Employers beware of delay-related risk: English Court of Appeal holds that Contractor partially stopping work does not give Employer right to terminate a construction contract
Recently the English Court of Appeal handed down its Judgment in Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd; overruling the High Court decision that the Employer had been entitled to terminate a construction contract upon the ground that the Contractor’s extensive delay in performing the works amounted to a repudiatory breach of the agreement. The decision confirms that it will only be in exceptional cases that delay in construction contracts will amount to repudiation, thereby giving the other party the right to terminate the contract.
The facts and decisions
A construction company, Telford Homes Ltd (“Telford”) was contracted by Ampurius Nu Homes Holdings Ltd (“Ampurius”) to construct four blocks (tiled “A”, “B”, “C” and “D”) for a 999-year lease for a consideration of £8million (the “Contract”). During the course of the contract, Telford experienced financial difficulties and stopped work on blocks A and B, but it continued work on blocks C and D. Almost a year after work was halted on blocks A and B, Telford re-commenced the work on these two blocks. This was seemingly unbeknown to Ampurius, although Telford had suggested that it would recommence work when it had organised further financing.
Shortly thereafter, Ampurius informed Telford that it had terminated the Contract. The main ground for termination was that the continued works on blocks A and B potentially interfered with the marketing of blocks C and D, which were nearing completion.
The English High Court held that Ampurius had been entitled to terminate the Contract on the ground that Telford's delay in completing the works amounted to a repudiatory breach of the Contract. The Court of Appeal overruled the trial judge’s decision, finding that Telford's delay in completing the works did not amount to a repudiatory breach.
The Court also set out the following legal principles in reaching its finding:
- Affirmed the overarching test to decide whether conduct by a contracting party amounted to repudiation, is when the acts are such so as to deprive the injured party of a substantial part of the benefit of the agreement.
- The starting point for this assessment is the ultimate benefit that the parties intended the injured party would receive due to the contractual performance.
- The next matter that the courts ought to assess is the effect of the breaching party’s conduct upon the injured party. In this regard, factors that the courts should consider are whether there is actual or potential loss, and whether the loss is readily quantifiable. If the loss is quantifiable, the court also ought to assess whether the loss can be compensated with proportionately reasonable damages measured in light of the total price paid.
- The relevant date for the purposes of deciding whether there is a repudiatory breach of an agreement is the same for anticipatory and actual breaches of contract1, namely, the date of termination, not the date of the breach of the contract.
The Judgment provides several useful points of guidance to commercial parties, particularly those within the construction industry, as set out further below.
Timing of termination is vital
The Judgment reveals that the timing of communication of termination is essential. Termination that is too late may lead to the court holding that the breaching party has affirmed the contract in reliance upon the injured party’s silence. On the other hand, termination that is too soon may lead to the court holding that the injured party failed to give the breaching party the opportunity to remedy a minor breach. In either case, the injured party may be held to have repudiatorily breached the contract through a termination that is too early or too late.
Clear acceptance of the breach
It is important for contractual parties to remember that if they wish to terminate an agreement upon the ground of repudiatory breach, any communication of acceptance of the repudiatory breach and termination must be clear and unequivocal2. Otherwise, an unclear communication of acceptance may entitle the breaching party to conclude that the injured party has affirmed the contract thereby allowing him to continue to perform his outstanding obligations and claim the contract price.
Preparing for repudiatory breach and termination
A way for contracting parties to cater for difficulties in contractual performance and termination is to address this issue in the contract. This is because the common law rules set out in the Judgment do not preclude the parties agreeing to a termination clause which provides a mechanism for termination (e.g. condition precedents for termination), to circumvent or limit the application of the common law doctrines3. Indeed, most construction contracts contain such clauses; nonetheless, care should be taken to ensure that the provisions are suitably drafted to reflect the parties; intentions in respect of the circumstances entitling termination. Further, parties exercising such a contracted termination provision must ensure that it is strictly complied with.
Conduct that may amount to a repudiatory breach of contract
The decision confirms that there are limited circumstances where a breach of contract will amount to repudiation thereby giving the other party the right to terminate the agreement. In this respect, the Court of Appeal made the following observations as to the type of conduct required for there to be a repudiatory breach:
- A delay in itself will not be sufficient to amount to repudiation. As most construction contracts span over long periods of time, the delay will have to be substantial in time and effect to amount to repudiation.
- A factor weighing against the conclusion that the contract has been repudiated due to delay is whether the breaching party offers to expedite performance to make-up for lost time.
- Where there is mere potential, or future loss, as a result of the breach, with no actual proven loss, this will make it less likely that the breach is repudiatory.
- Where compensation can remedy the breach of contract, this also will make the courts reluctant to conclude that there has been repudiation.
- On the other hand, a party unmistakably stating that it has no intention to proceed with the contract (known as renunciation) will provide a strong ground for concluding that there has been a repudiatory breach of the contact.
- Similarly, delay in contracts that stipulate that time is “of the essence” may amount to a repudiatory breach of the agreement4.
 Reaffirming Stocznia Gdanska SA v Latvian Shipping Co (Repudiation)  EWCA Civ 889; The Hongkong Fir  2 Q.B. 26.
 Heyman v Darwins  AC 356, 361; Chitty on Contracts (HK Edition) at [5-199]-[5-202].
 e.g. Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1 per Chan J at  considering the “situation where (as in that case) there is expressly or by necessary implication, to the effect that a certain term in that contract is a condition the breach of which entitles the innocent party to terminate the contract.
 See paras. and  of the Judgment.