D OUT MORE ABOUT THE IDEA BEHIND THE TRANSLEX-PRINCIPLES

D OUT MORE ABOUT THE IDEA BEHIND THE TRANSLEX-PRINCIPLES

No. VI.1 - Termination of contract in case of fundamental non-performance

(a) If a party's failure to perform its obligation amounts to a fundamental non-performance, the other party may terminate the contract.

(b) The right of a party to terminate the contract is exercised by notice to the other party.

(c) If performance has been offered late or otherwise does not conform to the contract the aggrieved party will lose its right to terminate the contract unless it gives notice to the other party within a reasonable time after it has or ought to have become aware of the offer or of the non-conforming performance.

(d) Termination of the contract releases both parties from their obligation to effect and to receive future performance.

(e) Upon termination of the contract either party may claim restitution of whatever it has supplied, provided that such party concurrently makes restitution of whatever it has received. If restitution in kind is not possible or appropriate allowance should be made in money whenever reasonable. However, if performance of the contract has extended over a period of time and the contract is divisible, such restitution can only be claimed for the period after termination has taken effect.

(f) Termination does not preclude a claim for damages for non-performance.

(g) Termination does not affect any provision in the contract for the settlement of disputes or any other term of the contract which is to operate even after termination.1 Introduction

2 Breach of contract3 Frustration4 Convenience5 Others6 Rescission7 Suspension8 Determination9 Related articles on Designing Buildings Wiki

Introduction

Most forms of contract will include

termination clauses, setting out the circumstances under which a contract may be terminated. When a contract is terminated, the parties to the contract are no longer obliged to perform their obligations under the contract.

Terminating a contract can be complex, and it is very important that the correct procedures are followed. This may involve issuing notices setting out the

grounds for termination , allowing warning periods, and giving the opportunity to remedy breaches.

There are a number of reasons why one or both parties to a contract may seek to terminate the contract .

Breach of contract

If the one of the parties to a contract fails to perform as required by the

contract , this may constitute a breach of contract . If the breach of contract is serious (a material breach), then the innocent party may also consider that it is discharged from any further obligations under the contract .

Where one party behaves in such a way as to indicate that it no longer intends to accept its obligations under thecontract , this is considered to be a repudiatory beach (or fundamental breach), allowing the innocent party to terminate the contract and to sue for damages . Generally, the contract will set out what those breaches are, but they might include:

Refusal to carry out work . Abandoning the site. Removing plant from the site . Failure to make payments .

Employing others to carry out the work . Failure to allow access to the site . Failure to proceed regularly and diligently .Failure to remove or rectify defective works . Where repudiation is considered to have occurred, the innocent party can either affirm that the contract will continue, or accept the repudiation and so terminate the contract . In either case, they will have the right to claim damages . Either way, it is important that there is some sort of response, as inaction may be considered to be an affirmation of the contract .

Assessing the seriousness of breaches of contract depends on the particular circumstances and terms of the

contract . For example, if a contractor failed to carry out the work to an agreed timetable, this might be considered a relatively minor issue on some projects , whilst on others it could be an extremely serious breach . The innocent party must be careful therefore to establish that there has actually been a material breach before considering that the contract is terminated, otherwise they might find themselves in breach of contract .

This can lead to disputes, where for example, the client refuses to make

payment, claiming that the contractor has failed to perform, whereas the

contractor contends that they are not performing because the client has refused to make payment.

An anticipatory breach (or anticipatory repudiation) occurs when one of the parties to the contract declares to the other that they do not intend to perform their obligations under the contract .

Frustration

Frustration occurs when circumstances that are not the fault of either party mean it is impossible to continue with the contract . The contract will come to an end without any party being considered to be in breach . However, parties must be certain that a frustration event has occurred so as not to be in

breach of contract .

Force majeure provisions might provide for circumstances that could otherwise be considered frustration events, and so result in termination of the contract .

Force majeure (for example,

exceptionally adverse weather conditions) is generally considered a

relevant event in construction contracts which will allow for an extension of time and a claim for loss and expense rather than termination . This may be in the interests of both parties.

For more information, see Frustration .

Convenience

Contracts may allow termination for ‘convenience’. This can be useful for example if the client fails to secure sufficient funding for the project to proceed. However termination for convenience can leave the terminating party open to significant claims by the other party.

Termination for convenience is only provided for in some forms of contract , and is often only available to the client .Others

Contracts may also allow termination under specific circumstances peculiar to a particular project. They may also allow termination for insolvency or bankruptcy.

Rescission

Rescission is a process of returning both parties to the position they would have been in had they not entered into a

contract . This might be appropriate for example if there is a serious error in the contract .Suspension

Contracts may also allow suspension of performance. The circumstances allowing suspension are generally similar to those allowing termination . Suspension can be useful, for example, if the client has difficulty in raising funds to pay for the work to proceed at the speed anticipated by the contract . In addition, the Housing Grants Construction and Regeneration Act gives the right to suspend performance for failure to make payment that has been notified as due.

Either party may have the right to terminate at the end of a suspension period, or if a suspension becomes prolonged with no prospect of work re-commencing.

See Suspension of performance for more information.

Determination Determination ends the contractor 's obligations under the contract , but the contract remains in place, as do the rights of both parties.

See Determination for more information.

Related articles on Designing Buildings Wiki

Alternative dispute resolution .Breach of contract .Concurrent delay .Consequential losses .Construction Act.Defects .Determination .Extension of time .Force majeure.Fair payment practices .Frustration .Liquidated damages .Loss and expense .Repudiation .Suspension of performance.

Variations.

Contract Clauses 

2 The right to terminate the contract requires that the other party's non-performance in fundamental. The type of non-performance is irrelevant, it relates to any failure by a party to perform any of its obligations under the contract. This wide scope includes defective and late performance.

A party's non-performance is fundamental if the requirements of Art. 25 CISG are met, i.e . if the non-performance substantially deprives the other party of what it was entitled to expect under the contract unless the non-performing party did not foresee and could not reasonably have foreseen such result. The nature of the obligation which one party is not performing may also be relevant in determining whether that party's non-performance is fundamental, e.g . when strict performance in compliance with the letters of the contract is of the essence. The time factor may also be relevant in that a non-performance that, in and of itself, is not fundamental, may be qualified as fundamental because the non-performance is of such a nature that the other party has reasonable grounds to believe that the non-performing party will not or cannot perform in the future.

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Dentons - Gary Smith What is a "reasonable" notice period when the contract is silent?

What is a "reasonable" notice period when the contract is silent?

This was the question that came before Mr Justice Norris towards the end of 2013 in the case of Hamsard 3147 Limited trading as "Mini Mode Childrenswear", JS Childrenswear Limited (in liquidation)) v. Boots UK Limited.

Background

This case arose following the insolvency of the supplier of the "Mini Mode" clothing brand to Boots stores throughout the United Kingdom. However, the principles laid down are of universal application to a question that arises on many occasions – what is a "reasonable" notice period if the contract is silent on this point? The reasons for this silence can range from the parties failing to address the issue up front to, as was the case here, circumstances having intervened between the parties leading to a renegotiation of the original agreement leaving the notice period position somewhat unclear.

Judgment

In his judgment, Norris J set out the following principles to be applied when deciding whether a notice period given is "reasonable":

1. what length of notice is reasonable must always depend on the particular facts of the particular case – other cases on this issue are therefore of limited assistance;

2. the particular facts might well involve consideration of the general circumstances and practices of the trade in which the claimant and the defendant are involved, since that relevant background might assist the objective observer to understand what the parties may reasonably be understood to have agreed as to being "reasonable notice";

3. what is "reasonable notice" is to be judged at the time when the notice is given – indeed as Norris J said, quoting Clarke J in Paper Light Limited v. Swinton Group Limited (1998), "…it would be unsatisfactory and make no commercial or other sense to hold that the reasonable period of notice should be determined long before the notice was to be given." ;

4. the principle that the length of notice to be given is to be assessed in light of the circumstances obtaining when the notice is given does not mean that the circumstances at the time of the contract are irrelevant; and

5. the degree of formality in the relationship will determine what notice period is reasonable – the more relaxed the relationship the less likely it is that the law will imply a lengthy notice period.

Applying these principles to the case before him, Norris J decided that a nine-month period of notice given by Boots to Hamsard was indeed reasonable.

Additional arguments

Does affirmation of a contract by one party where there has been a repudiatory breach by the other party constitute a waiver of those breaches for the purposes of deciding what notice period is "reasonable"?

Counsel for Hamsard claimed that, whilst his client was in repudiatory breach of the contract, once Boots decided to affirm the contract and terminate it by notice Hamsard's repudiatory breaches were irrelevant and could not be taken into account in deciding what period of notice was reasonable. This argument was rejected by Norris J, who stated that affirmation of the contract is not the same as waiver of the breaches.

Was it relevant in deciding what period of notice was "reasonable" that the current arrangements would inevitably be terminated as they were only ever intended to be interim in nature?

Norris J stated that the "notice period cannot be divorced from the realities of operating the contract" . Accordingly the fact that the termination of the interim arrangements had been discussed between the parties and that they were preparing for such an event lends itself to a shorter period of notice as being "reasonable".

Should a term of "good faith" be implied into the contact when deciding whether a notice period is "reasonable"?

The original 2007 Agreement between Boots and its supplier contained a provision that the parties would "… at all times act in good faith towards one another in relation to the operation of the Agreement to approach their dealings with one another on an open and collaborative basis so as to ensure that they maximise the Net Profit generated under the Agreement …" . While acknowledging that the revised commercial arrangements between the parties placed the continued existence of the good faith provision in doubt, counsel for Hamsard argued that the modern approach of the courts was to consider whether the provision which it is sought to imply into the contract (namely a provision of good faith dealings between the parties) would spell out in words what the contract, read against the relevant background, would reasonably be understood to mean. To support his argument counsel for Hamsard quoted the decision of Leggatt J in Yam Seng Pte Ltd v. International Trade Corporation (2013) , in which Leggatt J held that while English law did not recognise a requirement of good faith as a duty implied by law into all commercial contracts "…there seems to me to be no difficulty … in implying such a duty into any ordinary commercial contract based on the presumed intention of the parties" . Further, counsel for Hamsard sought to classify the commercial arrangement between Hamsard and Boots as a long term "relational contract", which had existed since 2002 and which, in the words of Leggatt J, "…may require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract… ".

While accepting the decision of Leggat J, Norris J said that the current arrangements were distinguishable on their facts. While the 2007 Agreement was "a true joint venture which was contemplated to last for a considerable period and it made appropriate express provision… about the approach each party should adopt to the relationship … [the] implicit contract entered into in February 2009 was brought about by force of circumstance and is plainly an interim arrangement affording the different parties an opportunity to negotiate a new joint venture ". Indeed, as Norris J said: "It is not obvious that [the parties] would have intended a clause about "good faith" directed to the conduct of a long term joint venture to form part of their interim bargain."

Lessons to be learned

What lessons can be learned from this decision?

Finally, it is clear from the comments of Norris J on the "good faith" argument that, while he did not rule out its application in future cases, the implication of a term of "good faith" in a commercial contract cannot be used to detract a party from exercising its contractual rights. As Norris J stated, " … I do not accept that there is to be routinely implied some positive obligation upon a contracting party to subordinate its own commercial interests to those of the other contracting party… Boots had a contractual right to terminate the relationship on reasonable notice. It was free to exercise that right according to its terms…"Even if a "good faith" term is either expressly recorded in an agreement or implied by the courts, this term does not necessarily take precedence over or detract from other commercial terms of the contract tion contracts

Termination and suspension of construction contracts

This guide was last updated in August 2011.

This guide covers contractual and non-contractual rights to terminate a construction contract. Contractual rights may include the right to terminate 'at will' where there has been no breach by the other party.

The majority of standard form building contracts contain express provisions regulating the rights of either or both parties to terminate the contract in defined circumstances.

Non-contractual rights to terminate

Frustration: this occurs when neither party has defaulted on the original contract but other circumstances have intervened to prevent the contract from being performed as originally intended. The result must be that further performance of the contract is impossible, illegal or radically different from what the parties contemplated when they entered into the contract.

If a frustrating event occurs the contract automatically ends and the parties are excused from their future obligations, although any accrued liabilities will remain.

It is important that a party is sure that frustration has actually occurred if it is going to rely on frustration to justify ceasing to perform its obligations under the contract to avoid being in breach if the event is not in fact a frustrating one. Case law gives some examples of events that are not frustrating events - for example, if the contract is more expensive to perform this is not a frustrating event. If an event happens which is provided for in the contract the consequences of that event happening will be as set out in the contract and it will not be a frustrating event. Parties therefore need to be wary of the potential overlap with force majeure clauses .

Repudiation: this occurs when a party commits a breach of contract that is sufficiently serious that it entitles the innocent party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract. Whether a material or anticipatory breach will depend upon the severity and effect of the breach, and whether it goes to the root of the contract.

Ordinarily, certain extreme types of breach will amount to a clear repudiation of a construction contract. Examples include:

refusal to carry out work;

abandonment of the site or removal of plant by the contractor;

employing other contractors to carry out the same work;

failure by an employer to give access to the site.

Other breaches may not be clear-cut. If the innocent party purports to treat the contract as repudiated because of a breach that is not in fact repudiatory it will have committed wrongful termination and be in breach itself. For that reason if there is doubt about whether or not a breach is repudiatory the innocent party may consider exercising a contractual right to terminate instead if available, although the amount of damages recoverable would usually be lower than damages for repudiatory breach.

Repudiation by one party will not by itself bring an end to further contractual obligations - it must be accepted by the innocent party. There is no particular form that this acceptance must take but it must be an unequivocal acceptance. If it is accepted, both parties are released from performance of their respective unperformed obligations and damages, assessed under the normal rules, will be payable by the party at fault. Damages for repudiation aim to put the innocent party in the position it would have been in had the contract been properly completed.

If the innocent party does not accept the repudiation it 'affirms' the contract. It is still entitled to claim damages for the breach but the contract will continue.

Difficulties can arise if the innocent party inadvertently affirms the contract instead of accepting the repudiation by acting in a way that contradicts acceptance or is equivocal in some way. It may find itself in breach of contract if it stops performing its obligations in the mistaken belief that it has accepted the repudiatory breach.

In some cases a breach may give the innocent party both a right to terminate for repudiation and a right under the contract. The innocent party does not necessarily have to elect to use one right or the other in these circumstances, but if exercise of the contractual right is inconsistent with acceptance of repudiation - for example, if the consequences of terminating under the contractual right are different - or the response to the breach is less than unequivocal the innocent party will be taken to have 'affirmed' the contract and will have to rely on the contractual right rather than repudiation.

Contractual rights to terminate

Termination clauses in contracts give parties right to terminate in certain circumstances. These most commonly deal with breaches of specified contractual obligations. There may be rights to terminate in other situations too, such as the occurrence of a force majeure event.

Termination for convenience

Termination 'at will' or 'for convenience' wording may be inserted into a contract allowing one party to terminate without having to establish that some event has occurred or breach has been committed by the other party. This can be useful where:

the employer reconsiders the use to which land should be put, cannot secure financing for the whole of the project or cannot secure anchor tenants'

the contractor finds the project will be unprofitable or too risky, or the project has been suspended for a significant period with no prospect of it being recommenced.

This type of provision has been traditionally less common than those permitting termination for default in some of the unamended standard forms, but employers are given the right to do so in some forms such as GCWorks and NEC3 and in the majority of PFI contracts. However, contractors and consultants are rarely given the right to terminate for convenience.

What does the case law say?

A contract may provide no express limitation on when, or in what circumstances, a termination for convenience clause can be operated. However case law tends to suggest that, in the absence of sufficient wording, it will be a breach of contract to exercise a termination for convenience clause simply for the employer to obtain a better price to complete the works from another contractor. The English courts tend to look to Australian cases for guidance on this issue.

Provide for compensation: to be effective, termination for convenience clauses will need to provide for contractor compensation. The standard forms which contain these clauses already do so. An Australian case in 2000 held that where compensation is provided for in the contract in clear, unambiguous terms it will usually be enforceable.

Clear wording: as with most contract provisions, clear wording will be required before a termination for convenience clause will be fully effective. Unreasonable provisions, such as allowing the employer to pass work on to a third party, must be stated in clear, unambiguous terms otherwise they will be unenforceable.

Use of omissions clauses to tackle bad bargains and poor performance: the courts have decided that an employer will not be able to use an omissions clause to get out of what it now considers to be a bad bargain. It is also doubtful that such a clause can be relied on by an employer to switch contractors in the event of dissatisfaction with the current contractor's work.

An example of an attempt to do this can be found in a 2003 case between Abbey Development and PP Brickwork Ltd. Here, the contract allowed for the employer to reduce or increase the quantity of work offered to the contractor as well as containing a termination for convenience clause. Abbey relied on these provisions to remove work from PPB after putting the contractor on notice for insufficient supervision and poor workmanship. The judge found that the provision was not clear enough to allow Abbey to use it to pass the work on to another contractor – it only allowed Abbey to reduce work where this was no longer required for the completion of the project.

Rational, honest and proper reasons: this was discussed in another 2003 case between Westminster Council and Hadley Design Associates. HDA was contracted on a rolling basis to refurbish flats built in the late 1950s. The Council terminated the contract under a one-month termination clause that did not require reasons, citing:

the need for market testing driven by a requirement for compulsory competitive tendering;

their desire to have a single firm supply maintenance and repair services, having already appointed another firm to supply maintenance services after the competitive tendering process;

residents' dissatisfaction with HDA's services.

The judge held that these reasons were 'rational, honest and proper'.

In summary, the case law warns us that even if the contract does contain an express provision dealing with termination for convenience:

trivial breaches may preclude termination;

harsh objectives need clear wording, otherwise termination will be seen as an intrusion on the contractor's right to finish the work;

work transferred between contractors is questionable;

an employer cannot use an omissions provision to get out of a bad bargain, and it is also doubtful it can be used if the employer is dissatisfied with a contractor's performance;

a termination clause should provide for compensation to avoid being treated as unenforceable because it is unfair.

Suspension

As with termination, suspension can take many forms. For example, a contractor may wish to respond to actual or alleged breaches of contract by an employer by suspending works, or an employer may wish to respond by suspending payment. Suspension clauses in the contract can be very helpful, but can sometimes be overlooked when the parties' focus has been taken up by negotiating the termination provisions.

There is a very close relationship between suspension and termination and, depending on how the clause is drafted, the end result of a suspension clause may be much the same as a termination clause in that either party will have the right to terminate the contract at the end of the agreed suspension period.

The justification for suspension clauses will be broadly similar to termination – for example, there may be a change of circumstances on the ground that makes continuing with the works impossible in the short term. Occasionally suspension can be used by one party to allow it space to consider how to proceed with a project, which should be acceptable to the other party if kept within bounds.

In the absence of an express contractual term, it would be difficult to argue that a general right to suspend exists in law as the courts have consistently refused to recognise such a right. It is therefore a good idea for the parties to consider having a suspension clause in their contracts. If so, they should also ensure that the contract deals adequately with the immediate practical consequences of a suspension order and how long a contract can be suspended for before termination may occur. Consideration should also be given to what happens when works are to resume following suspension.

Summary

Proceed with caution before using termination and suspension provisions and, if these rights are to be invoked, make sure you strictly follow the contract's notice and procedural requirements

Be careful with your wording. If a contract contains a termination for convenience provision, it is likely that it will be considered in breach of contract if this is used simply to obtain a better price from another party to complete the works - even where there is no express limitation on the circumstances when the provision can be used.

Where no provision is made in the contract for termination for convenience, it may be appropriate to consider whether any default or neutral grounds of termination are applicable or appropriate in the circumstances. Construction contracts

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Energy EuroFrustration in construction contracts

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Send us feedback Frustration occurs when circumstances that are not the fault of either party to a

contract mean it is impossible to continue with the contract . As a result, the contract comes to an end without either party being considered to be in

breach . However, the parties must be certain that a frustration event has occurred so as not to be in breach of contract .

Frustration is a common legal principle, but it is applied as narrowly as possible by the courts - it does not cover

contracts that were always going to be impossible to perform. For example, it would not apply in the case of a

contract to construct a tall building that could not be fulfilled because the

ground conditions were completely unsuitable.

Identifying the contractual obligations of the parties at the date of the contract is key to being able to establish the

conditions for frustration .

Some events that may lead to a frustrated contract include:

The government imposing unforeseen restrictions on building .

Laws being passed that make it illegal to undertake what was promised under the contract

The building where works were to be carried out being destroyed.

An event that was crucial for the

contractual obligations being cancelled.

Sometimes a party may try to claim a

contract is frustrated when they are obligated to make payments in a different currencies which then fluctuates. However, this does not necessarily amount to frustration .

Events that do not alter the obligations but instead delay performance, such as a workforce strike, don’t necessarily amount to frustration . However, it might do should the events have a particularly serious effect on the obligations or if the delay is particularly long.

Force majeure provisions might provide for circumstances that could otherwise be considered frustration events, and so result in termination of the contract . However, generally, force majeure (for example, exceptionally adverse weather conditions) is considered a relevant event which construction contracts allow for by an extension of time rather than termination .

Find out more

Related articles on Designing Buildings Wiki

Breach of contract .

Extension of time .

Force majeure.

Loss and expense .

Relevant event .

Suspension of performance.uction Litigation So you’ve hit that point where you’re sick to death of dealing with the other party’s games, and you’re ready to pull the termination trigger.

Before you do, you need to be absolutely sure that you’re in a solid position to terminate the contract.

Failing to terminate a construction contract properly can drastically affect your entitlements and your legal position, and can actually leave you vulnerable to a claim by the other party.

The Usual Principles of Terminating Contracts

Below we deal with terminating contracts using the formula in the Australian Standard. However, while following that process might be normal, your common law rights of termination still exist and it’s important to understand how they work.

What does this mean? It means that a construction contract can be terminated even without strictly following the process it might have laid out in its terms.

The only exception here is if the contract clearly and expressly excludes your common law rights of termination, which is not usually the case.

The basic common law rights of termination are fairly straightforward:

1. There must be a breach of a fundamental term of the contract;

2. You must clearly terminate the contract following that breach.

As you’d expect though, despite this deceptively simple statement, most people follow the process in the Contract. This is because termination under the process in the contract is normally clearer and less contentious than relying on the common law position.

Because each contract is unique, fully understanding your contract and how it interacts (if at all) with your ordinary rights of termination is an essential starting point.

Termination under Australian Standards contracts

The majority of standard contracts, including the Australian Standards building contracts, contain a formal process for the parties to follow which can trigger a right to terminate.

The process exists to minimise doubt and dispute about whether or not a party had a right to terminate. The process does not, of course, remove the chance of argument entirely.

The more popular Australian Standards contracts ordinarily contain a procedure where a principal or head contractor, in the event of a major breach, sends a notice to the contractor or sub-contract to “show cause”.

Usually the contract itself will set out what’s required in a show cause notice. However, by and large, the notice will need to clearly state what the problem is and call upon the other party to either fix it or say how they are going to fix it in a specified period of time.

‘Show cause’ notice must comply

In order to trigger the right of termination, a show cause notice must be validly issued under the contract.

However, the Courts have taken a pragmatic view of in this area, not always requiring technically strict compliance with the provisions but rather adopting a common sense business approach having regard to the context.

What if you Don’t ‘show cause’

Having received a show cause notice the contractor needs to respond to it to the principal’s reasonable satisfaction. Depending on the context, that might include a plan for rectification, a plan to get back onto the timetable, and details about how and when that’s going to be achieved.

If the contractor fails to respond or the response is inadequate, the Principal may, by written notice, either: take out of the Contractor’s hands the whole or part of the work remaining and suspend payment; or terminating the contract.

What if the Principal is at Fault?

The standards operate similarly if it’s the Principal in substantial breach.

The main difference (at least, in some of the AS contracts) is that the Contractor must first suspend the works before it’s entitled to terminate.

Determining whether a party in substantial breach has ‘shown cause’

As we’ve mentioned, once a show cause notice is issued the party allegedly at fault has to respond to the notice.

Once you receive that response, your obligation is to give proper and honest consideration to whether the other party has, in fact, shown cause in response to the notice issued.

That said, Courts have upheld decisions to terminate even where that decision was unreasonable or purely self-interested by the innocent party.

This formal procedure is replicated in other variants of the AS4000 suite of contracts such as the AS 4901-1998 Subcontract conditions and the AS 4902-2000 General conditions of contract for design and construct. Similar procedures are also found in other standard form building contracts.

What If you Terminate Incorrectly?

What happens if you try to terminate but stuff it up in some way?

Perhaps you don’t issue a valid show cause notice, or perhaps the issue wasn’t considered a substantial breach? And then, despite that, you go ahead and issue a termination notice.

The main benefits to terminating a contract when the other party is at fault are:

1. Obviously, getting another party in to do the work properly (or getting yourself out of a contract that has become unprofitable);

2. The ability to claim damages against the other party.

Failing to terminate properly can kill off both of these benefits.

How’s that? Well, if you try to terminate but don’t do it right, it’s generally regarded as a “wrongful repudiation”. That is, you’ve indicated that you don’t intend to be bound by the contract anymore.

In response to that, the other party can “affirm” the contract – that is, keep you bound to it – or they can terminate it themselves.

If they decide to terminate, it’s actually THEM who get to claim damages and not you.

This can put contractors in a tough situation. Say, for example, a Principal continually delays giving instructions or appears to be farming out work inside your scope to other contractors. Have they repudiated or not? Should you terminate or not?

Making the wrong decision can leave you not only unable to claim your losses back, but vulnerable to claims being made against you.

Damages for wrongful termination

So everything’s gone wrong – you tried to terminate and didn’t get it right, then the other party accepted your repudiation and terminated the contract themselves.

What can they claim against you?

A principal might, for example, try to claim the costs of getting a new contractor on the job (including tendering costs), the additional costs of that contractor coming up to speed, and potentially losses resulting from the project delay (for example, interest on finance).

A contractor might be able to claim not only for work done, but also for profits that they will no longer achieve on the job having been wrongly terminated. They might claim for staff costs and remobilisation costs, for equipment leases that had to be broken early, or many other categories.

In each case, all parties have a duty to take reasonable steps to mitigate (that is, minimise) their losses.

It’s also important to check whether your contract has provisions that affect your ability to claim for certain types of loss.

Practical Advice on Terminating a Construction Contract

Sometimes, of course, you have to terminate despite the risks.

If you’re in that situation here are our practical tips and questions to ask along the way:

1. Know your contract – what does it say about termination, about losses, and about the situation that you are faced with?

2. Why do you want to terminate the contract? What is it that has caused you to think that termination is the best option?

3. Are there legal grounds to terminate either under the contract or at common law (you might need advice on this)?

4. What process does your contract set out for termination, if any?

5. What are your risks if something goes wrong and the other party claims you have wrongfully terminated?

6. Are there other realistic options to termination that have lower risks or exposure which can give you a palatable outcome?

As always, we’re here to help you – if you’re faced with a termination problem, don’t hesitate to get in touch to work through the issues.

Termination in construction contracts .

Variations. Last edited 06 Feb 2018Posted by John P. Ahlers

On January 16, 2014

In Construction News and Notes , Contracting , Government Contracts , Notice Issues Construction Contracts Termination Basics – Part II

This is the second post in a two-part blog addressing construction contract terminations. Read our previous post on “Terminations for Convenience” here .

B. Termination for Default

Termination for default is a draconian action. It constitutes a type of forfeiture; therefore, courts scrutinize terminations for defaults carefully to ensure that the contractual provisions the parties agreed to as part of their original bargain are followed to the letter. The impact of a termination for default is a cessation of revenue by the contractor or subcontractor for the specific project. The terminated contractor or subcontractor may be accountable for reprocurement costs and other damages. Generally, because default terminations are forfeitures, Courts regard them with disfavor.

A typical termination for default clause reads as follows:

Termination for Default. If Subcontractor refuses or fails to supply enough properly-skilled workers or materials to maintain the schedule of Work, refuses or fails to make prompt payment to lower-tier subcontractors or suppliers of labor, materials or services, fails to correct, replace, or re-execute faulty or defective Work done or materials furnished, disregards the law, ordinances, rules, regulations or orders of any public authority having jurisdiction, files for bankruptcy, or is guilty of a material breach of this Subcontract, and fails to correct the default and maintain the corrected condition within not less than three (3) working days of receipt of written notice of the default, then Contractor, without prejudice to any rights or remedies otherwise available to it, shall have the right to any or all of the following remedies:

(1) Supply such numbers of workers and quantity of materials, equipment, and other facilities as Contractor deems necessary for the completion of Subcontractor’s Work, or any part thereof, which Subcontractor has failed to complete or perform after the above notice, and to charge the cost thereof to Subcontractor who shall be liable for the payment of same including reasonable overhead and profit.

(2) Contract with one or more additional subcontractors to perform such part of Subcontractor’s Work as Contractor shall determine to provide prompt completion of the Project and charge the cost thereof to Subcontractor.

(3) Withhold payment of any monies due or to become due Subcontractor pending corrective action to the extent required and to the satisfaction of Contractor.

(4) Terminate this Subcontract, use any materials, implements, equipment, appliances, or tools furnished or belonging to Subcontractor to complete Subcontractor’s Work and furnish those materials, equipment, and/or employ such workers as Contractor deems necessary to maintain the orderly progress of the Work: Subcontractor’s equipment shall only be utilized when equivalent equipment is not locally available to lease, will not be supplied by a substitute subcontractor, and when procurement of substitute equipment will delay completion of the Main Contract. All of the costs, including reasonable overhead, profit and attorneys’ fees, incurred by Contractor in arranging to and performing Subcontractor’s Work shall be charged to Subcontractor and Contractor shall have the right to deduct such expenses from monies due or to become due Subcontractor. Subcontractor shall be liable for the payment of any expenses incurred by Contractor in excess of the unpaid balance of the Subcontract Price.

In the event of any emergency, Contractor may proceed as above without notice.[1]

Generally, a termination for default clause contains the following elements:

Definition of Default. The default provision contains certain grounds for a default termination. Most common are the failure to meet the completion date; failure to make progress; failure to make payment to subcontractors, lower-tier subcontractors, and suppliers; failure to repair or replace faulty or defective work; disregard of laws, ordinances, rules, or other regulations; filing for bankruptcy; or otherwise materially breaching a term of the contract/subcontract.

Cure Notice. The second feature of a well-written termination clause is a cure notice. Generally, the contractor/subcontractor is given a period of time (3 to 5 working days) to cure the default after being provided with written notice of the event giving rise to the termination. A properly-crafted termination letter includes the specific bases for the default, the specific cure demanded of the contractor or subcontractor, and complies with the cure notice duration in the contract to the letter.

Default Remedies. The third feature of the well-written default provision is that the default remedies are set forth with particularity. Among the default remedies are augmentation of the contractor/subcontractor’s work through engagement of other workers or subcontractors, subcontractor’s withholding of money, and ultimately the termination and takeover of the contractor’s work.

Although not expressly stated in the standard default clause, closely-related concepts of contractor anticipatory repudiation or abandonment provide additional grounds for default termination. If a subcontractor or contractor leaves the project without any intention of returning, that constitutes an “abandonment,” which allows the owner/general contractor to take over the contractor’s/subcontractor’s work. To show that the contractor or subcontractor has abandoned the project, you must demonstrate an affirmative, unequivocal, and unconditional declaration of intent not to perform or some other unequivocal, definite demonstration of intent not to return.

The existence of a technical default by the contractor/subcontractor does not necessarily mean that a default termination is proper. Wrongful termination is itself a breach of contract. It relieves the contractor/subcontractor’s liability for preceding breaches and discharges the surety of any obligation under its performance bond. The owner or general contractor bears the burden of proof with respect to whether the termination for default was justified regardless. A default termination is a drastic remedy that should be imposed only for good grounds on solid evidence.

Comments: Termination is a tricky area of the law of contracts. Contractors and subcontractors are well advised to involve legal counsel before undertaking a contract termination, as the facts and circumstances of construction defaults vary widely and are oftentimes both factually and legally complex. Given the potentially harsh results, including the consequences of the default termination and the death sentence that the default termination suggests, it is prudent to contact an experienced construction lawyer at the first sign of trouble, and certainly before taking the extreme action of terminating a construction contract.

[1] Associated General Contractors of Washington Subcontract Form (2009).

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Does the doctrine of frustration have a useful and coherent role to play in English contract law?

Introduction

‘Discharge’ is the technical name for bringing contractual relations to an end. A contract can be discharged in one of four ways. The main one is Frustration.

‘Frustration’ is an event that occurs outside the parties’ control, which prevents the contract from being carried out

Frustration under English law is a doctrine, which acts as a device to discharge contracts where an unexpected event either transmutes contractual obligations impossible, or drastically modifies the party’s initial purpose for entering into the contract.

The common law doctrine of Frustration comes into play to discharge contractual obligations when no party is at fault. What actually happens is that an intervening event occurs that disables the performance of a contract. This event turns performance physically, commercially or legally impossible or transforms the obligations of the contract profoundly different from those, which were agreed at first place.

With a first sight, it would seem that there is a clear picture; frustration will take place in rare occasions falling under those specific categories. However, no clear-cut list of events leading to frustration exists. In addition to this the doctrine has been developed on a case-by-case approach. Therefore, it is far from clear as to what equals to a frustrated contract.

Indeed, when the doctrine should apply is a very contrasting topic. Today the subjective implied term theory has been replaced by the objective ‘reasonable man’ hypothesis. The main issue rests with the courts. They are the one who will decide when an exterior event equalled to sufficient frustration and proceed in the discharge of the contract. It is a fact that courts nowadays show reluctance in discharging contracts as frustrated.

There have been five theories[1] developed over the years attempting to set in order this area. However if we want to identify the peculiarities of its purpose in modern contract law we need to follow the development this doctrine.

Frustration: a struggle to categorize the doctrine

However we may argue that Frustration in modern contract law operates under three comprehensive categories. The basic factor is an intervening act, which makes performance impossible, illegal or commercially sterile.

Thus, Frustration is created by the impossibility of a contract. This means that supervening events occur that may render impossible the performance in occasions that involve a definitive damage of the subject matter [2].

However if the subject matter is damaged that does not necessarily mean that it will frustrate a contract. The risk of loss is an important element that should be taken into serious consideration.

This point can be mirrored in the following example: A has agreed to install an oven in B’s bakery, if, before the work was completed, the bakery is destroyed the contract is frustrated but if only the oven is destroyed, A is obliged to redo the work without any obligation from the other party.

Impossibility also occurs by the death or illness of a party, outbreak of war, strikes etc.

Subsequent illegality is another factor that can frustrate a contract. This happens when parties are ready to perform but changes in the law prevent it, such as the law in another country changes or the law changes due to an outbreak of war [3].

The third scenario, which leads to frustration, is commercial sterility; this arises when the central purpose of the contract is destroyed unless substantial purpose remains.

Supervening events, which may equal in frustrating a contract, will not necessarily occur to this result, since certain features may omit the doctrine of frustration.

Provisions of Contractual Relationships

The common law relating to frustration leads to ‘dead or alive’ practices. If the doctrine applies, the contract is considered as a dead one; if it does not apply the contract sustains all its legal effects. The parties though may decide to agree on middle solutions.

For example, as far as the coronation seat cases are concerned, the contracts provided that, if the processions were postponed, the tickets should be valid for the days on which the procession eventually did take place; or that the ticket holders should get their money back less a sum to cover the other party’s expenses.[4] When the coronation was postponed, these provisions effected in order to exclude the doctrine of frustration.

If a contract contains an express clause, which specifically covers the casus, it is questionable whether or not the provision covers the events, which have occurred.[5] In one case a contract to build a reservoir in six years provided that the builder should have an extension of time for delays ‘however occasioned’. This provision was interpreted as giving him a period of grace only in the event of non-frustrated delays. It did not cover the delays that had actually occurred when the First World War brought the work to termination, and forced the builder to sell his construction plant. The builder’s plea of frustration succeeded.

Also, the fact that the contract makes some provisions for a supervening event will not exclude frustration if the provision is incomplete. A charter party may, for example, provide that the ship owner is not liable for delays due to certain events outside of his power. A clause like the above will not prevent the charterer from founding a ground of frustration. This happens because the provision deals only with one possible effect of the delay, explicitly its result on the liability of the ship owner for breach. It clearly does not contain anything about the liabilities of the charterer, which can consequently be discharged as a result of frustration.

A contractual provision for the event will not exclude frustration in certain cases of supervening illegality. Setting an example, if one of the contracting parties becomes an alien enemy the contract would not be saved by even the clearest obvious provision for that event; for the parties cannot ‘contract out’ of the predominantly strong public policy against aiding the enemy economy in time of war. On the other hand, clauses dealing with export or import prohibition [6] are commonly supported that they assume that the prohibition will be observed and do not subvert its purpose.

To conclude there is the possibility that a contract may particularly provide for discharge on the occurrence of listed events, whether or not these events generate a change of circumstances that would be sufficiently essential to frustrate the contract. Such clauses are meant to decrease the uncertainty which can result from the struggle to decide whether the change is of this kind: and also to moderate the hardship which a party may suffer where the damage is not ultimate so that he would stay bound even though the contract has become unpredictably burdensome on him. If the specified event occurs, the contract is discharged under the express term and not the doctrine of frustration.

‘Self-induced’ frustration

Neither party can rely on ‘self-induced’ frustration that is on a hurdle to performance raised by default or deliberate act of one of the parties.[7] This is most obvious where that conduct constitutes itself a breach of the contract. The venture may be discharged but the person whose conduct induced the casus will stay contractually liable.[8] Therefore, he is in breach of contract guiding the ship to war zone, resulting in her detainment and cannot rely on the detention as a ground of frustration. The doctrine similarly does not apply where the breaches of both parties contribute to a frustrated delay. Neither can a party rely on an event which was due to his liberate act, even though that act is not itself a breach. E.g. an actor who had contracted to give a theatrical show on an indicated day could not rely on failure to perform due to his imprisonment. Even negligence in bringing on the incident would normally omit frustration. The defendants in Taylor v Caldwell would not have been able to rely on the doctrine if the fire was caused by their own negligence.

Following this principle the position ought to be the same where a singer was unable to perform because he did not take care and contracted flu; but as the effect of such conduct on a persons’ health is hard to predict it may be that the contract could be frustrated in such a scenario.

The purposefulness of the rule that a party cannot rely on self-induced frustration is to deprive the party of the benefit of the doctrine of discharge; the rule must not result to prejudgment of the other party. It follows that the party whose conduct has brought about the event cannot rely on it as a foundation of discharge. However, the other party may be able to do so. E.g. an employee who is prevented from working by a sentence of imprisonment cannot be based on this fact and frustrate the contract. However, his employee could rely on it, with the result that he would not be liable for unjust firing.

The question whether frustration is indeed due to the voluntary act of a party can also arise where A enters into several contracts with different parties and the supervening event deprives him of the power of performing some, but not all, of those contracts. Suppose A has planted a crop of vegetables in a farm, which is normally expected to produce 20 tons. He agrees to sell 10 tons of this expected crop to X and 10 tons to Y; but as a result of events beyond his control, the total yield is only 10 tons. One view, for which there is considerable support in the authorities that if A delivers the 10 tons to X, his contract with Y will not be frustrated since his failure to perform it was due to A’s voluntary act; and that for the same reason his contract with X would not be frustrated if he delivers the 10 tons to Y. Yet it seems inconsistent with the principle of frustration to hold A liable for a shortfall due to an event beyond his control, which would have provided him with an excuse if he had agreed to sell the whole quantity to only one buyer. As long as A acts reasonably in allocating the actual yield (in delivering the 10 tons to the first of the two buyers to have contracted with him) he should be under no further liability. It might also be reasonable for him to allocate 5 tons to each buyer. He could then rely by way of excuse on an express contractual provision for the event, but probably not on the common law doctrine of frustration, since the effect of that doctrine is generally said to be to bring about the total discharge of the contract.

Foreseen and foreseeable events: Risk and Frustration

In many frustration cases, the courts have underlined the unexpected nature of the supervening event. Herein, there can be no frustration if, at the time of the contracting, the parties actually foresaw that the event would, or was very possible to occur. This view is based on the hypothesis that, in these circumstances, the parties accepted a possible risk that the event may arise.

Such a risk would undoubtedly be mirrored in the contract price; and if the parties did not want to take the risk, they could clearly avoid it. To strengthen this argument, it is necessary to define exactly what the parties foresaw. The fact that they anticipated a delay does not prevent frustration if the delay that took place was of an absolutely different order or magnitude and was not predicted.

Neither is the doctrine of frustration eliminated merely because a party could have foreseen that the event would occur. No doubt, it was ‘reasonably foreseeable’ that King Edward VII might fall ill at the time fixed for his coronation, but this did not prevent the doctrine of frustration from applying in such a case.

Several judicial statements support a more strict method and assert that a contract can be frustrated even by an event, which was perfectly foreseen. It is hard to understand why the courts should alter the contractual dangers, which have been deliberately undertaken; and the desirable view seems to be that, if parties contract with reference to risk of which they were aware then they should normally be able to rely on the doctrine of frustration.

They should be able to do so only if the contract specifies that they had not intended to provide for the risk. For example they could claim that, if such an event occurs, they would leave the legal experts to sort it out and if their efforts to do so ended in deadlock, the contract could indeed be frustrated.

Conclusion

The doctrine of frustration seems to become more and more rare in the courts of England. Since the frustration of contracts is highly restricted, a defense in frustration of a contract is highly unlikely because the key element is that a valid contract has been made and the good faith it has been structured upon should be under respect.

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THE REPUBLIC OF UGANDA

IN THE HIGH COURT OF UGANDA SITTING AT ARUA

CIVIL SUIT No. 0007 OF 2013

1. CAFE TECHNICAL SERVICES LTD. }

2. WOBAS CONSTRUCTION (U) LTD. }

…………………… PLAINTIFFS

A.

J. W. OPOLOT CONSTRUCTION (U) LTD. …………………………… DEFENDANT

Before: Hon Justice Stephen Mubiru.

JUDGMENT

The plaintiffs jointly sued the defendant for general and special damages for breach of contract. It was the plaintiffs' case that on 23 rd January 2012 and subsequently on 15 th October 2012, they were respectively sub-contracted by the defendant to offer services which included supervision of the construction of classroom blocks and construction of a five stance water borne toilet at Arua Public Secondary School respectively. The agreed contract price for the supervision was shs. 25,000,000/= while that of construction of the five stance borne toilet was shs. 18,000,000/=, and supply of 10,000 concrete blocks at shs. 30,000,000/=. The second plaintiff was as well required to pay to the defendant a sum of shs. 20,000,000/=, hence making the whole contract price to be shs. 140,000,000/=. It is the plaintiffs' case that due to the defendant's breach of the head contract, the defendant was given notice of termination on 9 th March 2013 and the head contract was eventually terminated on 10 th April 2013.

By the time of termination of the head contract, the second plaintiff had made 7,000 blocks worth shs. 21,000,000/= at the rate of shs. 3,000/= each. After the head contract was terminated, the defendant instructed the second plaintiff to level and remove the top loose soil at the costs of shs. 23,000,000/= The second plaintiff's total claim is shs. 64,000,000/= inclusive of the commitment fee of shs. 20,000,000/= while the first plaintiff's claim is for shs.25,000,000/= hence a total of shs. 89,000,000/= is claimed by both plaintiffs against the defendant.

In its written statement of defence, the defendant denied both plaintiffs' claims. It contended that the first plaintiff was to be paid after completion of works but it failed to. It denied having stopped the second defendant from making more blocks and instead level the ground, which was never part of the contract. The defendant instead counterclaimed against the first plaintiff a sum of shs. 5,000,000/= made to it as advance payment to mobilise construction material and deposit the same on site which the first plaintiff failed to do resulting in the termination of the head lease. The defendant therefore counterclaimed for general and special damages for breach of contract, interest and costs.

When the suit came up for hearing, the defendant was unrepresented in court a return of service on court record that showed the defendant had been served. There being no explanation for the defendant's absence, the plaintiffs were granted leave to proceed ex-parte.

P.W.1, Mr. Tatia Allan, testified that the first plaintiff is a company limited by shares and its major activities are undertaking construction works and supply of various items like furniture, building materials, equipment, etc. 23 rd January 2012, the first plaintiff was sub-contracted by the defendant to supervise construction of classroom blocks and a five stance water borne toilet at Arua Public Secondary School. The agreement stipulated that the plaintiff was supposed to supervise the construction of classroom blocks and toilets (the whole works). The work was supposed to be done by workers employed by the defendant. The duration of the work was for 48 weeks. Work commenced in August 2012 and the agreed remuneration was shs. 25,000,000/= after completion of the work.

The plaintiff executed its work for about five months. However, the contractor eventually failed to supply materials for the works to the second plaintiff which was the company executing the works. The defendant's contract was consequently terminated by Arua Public Secondary School. There was no provision of termination in the agreement we made with the defendant. The first plaintiff's role was to ensure that the approved plans were being followed in execution of the works, overseeing the testing of materials at the UNRA Lab in Arua, ensure that the materials used are of proper quality, ensure quality workmanship, including the qualification of workers, and their physical activities on the site e.g setting out of the buildings, the tools that were being used and prepare progress reports from time to time. In performing its duty, the first plaintiff guided by specifications given by the Ministry in the copies of the bills of quantities. The first plaintiff was based on site daily. It had about five employees of the company at the site daily. The first plaintiff was supposed to be paid 25,000,000/= for that work but the money was not paid since it suddenly lost touch with the defendant, hence the suit.

P.W.2, Ms. Zulaika Ali, the Manager of the second plaintiff., testified that the defendant is a construction company which sub-contracted the second plaintiff to construct a five stance waterborne toilets and supply 10,000/= concrete blocks. Before the second plaintiff started work, it paid shs. 20,000,000/= as commitment fee to the defendant on 15 th October 2012. The defendant was supposed to pay the second plaintiff 140,000,000/= upon the execution of the work. The second plaintiff executed part of the work but was never paid. the second plaintiff was unable to compete the work because the head contract between the defendant and Arua Public Secondary School was terminated before completion. The defendant was given notice of termination on 9 th March 2013 and the head contract was eventually terminated was on 10 th April 2013. By the time of termination, the second plaintiff had made 7,000 blocks worth shs. 21,000,000/= at the rate of shs. 3,000/= each.

After his contract was terminated, the defendant instructed the second defendant to level and remove the top loose soil at the cost of shs. 23,000,000/= , which the second plaintiff did, hence the total claim is shs. 64,000,000/= including the commitment fee. The second plaintiff demanded for payment but it has never been paid. When the head contract was terminated, the defendant left in the second plaintiffs' custody, a van and a tipper lorry. The van is in custody of the first plaintiff while the second defendant has the lorry. The Director of the defendant left the vehicles with the plaintiff in the year 2013 promising he would come back to pay, but has never showed up since then. The second plaintiff thus seeks to recover shs. 64,000,000/=, general damages for breach of contract and the costs of the suit.

P.W.3 Mr. Ayub Khan, the Site Foreman of the second plaintiff testified that the second plaintiff excavated a pit about ten meters by six metres for the construction of the waterborne toilet. They started by demolishing the old structure, which was a block of three classrooms, during late August and early September 2013 using an earth mover. They later removed the loose soil around. They secured a machine for making concrete blocks and installed it. They ferried stone dust and the work of making blocks kicked off in October 2012. They produced around 7,000 blocks but were producing below capacity because of limited space and the weather was not conducive because it was a rainy season. They laid the foundation on the five stance waterborne toilet. They were unable to compete the work within the contract period because the machines were delivered late from where they were hired and they would break down often. The works executed by the second plaintiff have not been paid for as agreed, hence the suit.

In his written final submissions, counsel for the plaintiffs Mr. Henry Odama in summary argues that both plaintiffs have proved the execution of valid sub-contracts with the defendant. They have also adduced evidence proving that they executed work under those contracts for which they have not been remunerated by the defendant. They are therefore entitled to an award of general damages for breach of contract, special damages of shs. 64,000,000/=, which were specifically pleaded and proved, interest on both awards and the costs of the suit.

Although the defendant in this suit did not offer any evidence, the plaintiffs still bear the burden to prove their respective cases on the balance of probabilities since the burden was always on the plaintiff to prove his case on the balance of probabilities even if the case is heard on formal proof (see

Kirugi and another v. Kabiya and three others [1987] KLR 347). The issues for determination are as follows;

1. Whether there exists valid contracts between the plaintiffs and the defendant.

2. Whether the defendant breached any of those contracts.

3. Whether any of the plaintiffs is entitled to the reliefs sought.

First issue: Whether there exists valid contracts between the plaintiffs and the defendant .

During his testimony, P.W.1, Mr. Tatia Allan mentioned a contract dated 23 rd January 2012 but it was never tendered in evidence. Under section 10 (2) of The Contracts Act, 7 of 2010, a contract may be oral or written or partly oral and partly written or may be implied from the conduct of the parties. From the testimony of this witness, it was established that the first plaintiff entered into a contract with the defendant and that the plaintiff executed a part of the contract.

During the testimony of P.W.2 she tendered in evidence a contract dated 15 th October 2012 which was received and marked as exhibit P. Ex. 4. Having examined both contracts, I find that the basic requirements of validity, i.e.; valid offers met by valid acceptance, an intention by both parties to create legal relations, certainty of the terms agreed upon, valuable consideration given by both parties and capacity to contract, are satisfied. None of the contracts is affected by any illegality or other voiding circumstances. The first issue is therefore answered in the affirmative.

Second issue: Whether the defendant breached any of those contracts.

A breach occurs when a party neglects, refuses or fails to perform any part of its bargain or any term of the contract, written or oral, without a legitimate legal excuse. This includes failure to perform in a manner that meets the standards of the industry or the requirements of any express or implied warranty. Under each of the contracts, the defendant was obliged to pay the respective plaintiffs for their service; with regard to the first plaintiff, for supervisory services and with regard to the second plaintiff, with regard to construction of a five stance waterborne toilet and supply of 10,000 concrete blocks. There is no evidence that the defendant paid for any of those services.

It is an implied term in every construction contract that the contractor will carry out work in a "good and workmanlike manner" (see

Duncan v. Blundell (1820) 171 ER 749; Cousins v. Paddon 150 Eng. Rep. 234 (1835); Conquer v. Boot [1928] 2 KB 336, [1928] All ER 120 and

Purser and Co. (Hillingdon) Limited v. Jackson and Another, [1971] 1 QB 166). This term imposed upon the plaintiffs an obligation, during the performance of their part of the contract, to employ that degree of skill, efficiency and knowledge which is possessed by those of ordinary skill, competency and standing in the particular trade or business for which they as sub-contractors were employed, preformed in a manner generally considered proficient by those capable of judging such work. The focus is not on the result of the work, but the manner in which the work was performed.

The first plaintiff undertook to complete the task within a period of 48 weeks from the signing of the contract, hence by 24 th December 2012. However, the head contract was terminated on 10 th April 2013 before the works under the first plaintiff's supervision could be completed. With regard to the second plaintiff, the contract period was unspecified but by 10 th April 2013, approximately six months after the signing of their contract, out of the 10,000 blocks contracted, they had produced only 7000 blocks. The implication is that they were producing an average of 1000 blocks per month or approximately 30 blocks a day or 4 blocks an hour, assuming they operated an eight hour working day. The second plaintiff attributed this low productivity, to faulty machines, bad weather, interruption by ongoing school activities and limited space. None of these is a frustrating event capable of excusing the second plaintiff from executing its part of the bargain. None of the reasons will excuse the second plaintiff from liability for delay or non-performance of its obligations.

Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and / or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance (see National Carriers Ltd v. Panalpina (Northern) Ltd, [1981] AC 675, [1981] 1 All ER 161). Generally, these are events beyond the parties' control, which could not have been foreseen at the time the contract was entered into or prevented by the affected party. Thus, the fact that a contract has become uneconomic or commercially impractical will likely not be considered a force majeure event unless expressly provided for.

In the first place, there is no implied term for a builder of a school to have uninterrupted possession of and access to the site (see

Porter v. Tottenham U.D.C [1915]1K.B. 776 ). Secondly, inclement weather, if at all it occurred, which fact was not proved during the trial of this case, could not excuse the delay. For example in Davis Contractors v. Fareham UDC [1956] AC 696, the plaintiff agreed to build 78 houses in eight months at a fixed price. Due to bad weather, and labour shortages, the work took 22 months and cost £17,000 more than anticipated. The builders said that the weather and labour shortages, which were unforeseen, had frustrated the contract, and that they were entitled to recover £17,000 by way of a

quantum meruit. The House of Lords held that the fact that unforeseen events made a contract more onerous than was anticipated did not frustrate it.

It is a well-established rule that where a party agrees to do a certain thing, and does not specify how it shall be done, the law implies a promise on his part to do it in the usual manner (see

Hattin v. Chase 33 A. 989 at 658 (Me. 1895 ). In the instant case, at a production rate of only 30 blocks a day or 4 blocks an hour, the second plaintiff cannot claim to have performed its part of the bargain in a good and workmanlike manner. Similarly, the first plaintiff undertook to supervise performance of the contract for a period of 48 weeks and 51 weeks later, the works were yet to be accomplished. The first plaintiff too cannot claim to have performed its part of the bargain in a good and workmanlike manner. That notwithstanding, when the head contract was terminated, the defendant assigned the second plaintiff additional work of levelling the site, which was not part of the work the second plaintiff had contracted for originally.

Improper performance provides a basis for finding non-performance which may, in a proper case, not only discharge the recipient of the services of its payment obligation, but also subject the service provider to a claim for breach of contract. One party's failure to deliver the quality of performance promised may potentially result in discharge of the other party's performance obligation on account of failure of consideration. However, it is only when the failure to perform in a workmanlike manner renders the work of no value to the service recipient, that the latter's obligation to pay for services is discharged. Otherwise, the plaintiffs would be entitled a claim and the defendant a corresponding obligation to pay reasonable remuneration for work done which is freely accepted, under the doctrine of

quantum meruit. In a quasi-contractual case such as this, the court will look at the true facts and ascertain from them whether or not a promise to pay should be implied irrespective of the actual views or intentions of the parties at the time when the work was done or the services rendered.

In British Steel Corporation v. Cleveland Bridge and Engineering Co. Ltd, 1984] 1 All ER 504, [1984] 1 WLR 504, Goff J said:

The question whether.....any contract has come into existence must depend on a true construction of the relevant communications which have passed between the parties and the effect (if any) of their actions pursuant to those communications. There can be no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement; everything must depend on the circumstances of the particular case. In most cases where work is done pursuant to a request contained in a letter of intent, it will not matter whether a contract did or did not come into existence; because if the party who has acted on the request is simply claiming payment, his claim will usually be based upon a quantum meruit, and it will make no difference whether that claim is contractual or quasi-contractual. Of course, a quantum meruit claim (like the old actions for money had and received and for money paid) straddles the boundaries of what we now call contract and restitution; so the mere framing of a claim as a

quantum meruit claim, or a claim for a reasonable sum, does not assist in classifying the claim as contractual or quasi-contractual......As a matter of analysis the contract (if any) which may come into existence following a letter of intent may take one of two forms: either there may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other; or there may be what is sometimes called an ‘if’ contract, ie a contract under which A requests B to carry out a certain performance and promises B that, if he does so, he will receive a certain performance in return, usual remuneration for his performance. The latter transaction is really no more than a standing offer which, if acted upon before it lapses or is lawfully withdrawn, will result in a binding contract. The former type of contract was held to exist by Judge Fay QC in Turriff Construction Ltd. v. Regalia Knitting Mills Ltd (1971) 9 BLR 20 ; and it is the type of contract for which [Counsel for CBE] contended in the present case. Of course, as I have already said, everything must depend on the facts of the particular case; but certainly, on the facts of the present case – and, as I imagine, on the facts of most cases – this must be a very difficult submission to maintain.' If there is no contract there can be no question of a party to a transaction being in breach of an obligation of the type which can only arise under a contract. ‘In my judgment, the true analysis of the situation is this. Both parties confidently expected a formal contract to eventuate. In these circumstances, to expedite performance under that anticipated contract, one requested the other to commence the contract work, and the other complied with that request. If thereafter – as anticipated – a contract was entered into, the work done as requested will be treated as having been performed under that contract; if, contrary to their expectation, no contract was entered into, then the performance of the work is not referable to any contract of which the terms can be ascertained, and the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as has been done pursuant to that request, such an obligation sounding in quasi-contract or, as we now say, in restitution.

In the instant case, the work done by the second plaintiff in levelling the site is not referable to the contract of

15 th October 2012, but was nevertheless done at the request of the defendant. In the circumstances, the law imposes an obligation on the defendant as the party who made the request to pay a reasonable sum for such work as was done by the second plaintiff pursuant to that request. The services offered by the two plaintiffs are not of a kind which would normally be given free of charge. In absence of evidence suggesting that either plaintiffs' failure to perform in a workmanlike manner rendered the work of no value to the defendant, the defendant therefore breached its part of the contract when it failed or refused to pay the plaintiffs a reasonable sum for that part of the work as was done pursuant to the two contracts and the subsequent request. The second issue is therefore answered in the affirmative too.

Third issue: Whether any of the plaintiffs is entitled to the reliefs sought .

Under section 61 (1) of The Contracts Act, 7 of 2010, where there is a breach of contract, the party who suffers the breach is entitled to receive from the party who breaches the contract, compensation for any loss or damage caused to him or her. For a loss arising from a breach of contract to be recoverable, it must be such as the party in breach should reasonably have contemplated as not unlikely to result. The precise nature of the loss does not have to be in his or her contemplation, it is sufficient that he or she should have contemplated loss of the same type or kind as that which in fact occurred. There is no need to contemplate the precise concatenation of circumstances which brought it about (see The Rio Claro [1987] 2 Lloyd's Rep 173).

On account of the plaintiffs' failure to prove that their performance of their obligations under the contracts met the "good and workmanlike manner" standard, their claim for general damages cannot be sustained. Under the principle of ex turpi causa, the court will not assist the plaintiffs to recover compensation for consequences that are partly out of their own shortcomings. The claim for general damages for breach of contract is thus rejected.

Although the plaintiffs are not entirely blameless for the failure of the head contract and of their respective sub-contracts, the circumstances are such that the law should, as a matter of justice, impose upon the defendant an obligation to make payment of an amount which the plaintiffs deserve to be paid, on a quantum meruit basis. The fundamental principle that equity is concerned to prevent unconscionable conduct applies to a case like this. The court will impose such an obligation where the defendant has received an incontrovertible benefit (e.g. an immediate financial gain or saving of expense) as a result of the plaintiffs' services; or where the defendant has requested the plaintiff to provide services or accepted them (having the ability to refuse them) when offered, in the knowledge that the services were not intended to be given freely. The court regards it as just to impose such an obligation on the defendant who has received the benefit and has behaved unconscionably in declining to pay for it. The court is more inclined to impose an obligation to pay for a real benefit obtained by the defendant, since otherwise the circumstances will leave the defendant with a windfall and the plaintiffs out of pocket.

The law is that special damages must not only be specifically pleaded but must also be strictly proved. (See Kyambadde v. Mpigi District Administration [1983] HCB 44 ). The plaintiffs not only pleaded the special damages claimed but also adduced evidence proving them. The plaintiffs are therefore entitled, on a

quantum meruit basis, to payment for their services, and the value of that should represent the extent of the unjust enrichment obtained by the defendant.

For that reason Judgment is entered for the plaintiffs severally against the defendant in the following terms;

a. Special damages of Shs. 25,000,000/= in favour of the first plaintiff.

b. Special damages of Shs. 64,000,000/= in favour of the second plaintiff

c. Interest on the awards in (a) and (b) above at the rate of 15% p.a. from the date of judgment until payment in full.

d. The costs of the suit.

Dated at Arua this 10 th day of July 2017 …………………………………..

Stephen Mubiru

Judge

10 th August ESSION MODERN DAY CONSTRUCTION CONTRACTS

Facing frustration: the relevance of frustration in modern day construction contracts

11 MAR 2016  —  BY JANINE STEWART, PARTNER, AND HANNAH GILLIES, SOLICITOR, MINTER ELLISON RUDD WATTS

Introduction

“Frustration of contract” immediately releases contracting parties from performance of the contract if an event occurs beyond their control which renders further performance “impossible” or “substantially impossible”.

The test for proving that performance is “impossible” is not straightforward and comes with a high threshold. Furthermore , the application of frustration to modern day contracts, in particular construction contracts, is questionable. This article examines the doctrine of frustration and its continued relevance and application given that various contracts (particularly property and construction contracts) specifically address common frustration risk events.

The doctrine of frustration

The law of frustration is well settled in New Zealand. As recently affirmed by the Supreme Court in Planet Kids v Auckland Council (2014] 1 NZLR 149 (SC) at [51] citing Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 (HL)), frustration occurs “wherever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”. In order for a contract to be frustrated, the frustrating event must not be brought about by one of the contracting parties, and the contract must not make provision for such an event.

For example, in the High Court of Australia case of Codelfa Construction Pty Ltd v State Authority of NSW (1982) 149 CLR 337 the parties entered into a tunnelling contract for extension to Sydney’s rail network on the understanding that the contractor’s price was based upon continuous shift-working. This was reflected in the contractor’s programme, which formed part of the contract. Shortly after work commenced, members of the public obtained injunctions in order to restrict the contractor to two-shift daytime working and no work on Sundays. On appeal from arbitration, the High Court of Australia found that the arbitrator should have little difficulty in holding that the contract had been frustrated given that the completion of the works by the stipulated time for performance was impossible (without an agreed variation to shifts).

High threshold

Once a contract is frustrated it is terminated automatically and immediately, irrespective of the parties’ subjective intentions to continue (albeit on modified or renegotiated terms).

Given that the effect of frustration is to end the contract, the courts have been careful to confine the doctrine within narrow limits and do not invoke it lightly, so as to not interfere with a negotiated contract (Karelrybflot AO v Udovenko [2000] 2 NZLR 24 (CA) at [37]). Thus, the doctrine requires that the contractual obligation becomes impossible or incapable of performance.

This includes whether the purpose of the contract has become impossible to attain (for example in Krell v Henry [1903] 2 KB 740 where the defendant leased a flat from the plaintiff for two days, and both parties knew that the entire purpose of this was so that the defendant could view the coronation procession of Edward VII. The procession was cancelled, and it was held that the letting contract was frustrated). The result may have been different if the court found that the viewing was not the sole purpose of the letting contract and that the tenant would still have obtained some benefit out of the contract.

It will not be enough that the obligation has become more onerous, more expensive or slower (unless the delay is such that the purpose of the contract is frustrated). Therefore, cases where the doctrine has been successfully upheld in the construction context are usually of the kind where the work in the project has been destroyed, for example by fire or landslide (for example Appleby v Myers (1867) LR 1 CP 615).

The high threshold for a finding of frustration is also influenced by the fact that contracting parties are expected to bear the risk in contracts of certain kinds. So, for example, a contractor who provides a quote for certain works is expected to take the risk that the works will prove more difficult and more costly than expected.

In Davis Contractors (supra) shortages of labour and materials meant that performance of a contract to build 78 houses in eight months for £94,000 took 22 months and cost the contractor £115,000. Despite such severe obstruction to contractual performance, the House of Lords found that this was insufficient to frustrate the contract. The contractor had taken on the risk of lack of labour because it was not an unforeseen event for a contractor, and it could have been the subject of contractual stipulation if the contractor did not want to take on this risk.

Remedies upon frustrating event

The Frustrated Contracts Act 1944 (FCA) contains two major provisions to relieve injustice in a situation where one party has performed their contractual obligations before the contract is terminated due to a frustrating event.

The FCA provides that:

(a) Where money has been paid by one party before the frustrating event, it can be recovered and monies payable cease to be payable. If the party to whom these monies were paid has incurred expenses in performing his or her part of the contract before frustration, the court may allow him or her to offset a sum in respect of those expenses. For example, if a contractor has partly constructed a house and has received $50,000 in progress payments before the frustrating event, the owner will be entitled to recover this sum less the amount the court allows the contractor to keep as reimbursement for the works completed; and

(b) Where one party’s part performance has conferred a benefit on the other party before the contract is discharged, that other party may recover a “just sum” in compensation.

Parties can contract out of the FCA and specify what will happen upon termination due to a frustrating event. For example, clause 14 of the standard form construction contract NZS3910 provides that:

“In the event that either the Principal or the Contractor considers that the Contract has become impossible of performance or has been otherwise frustrated, one may notify the other that it considers the Contract to be terminated. If the other parties agree, or in the event of disagreement if it is so determined by the Engineer or by mediation or arbitration under Section 13, then 14.1.2 shall apply.”

This clause dictates the process if only one party considers that the doctrine is engaged by referring it to the Dispute process under clause 13 of NZS3910. If the contract is found to be frustrated, clause 14.1.2 provides for the costs that are payable by the principal to the contractor following the frustrating events (including the value of the work carried out at the date of termination less amounts previously paid).

In the context of construction contracts, contractors and principals often find themselves in situations where performance has become more onerous, more expensive or slower due to unforeseen circumstances. However, the fact that the bargain has become unworkable in a commercial sense because of an unforeseen event will not discharge the party from further performance on the grounds of frustration. Therefore, it is important that the contract is drafted to reflect the parties’ intention as to what should happen if such an event was to occur and this is what a force majeure clause is desired to do.

Force majeure clauses

Force majeure clauses are common in the construction sector and offer a commercial mechanism to clearly address unforeseen events. Parties can agree upon both the events that trigger the force majeure clause, and the consequences. Unlike the strict doctrine of frustration, where the threshold can be difficult to meet, parties can negotiate force majeure clauses in order to achieve flexibility for certain events. For example, parties to a construction contract may choose to suspend performance or extend time for performance upon the occurrence of a force majeure event.

Clause 10.3.1 of NZS3910 is a force majeure provision which provides that the engineer grant an extension of time to the contractor if the contractor is “fairly entitled to an extension” including by reason of flood, volcanic or seismic events, or any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor.

Force majeure clauses are also included in the FIDIC suite of contracts (Red, Yellow and Silver Books) at clause 19 where “force majeure” is defined as an exceptional event or circumstance beyond a party’s control, which could not reasonably have been provided against before entering into the contract and which, having arisen, could not reasonably have been avoided or overcome and which is not substantially attributable to the other party. The categories listed as force majeure events include: (i) war and other hostilities; (ii) rebellion, terrorism and civil war; (iii) riots and strikes (by persons other than the contractor’s personnel and subcontractors); (iv) explosive materials and radioactive contamination; and (v) natural catastrophes such as earthquakes, hurricanes and volcanic activity.

Clause 19 of the FIDIC suite of contracts entitles the contractor to an extension of time if it is prevented from performing the contract by any of the force majeure events. However, it will only be entitled to recover the costs incurred due to the force majeure event if it is a category (i) to (iv) event (meaning that the contractor cannot recover costs arising in relation to natural catastrophes).

Relationship between frustration and force majeure

Where the parties have turned their minds to the frustrating event and contractually allowed for it in a force majeure clause, reliance on the common law doctrine of frustration is generally precluded. Given the prevalence of force majeure clauses in standard form construction contracts, a finding that the contract had been frustrated in Codelfa Construction Pty Ltd v State Rail Authority of NSW (supra) has been described by

Hudson’s Building and Engineering Contracts (12th Edition) as an “exceptional result” (at [1- 059]).

Force majeure clauses are commonplace in the construction industry, such that the absence of one might be viewed as implied acceptance of risk by the contractor for certain events that would normally be covered by such a clause (and which therefore can no longer be described as “unforeseen”). As was recently confirmed by the Supreme Court in Planet Kids (supra) at [139]:

“Where risk is allocated to one of the parties under the contract, then the doctrine of frustration is excluded, in so far as it relates to the occurrence of one of the allocated risks. The allocation of risk can be express or by necessary implication …” (emphasis added).

Determining whether a contractor has impliedly taken on such risks in the absence of a clearly drafted force majeure clause will obviously depend on the particular facts and circumstances. Some events, such as earthquakes or other natural catastrophes, could be viewed as foreseeable risks which should have been clearly allocated in construction contracts, failing which the court may find that one of the parties has taken on the risk by necessary implication, for example through being reflected in the agreed price. In such a case, if the court finds the risk has been impliedly allocated under the contract, the doctrine of frustration may be excluded.

However, there may be other scenarios where the court determines that an event falls outside what the parties expressly allowed for in a force majeure clause (or implicitly allowed for in the absence of such a clause). In such a case, if it is not reasonable to place the risk of non-performance for the events which have occurred on one party or the other or neither, the contract may be frustrated.

For example, in Metropolitan Water Board v Dick Kerr & Co Ltd [1918] AC 119 (HL) contractors entered into a contract in July 1914 to construct reservoirs at an agreed price within six years. In February 1916 the government prohibited the continuance of work due to the outbreak of war. The contract provided the engineer power to extend time for completion in the event of any “difficulties, impediments, obstructions, oppositions…whatsoever and howsoever occasioned”. The House of Lords considered that this scenario could not possibly have been in the contemplation of the parties to the contract when it was made and therefore it fell outside the scope of the force majeure clause. The contract was therefore frustrated as the works were prohibited by law (at [126]).

Conclusion

The threshold for frustration is high, and the operation of frustration will be contractually constrained by what the parties have allowed for in their contract, in particular with reference to the force majeure clause. Increasingly, parties are already allocating risks or at least addressing some risks in their contract, such that the doctrine of frustration often does not apply.

However, it is arguable that a well-drafted force majeure clause assists the court in reaching a finding of frustration where there has been a truly frustrating event, as the court can clearly identify which risks the parties have foreseen and allocated accordingly.

How strong the doctrine of frustration will be in modern day contracting will continue to be tested by (most commonly unfortunate) catastrophic events.