Breach and abandonment: termination provisions put to the test.
Are you clear on whether you have the right to terminate your contract for a breach where you deem non-performance occurs?
Have you considered the risks to yourself for a breach of contract should you get it wrong?
This case surrounds the termination of a contract between PBS Energo AS v Bester Generacion UK Ltd and the validity of the termination by both parties, and, Mrs Justice Cockerill’s judgement which highlighted various issues that would possibly be of interest to commercial lawyers.
This particular case highlights the importance of following the terms of a contract (FIDIC in this instance) before taking any action.
This particular contract relates to a biomass energy plant project located in Wrexham North Wales.
Equitix employed Bester to design, construct and install the plant as the EPC Contractor. Bester employed PBS as a sub-contractor. VB (PBS’s parent company), provided a parent company guarantee and as such were added to the proceedings by Bester to avoid the risk of multiple proceedings in the event of default on the part of PBS.
PBS aborted the construction and contract, on the grounds that Bester failed to pay a key payment by the agreed date, and, that Bester would not agree to grant a request for an extension of time.
The termination case brought by PBS was rejected by the courts. Justice Cockerill J noted that the failure to pay a milestone payment did not justify termination of the contract by PBS and would not trigger a right to terminate under the FIDIC contract.
The Court considered the proper construction of clause 16.2 (b) of the subcontract and the circumstances in which a late payment might trigger entitlement to terminate.
The Court also considered whether entitlement to payment had arisen under the payment process set out in the subcontract. It found that it had not.
Justice Cockerill J also held that the contractor (PBS) was not entitled to terminate the contract due to the employer’s failure to agree an extension of time and that it did not amount to a “material breach” justifying the termination by PBS.
This was based on the fact that PBS had the option to adjudication if Brewster were to refuse an extension of time and as such it was not a “final” decision which remained to be seen if a different ending would have been met should adjudication had been sought.
Bester relied on their contractual right to terminate on two clauses within the FIDIC contract,
- Firstly, to be entitled to terminate the contract by reason of a failure to comply with a Notice to Correct as regards delay to the project, caused by delay in the detailed design and suspensions of works and by reason of failure to provide necessary permits and assistance.
- 2 (a) Failure to provide performance security or comply with a notice to correct.
- Secondly Bester relied on the abandonment of the works or an intention not to perform to the abandonment of the works.
- 2 (b) – Abandons the works or unwillingness to continue
As PBS made no attempt to continue works and Bester had not prevented them from returning to site, Bester could therefore, terminate the contract for the abandonment of works.
The judge considered other principles, one being the prevention principle which states “a party cannot require another to comply with its obligation when considering Besters right to terminate, and found that no prevention by Bester had stopped works on site being carried out by the contractor, and that Bester had not locked the contractor out of the site barring PBS from resuming works at no point after PBS had left.
Liquidated damages and termination
When determining LDs the court looked to the decision made in the Triple Point Technology Inc v PTT Public Company Ltd  EWCA Civ, (note, this case is under appeal) the Court of Appeal which found that liquidated damages (“LDs”) were not payable when completion of the works did not take place. However, in the Triple Point case, the phrase “up to date PTT accepts such work” which was a clear marker that completion was key to the LDs being claimed.
In drafting the contract, the wording will be critical, it had been observed by Cockerill J that it would be more usual for LDs to accrue up to the date of termination. LDs were found in favour of Bester as the facts found LDs were still available up until when termination occurred, the contract also provided for separate compensation payments, (although this was for different losses), upon a termination event.
This case shows the importance of ensuring there are clearly defined termination rights within the contract and complying with the “letter” of the clauses within the contract should a dispute arise, leading to the contract being terminated.
Contractors should also be aware that there is no automatic right to terminate a contract for non-payment. It should also strengthen the need to word the contract precisely so if termination should occur Liquidated Damages are clearly outlined.
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