REUTERS | Arnd Wiegmann

Termination or repudiation: that is the question

Persistent late payment or non-payment of invoices may constitute a repudiatory breach of contract in some situations, but not in others. It is not always easy to spot the difference. In the current economic climate, this has become a common problem. Employers are reluctant to make payments to contractors who are on the brink of insolvency, especially as they are likely to be unsecured creditors in that insolvency. What can or should an employer do in these difficult circumstances?

We have recently been involved with two projects where the employer faced this issue. Both projects were seeing a significant lack of progress being made on site by contractors who were in serious financial trouble and had little or no workforce on site.  Sub-contractors were not being paid, but formal insolvency proceedings were still some way off.

On the first project, the employer sought advice having already given notice of termination, taken back the keys, prevented the contractor from attending site, changed the locks and engaged alternative contractors to complete the works. On the second project, the employer did not want to make further payments to the contractor whose insolvency was imminent. However, it also had the benefit of  an on demand bond, on which it would need to rely to recover the additional costs of completing the project. The employer was concerned that non-payment might be seen as repudiatory breach, which would invalidate the bond. In both situations the employers were following high risk strategies because they were at risk of inadvertently repudiating the contract.

How might an employer inadvertently repudiate the contract?

On the first project, an adjudicator held that the employer’s actions amounted to a clear case of repudiation, which the contractor was justified in accepting. This was despite the contractor’s failure to attend site for several days. Surely that amounted to “abandonment” of the contract and demonstrated an intention to no longer be bound by the contract: a repudiatory breach by the contractor, which the employer was simply accepting? The problem in this case was that the contractor’s conduct was judged to fall short of complete abandonment. As an employer, if you accept what you think is a repudiatory breach by the contractor but you get this wrong, it will be you who is held to have repudiated the contract. So in this case, the employer’s notice of termination amounted to repudiation.

The problem for employers is that, if the contractor’s actions do amount to a repudiatory breach and the employer does not accept this breach, it will continue to be bound by the contract. Clearly, it can be a very close call.

In these circumstances, any notice of termination should cover both alternatives: the employer should serve a notice that accepts the contractor’s repudiatory breach, and, alternatively, if it is subsequently found not to be a repudiatory breach, notifies the contractor of its intention to terminate the contract for one or more reasons stated in the contract.

On the second project, the employer needed to be careful not to repudiate the contract, as it  needed to rely on the on demand bond. Our advice was to wait for an administrator or liquidator to be appointed to the contractor. Under the terms of its contract, on the appointment of an administrator or a liquidator, the employer was able to terminate with immediate effect, and was not obliged to make any further payments to the contractor. The employer could then engage an alternative contractor to complete the works, charge the balance to the contractor or its administrator, and make a call on the bond. It may not always be appropriate to wait for formal insolvency proceedings but, as an employer, you should consider this course of action.

The message: proceed with caution

Never has the phrase “act in haste, repent at leisure” been more appropriate. An employer who acts quickly without giving careful consideration to the consequences of its actions and/or taking appropriate professional advice may find that it has inadvertently repudiated the contract.

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