Construction law knowhow by David Lewis

Termination for breach of contract: and the parties’ claims when this happens

30/05/2010 18:56

As a general principle, if one party breaks his contract this doesn’t entitle the other party to stop performing his obligations.

Consistently with this principle, there is no general right at common law for a contractor to suspend work if payment is wrongly withheld.

There are two main exceptions. The first is where there is a fundamental breach, i.e. one which deprives the other party of substantially his whole benefit from the contract.

The second main exception is repudiation, which occurs if one party acts or expresses himself so as to show that he does not mean to accept the obligations of a contract any further.

A wrongful suspension of work can amount to repudiation if it meets that criterion.

An absolute refusal to carry out the work or an abandonment of the work before it is substantially completed, without any lawful excuse, is a repudiation.

If the other party chooses to “accept” the repudiation, this releases both parties from further performance.

However, “accepting” a breach of contract as a repudiation when it is not is itself a breach of contract and a repudiation.

It is a good precaution to give notice before treating delay by the contractor as a repudiation; and I suspect that this principle can be extended to other potentially repudiatory breaches of contract, chiefly an apparent suspension of work.  Effectively non-compliance with the notice can turn a non-repudiatory breach into a repudiation.

Depending on circumstances, a sensible response to a serious breach of contract can be to avoid accepting it as a “repudiation”. This won’t prejudice the innocent party’s claims for damages for breach of contract. But sometimes an employer does need to accept a contractor’s repudiation because he wants to engage other contractors to make good defects and complete the works. It has been held that the engagement of additional contractors to execute the same works already contracted to another contractor is itself a repudiatory breach, so it makes sense for an employer to terminate the contract safely and lawfully before doing that.

Where a contractor fails to complete, the normal measure of damages is:

A.     

the total of sums paid

 

 

  PLUS

 

 

B.

the cost to the employer of completing the contract work substantially as originally intended

 

 

 

MINUS

 

 

C:

the contract price.

Where contract work has been partly carried out and the contract is brought to an end by the employer’s repudiation – including, in my view, “accepting” a non-existent repudiation by the contractor - the contractor is entitled to be paid the value of the work done at contract prices and the loss of profit on the unfinished balance.

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