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Termination of contract and issues of liability
00:00 18 Nov 1998
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Most professionals in the construction industry understand the
concepts of termination and repudiation. It is appreciated that
these matters need to be approached with sensitivity and caution,
proper legal advice being crucial.
Nevertheless it is commonplace to find situations where the termination of a construction contract has been poorly handled - with a flurry of letters, faxes and e-mails blinding commercial judgement.
The case of Bedfordshire County Council -v- Fitzpatrick Contractors demonstrates how such actions may appear entirely unreasonable when under the cold examination of a court of law. The proceedings arose out of the termination of a highway maintenance contract awarded by Bedfordshire County Council to Fitzpatrick.
The contract was for a period of four years, with work to be carried out pursuant to works orders for the construction, maintenance and clearance of all directly maintained highways in Bedfordshire.
The contract envisaged the operation of the Transfer of Undertakings (Protection of Employment) Regulations 1981, to the effect that there would an automatic transfer of the employment of the Council's highways maintenance employees.
This meant that Fitzpatrick was concerned to ensure that the value of work executed under the term contract would be sufficient to keep the transferred workforce gainfully employed, otherwise it could face substantial redundancy costs.
During the tender Fitzpatrick had requested the Council to confirm the minimum contract value per annum and had been told that it would be of the order of £6 million, although this figure could not be guaranteed.
In February 1996 Fitzpatrick's tender was accepted and it was agreed that the commencement date would be 1 June 1996.
orders
As June approached however, it became obvious to Fitzpatrick that the anticipated volume of work orders would not be available to it by 1 June. On 24 May it wrote to the council stating that it was only in receipt of work orders for the first month of the contract with a value of approximately £15,000. It noted that a spend level in the order of £400,000 per month would be a minimum requirement to maintain gainful employment for the transferring employees.
A snowstorm of correspondence commenced. The council responded to the effect that it considered there was no obligation upon it to provide sufficient work to guarantee gainful employment for the transferred workforce at the start of the contract.
The first of June passed without Fitzpatrick commencing work, and the council immediately made provision for the continuation of highway maintenance by employing the direct workforce that was to have been transferred to Fitzpatrick.
Relations between the parties deteriorated further. On 11 June Fitzpatrick wrote to the council stating that it considered that 1 July would be a more appropriate date for the contract to commence.
The following day the council replied to the effect that unless Fitzpatrick confirmed its intention to take up all its obligations under the contract by 15 June, the council would treat this as a repudiation and terminate the contract. On 13 June, not having received an acceptable response from the contractor, the council gave notice terminating the contract forthwith.
The Honourable Mr Justice Dyson QC was first asked to consider the issues of liability.
Firstly Mr Dyson had to consider whether there was an implied term of trust and confidence in a long-term contract of this type, in similar terms to that which would exist between an employer and employee.
This, it was argued, would apply to the effect that the contractor would not conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between the parties.
Mr Dyson was satisfied that no such term should be implied and that the contract stood perfectly well on its own terms.
Turning to the actions of Fitzpatrick, it was clear that it was in breach of contract by failing to accept the transfer of the workforce and start work on 1 June. It was not a term of the contract that there should be sufficient work available on 1 June and even if there had been such a term, this would have given rise to an entitlement to damages payable to Fitzpatrick. It would not entitle Fitzpatrick to refuse to perform the contract.
breach
Such a breach of contract by Fitzpatrick did not however amount to repudiation. The council was in no doubt that Fitzpatrick had the will and the ability to perform this four-year contract. Furthermore the council had failed to make "time of the essence" in the contract by its letter of 12 June, since it had failed to give Fitzpatrick reasonable notice.
In Mr Dyson's view the failure to commence work was not a breach which would deprive the council of substantially the whole of the benefit which it was intended that the council should obtain from the further performance of the contract. It followed from this that the council was in repudiation in terminating the contract on 13 June.
Nevertheless it is commonplace to find situations where the termination of a construction contract has been poorly handled - with a flurry of letters, faxes and e-mails blinding commercial judgement.
The case of Bedfordshire County Council -v- Fitzpatrick Contractors demonstrates how such actions may appear entirely unreasonable when under the cold examination of a court of law. The proceedings arose out of the termination of a highway maintenance contract awarded by Bedfordshire County Council to Fitzpatrick.
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The contract was for a period of four years, with work to be carried out pursuant to works orders for the construction, maintenance and clearance of all directly maintained highways in Bedfordshire.
The contract envisaged the operation of the Transfer of Undertakings (Protection of Employment) Regulations 1981, to the effect that there would an automatic transfer of the employment of the Council's highways maintenance employees.
This meant that Fitzpatrick was concerned to ensure that the value of work executed under the term contract would be sufficient to keep the transferred workforce gainfully employed, otherwise it could face substantial redundancy costs.
During the tender Fitzpatrick had requested the Council to confirm the minimum contract value per annum and had been told that it would be of the order of £6 million, although this figure could not be guaranteed.
In February 1996 Fitzpatrick's tender was accepted and it was agreed that the commencement date would be 1 June 1996.
orders
As June approached however, it became obvious to Fitzpatrick that the anticipated volume of work orders would not be available to it by 1 June. On 24 May it wrote to the council stating that it was only in receipt of work orders for the first month of the contract with a value of approximately £15,000. It noted that a spend level in the order of £400,000 per month would be a minimum requirement to maintain gainful employment for the transferring employees.
A snowstorm of correspondence commenced. The council responded to the effect that it considered there was no obligation upon it to provide sufficient work to guarantee gainful employment for the transferred workforce at the start of the contract.
The first of June passed without Fitzpatrick commencing work, and the council immediately made provision for the continuation of highway maintenance by employing the direct workforce that was to have been transferred to Fitzpatrick.
Relations between the parties deteriorated further. On 11 June Fitzpatrick wrote to the council stating that it considered that 1 July would be a more appropriate date for the contract to commence.
The following day the council replied to the effect that unless Fitzpatrick confirmed its intention to take up all its obligations under the contract by 15 June, the council would treat this as a repudiation and terminate the contract. On 13 June, not having received an acceptable response from the contractor, the council gave notice terminating the contract forthwith.
The Honourable Mr Justice Dyson QC was first asked to consider the issues of liability.
Firstly Mr Dyson had to consider whether there was an implied term of trust and confidence in a long-term contract of this type, in similar terms to that which would exist between an employer and employee.
This, it was argued, would apply to the effect that the contractor would not conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between the parties.
Mr Dyson was satisfied that no such term should be implied and that the contract stood perfectly well on its own terms.
Turning to the actions of Fitzpatrick, it was clear that it was in breach of contract by failing to accept the transfer of the workforce and start work on 1 June. It was not a term of the contract that there should be sufficient work available on 1 June and even if there had been such a term, this would have given rise to an entitlement to damages payable to Fitzpatrick. It would not entitle Fitzpatrick to refuse to perform the contract.
breach
Such a breach of contract by Fitzpatrick did not however amount to repudiation. The council was in no doubt that Fitzpatrick had the will and the ability to perform this four-year contract. Furthermore the council had failed to make "time of the essence" in the contract by its letter of 12 June, since it had failed to give Fitzpatrick reasonable notice.
In Mr Dyson's view the failure to commence work was not a breach which would deprive the council of substantially the whole of the benefit which it was intended that the council should obtain from the further performance of the contract. It followed from this that the council was in repudiation in terminating the contract on 13 June.
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