The importance of terminating construction contracts properly

Manor Co-Living Ltd v RY Construction Ltd [2022] EWHC 2715 (TCC)

Summary of the case

This case concerns a construction dispute that went to adjudication and the subsequent claim for breach of natural justice arising from the adjudicator’s decision.

Unhappy with the decision made by the adjudicator, Manor Co-Living Ltd brought a claim to the High Court for a breach of natural justice arising from the adjudicator’s alleged failure to properly consider their defence (that the contract was validly terminated under common law).

The High Court decided that as the adjudicator had considered the claimant’s defence and determined that there had been no effective communication of termination; ultimately there was no breach of natural justice.

Facts of the case

Manor Co-Living Ltd (MCL) is a company that buys and sells real estate. RY Construction Ltd (RYC) is a company that primarily constructs residential dwellings.

In 2020 MCL and RYC entered a construction contract for conversion and extension works, using the JCT Standard Building Contract 2016.

Following a dispute between the parties, a default notice was sent to RYC on 11 November 2021, identifying defaults on their part and asking them to remedy those defaults within 14 days. If they did not, then MCL would terminate the contract.

As no remedy was forthcoming, a notice was sent to RYC saying that MCL sought to terminate the contract and would be barring RYC from access to the site.

RYC replied, calling the notice invalid as it had been delivered by email and the contract only made provision for hand delivery or postal delivery by recorded, signed-for or special delivery. Furthermore, they said that by barring them from the site, MCL had acted prematurely and were in repudiatory breach of contract. A repudiatory breach is one that goes to the heart of the contract and makes up an essential part of the agreement between the two parties.

MCL argued that the Termination Notice was valid but even if it wasn’t, because of RYC’s repudiatory breach they were entitled to terminate the contract under common law.

The dispute was referred to adjudication.

The adjudication

In the adjudication, the adjudicator decided in favour of RYC, agreeing that the Termination Notice was invalid and rejected the contention by MCL that they had validly terminated the contract at common law.

So, what is required to terminate a contract at common law?

There are two limbs that must be fulfilled:

1. There must be a repudiatory breach; and
2. The decision to terminate must be effectively communicated to the other party (i.e. there must be an acceptance of the repudiation).

The adjudicator, without considering whether there was a repudiatory breach on the part of RYC, did not think there was a valid termination at common law. He saw no evidence that proved there was effective communication from MCL to terminate the contract due to the repudiatory breach of RYC.

It should be noted that during the adjudication MCL never made the point that its conduct in barring RYC from the site constituted an acceptance of the repudiation.

The present case

MCL brought a claim for breach of natural justice to the High Court arguing that the adjudicator had failed to consider whether MCL had successfully terminated the contract at common law. MCL felt that the adjudicator had found that the barring of RYC from the site had constituted a valid acceptance of repudiatory conduct for the purposes of common law termination but then failed to consider the first limb of the common law defence. Failing to consider this was a breach of natural justice as it would have provided MCL with a defence to RYC’s claim for declarations.

In opposition, RYC argued that the adjudicator did consider the common law termination argument and determined that it didn’t apply. They disagreed that the adjudicator made any finding that MCL’s conduct amounted to an acceptance of repudiatory conduct and that as MCL never put forward an argument, that constituted an acceptance and the adjudicator had not erred in not considering it.

The judge’s decision

The judge considered that if the adjudicator had accepted that there was a valid acceptance of a repudiatory breach and then failed to consider whether there had been repudiatory conduct on the part of RYC, then there would have been a breach of natural justice. However, the judge found no such errors in the decision.

Crucial to the judge’s decision was the fact that MCL never put forward an argument that the refusal to allow RYC back on the premises constituted a valid communication of acceptance of a repudiatory breach. MCL had only argued that the termination notice constituted a valid acceptance of the repudiatory breach. As this argument was rejected by the adjudicator, in the judge’s view, there was no need for the adjudicator to then question if there had been repudiatory conduct on the part of RYC.

The judge also found nothing that indicated that the adjudicator had made a finding that MCL’s conduct had constituted an acceptance of the repudiatory breach.

The judge concluded that the adjudicator did consider the substance of MCL’s alternative claim based on common law repudiatory breach. The judge found that the adjudicator rejected it on its merits on the basis that there had been no valid acceptance, and correctly concluded that there was no need for him to address the question of RYC repudiatory conduct.

The judge did note, however, that it was not an option for a referring party to pick and choose which parts of the responding party’s defence are within the adjudicator’s jurisdiction. He also emphasised that the responding party is entitled to raise any defence it considers properly arguable.

There was no breach of natural justice. MCL’s challenge failed.

The significance of this case

This case highlights some important considerations for termination of contracts and adjudication.

Regarding termination of contracts, it highlights the consequences of getting termination wrong. Had MCL simply followed what was stipulated in the termination clause of their contract with RYC, they would have been able to save themselves a great deal of time and money. Instead, by terminating the contract incorrectly, they opened themselves up to a claim from RYC for breach of contract. If you ever find yourself in a situation where you wish to terminate a contract, this case should emphasise the importance of getting good legal advice before you take action!

This case also emphasises the role played by adjudicators. They will not, nor are they expected to, consider aspects of disputes that have not been brought to their attention. This case shows that it’s crucial to explore as many avenues as possible in the arguments you bring before an adjudication.

It also throws a little light onto the strategy adopted in adjudication cases, and what an adjudicator is supposed to consider. Though it ultimately had no effect on the decision, the judge was critical of attempts to limit the scope of the jurisdiction of the adjudicator; it is clear that an adjudicator needs to consider all the relevant parts of the defence of a responding party regardless of the arguments advanced by the referring party.

As for the responding party, they should decide whether to set out a positive case in their defence or to adopt a line-by-line response. Essentially, the response should identify crucial information or facts, such as conclusions from reports (e.g. valuation or expert reports), case law reports and witness statements to ensure that they are at the forefront of their defence.

As with all legal disputes, before entering adjudication it is very important to seek legal representation and advice. Our Dispute Resolution team can advise and guide you through the entire process and will always seek the best possible outcome for you and your business.

Suryen Nullatamby – Senior Associate and Adjudicator

[email protected]