Termination: Parting Of The Ways

Terminating a contract is a last resort. There is no going back so the stakes are high. If a party gets it wrong, it can be in breach. So what advice is there for parties either receiving or initiating a termination notice? Most recently, issues around termination have been considered in Sabic UK Petrochemicals Ltd vs Punj Lloyd Ltd [2013].

The termination clause

A termination clause will list the grounds for termination and which of them are capable of remedy and therefore subject to prior notice.

Most termination clauses are fault based, with the exception of a party's insolvency which may trigger automatic or discretionary termination. A termination clause may prescribe what must be contained in a notice of termination. Identification of the breach to be remedied in the notice will be required regardless of what such a clause says.

The Sabic case - was the notice valid?

In the Sabic case, the recipient of the notice argued it was invalid because:

it did not say on the face of it that it was a clause 27.2.10 (Termination) Notice it did not identify in sufficient detail the breach to be remedied or the steps to be taken to do so the period to rectify was too short. In construction contracts what is material breach can be difficult in matters such as progress and suitability of work and materials, as these can be matters of judgment.

The judge in the Sabic case found that such a notice, although it requires to refer to the actual termination clause, does not need to say it is a clause 27.2.10 Notice.

In Sabic, the ground for termination was the contractor failing to proceed with the works with due diligence and the judge found in that case that, where such a warning is given of a failure to exercise due diligence, it does not necessarily require to particularise the respects in which the contractor has failed.

In this case, a seven-day period was given to rectify. The length of a remedial period is a constant source of debate. In Sabic, the court considered that the contractor on the receiving end of this notice should have been able, within seven days, to demonstrate that it was "taking steps to get to grips with the contract". Even if it was too short, the judge considered this would not take away from the fact it was a termination notice - it would merely allow for more time to be given to the recipient before termination could take place.

"Material breach" as a ground of termination

Another specified ground of termination is often...