoria Peckett, partner and head of the construction team at CMS Cameron McKenna, looks at their use and at what the future holds for termination provisions.

How has the use of termination provisions developed over the past five years?

Not much has really changed in the last five years. There has always been a well-established practice of providing for construction contracts to be terminated in a number of scenarios. Mostly these relate to default and insolvency. So there is a well-developed procedure of including these terms in contracts. However, using them can be very contentious, so quite a few disputes about termination clauses end up as reported cases.

Did the financial crises affect the use of these provisions and, if so, how?

In my view, not particularly. Termination clauses have always been used and there have always been instances of people wanting to get out of their contractual relationships. If anything, we may see an increased use of them in the coming years--certainly in the UK market. As we come out of the recession and there is more work around, people may want to get out of work that is unprofitable. This may happen not only with one-off projects but also in the case of framework contracts. People may have signed up to these when there was not much work around but then do not want to stay in them when there is better work elsewhere to be found.

Have terminations provisions been abused?

This is a good question. It depends on what you mean by abused. It is rare to see obvious cases of abuse where one party just wants to exit the relationship and uses contractual terms in circumstances where they are plainly not entitled to do so.

What you do see are cases where a party tries to use a contractual right to terminate in a way which is not an obvious use of the clause. In these cases, it is not so much a question of abuse as people being creative. These cases are more likely to end up in court or arbitration as one party is testing the boundaries of what can be done under the contract.

What are the common issues that arise in relation to termination provisions?

There are many of them. It can be difficult sometimes to work out when a contractual right to terminate has arisen--you are looking at a particular set of circumstances and trying to judge whether the contractual termination provisions apply to them. However, the contract was drafted before those circumstances arose and therefore probably doesn't deal with them specifically. But you do have some generic rights of termination, for instance for a 'material' breach of contract. The question will always be: What does that mean in the circumstances and do the facts allow the application of the right to terminate?

Another common issue is determining what losses parties can recover. Typically, one party will try to terminate under the contract. Often the other party asserts that they can't do that and that doing so constitutes a repudiation of the contract. The question of what damages are paid rests on which argument prevails. The amount of damages that flow from this can vary tremendously depending on which interpretation is correct.

Do you expect the way in which termination provisions are drafted/used to change?

Possibly. The reason I say this is because a couple of recent cases touched on one particular aspect of termination. They both relate to a right to terminate for convenience (or a right to terminate at will)--a provision for which is sometimes included in contracts.

In Comau UK Ltd v Lotus Lightweight Structures Ltd [2014] EWHC 2122 (Comm) one party tried to terminate under a clause entitling it to terminate for breach/for repudiatory breach, but was found to be in the wrong. The other side argued that this was itself a case of a repudiatory breach and they had lost profits as a result (which should be recoverable). The court decided that, because the contract included the right to terminate at will at any time, Comau could not have had any expectation of earning profit for the duration of the contract and damages ought to be assessed accordingly (therefore substantially reducing Comau's entitlement).

In another case, Wilmott Dixon v London Borough of Hammersmith and Fulham [2014] EWHC 3191 (TCC), the finding was almost the opposite.

This is an area which is presently unclear--no doubt lawyers and their clients will have to scrutinise termination at will clauses much more closely.

Interviewed by Diana Bentley.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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