Who must issue termination notices under construction contracts? The High Court provides guidance

A recent Technology and Construction Court case provides useful guidance about the correct party to issue default notices under many common forms of construction contract.

Struthers v Davies

[2022] EWHC 333 should serve as a warning to employers who are seeking to terminate such construction contracts on the basis of a contractor’s breach: they should follow the letter of the contract and remember that default notices are in the contract administrator’s discretion. The case is also important for contract administrators. Employers will be relying exclusively upon them to serve such notices, meaning that they could open themselves up to liabilities to the employer if they fail to do so.

Background

Two homeowners had entered into a RIBA Building Contract with a building contractor in March 2015 for works at their home in Surrey. The date for completion was set for some six months later, but the contractor failed to meet it, and in the following months made little progress towards completion of the works. The contractor refused to purchase materials to complete the works, used materials paid for by the homeowners on other jobs, and all but abandoned the work altogether.

Given the lack of progress, the homeowners purported to terminate the building contract. They subsequently brought a claim against the contractor, seeking, amongst other things, recovery of the costs they incurred in rectifying defects and completing the unfinished work.

Who serves the default notice?

One point in dispute was whether or not the contractor’s employment had been validly terminated in accordance with the building contract. The contractor argued that one of the notices leading up to the termination was invalid because it had been issued by the wrong party – the homeowners rather than the contract administrator.

The RIBA Building Contract form allows the employer to terminate the contractor’s employment in circumstances where, in particular, the contractor has abandoned the work or is failing to proceed regularly and diligently. This involves a two-stage process:

• first, the Architect or Contract Administrator may issue the contractor with a notice of intention to terminate, specifying the contractor’s breach (“Default Notice”); and
• where the specified breach continues for 14 days after the Default Notice has been issued, the employer can then serve a second notice terminating the contractor’s employment (“Termination Notice”).

In the case, the homeowners had attempted to operate this procedure. However, it was the homeowners, not the contract administrator, who had issued the first of these notices, the Default Notice.

The issue before the Court was whether the Default Notice was valid, even though it had been issued by the wrong party. The contractor argued that the termination provisions should be interpreted strictly, so that only a Default Notice issued by the contract administrator would be valid.

The decision

On the issue, the judge agreed with the contractor. He noted that there were sound reasons for requiring the initial notice to come from the contract administrator rather than the client. It did not appear to him correct as a matter of law for the employer to be entitled to issue the Default Notice instead of the contract administrator.

Having said this, the judge decided that the contractor’s conduct was so bad that it qualified as a repudiatory breach of the building contact (a breach serious enough to entitle the homeowners to terminate the contract). He referred to “a litany of failures to carry out work in time and to give any indication of a final date for already delayed works”. Given this, the homeowners’ notice had the effect of accepting that repudiatory breach and terminating the contract in any case.

Why does it matter?

The case provides a further example showing why termination by an employer is a risky process. The contractual procedure should always be followed to the letter, as termination clauses will be strictly interpreted by the Courts, and it is easy to slip up.

However, of more general assistance is the judge’s confirmation that the Default Notice must be issued by the contract administrator rather than the employer. This provides clarity for all parties for the future.

The point will have wide application. For example, a similar two-stage procedure applies for termination by the Employer in many of the JCT forms, where the first notice is to be issued by the Architect/Contract Administrator. The judge’s reasoning would seem equally to apply under those contracts, meaning that this first notice should always be issued by the Architect/Contract Administrator rather than the Employer.

This case is also significant for those acting as contract administrators. Previous cases have confirmed that a contract administrator can be in breach of their duties if they fail to issue a default notice. This case confirms that employers cannot issue such notices, meaning that they will not be able to cure the situation for themselves. It makes it even more important that contract administrators consider the issue and (at least) advise the employer if they consider that the contractor’s conduct justifies issue of a default notice. Otherwise, contract administrators could open themselves up to liabilities to the employer.

The case leaves open an outstanding question over whether or not the employer must issue the second notice under such procedures, the Termination Notice. There might be circumstances when practicalities dictate that this notice is instead issued by, for example, an Employer’s Agent or solicitor on the employer’s behalf. While there are good reasons for requiring an independent contract administrator to issue the Default Notice (because they would be under a duty to act impartially in finding the contractor in default), there seems less justification for insisting on strict compliance in the case of the second notice. It appears sensible, therefore, for issue of the Termination Notice by an agent of the employer to be valid, although we are not aware that this point has yet been tested before the Courts.