Failure to pay, breach and abandonment: termination provisions put to the test

It is often unclear whether a party to a contract has a right to terminate for the other’s breach, with the associated risk of being in breach for non-performance itself if it gets it wrong.  The recent construction case PBS Energo AS v Bester Generacion UK Ltd and another [2020] EWHC 223 (TCC) addressed the validity of purported terminations by both parties and Cockerill J’s judgment highlights various issues likely to be of interest to commercial lawyers.

The case concerned the aborted construction of a biomass energy plant in North Wales.  PBS, the contractor, claimed to terminate on grounds including Bester’s failure to pay a milestone payment by the due date or to agree to PBS’s claims for extensions of time.  Bester relied more successfully on a contractual right to terminate for abandonment of the works.

Failure to pay a milestone payment did not justify termination by the contractor

On the facts, the milestone in question had not been achieved by the contractor, but Cockerill J noted a simple failure to pay would not usually trigger a right to terminate.  This was reinforced by the payment mechanisms and provision for interest for late payment.  As PBS could not exercise its specific right to terminate for non-payment as it had not complied with the relevant mechanism, the judge considered the contractual right to terminate for “substantial” breach.  She found that this was a lesser hurdle than common law repudiatory breach and “material” breach.  Even so, although a payment obligation that was particularly large or repeated failures to pay may fall within the meaning of “substantial” breach, an instalment representing 5% of the contract price did not in this case.

Contractor was not entitled to terminate for the employer’s failure to agree an extension of time

Cockerill J held that refusing an extension of time did not amount to a “material breach” by the employer justifying termination by PBS (as PBS had alleged).  This was based on the fact that the contractor had the option to refer the refusal to extend to adjudication so Bester’s rejection of its request was “not final”.  It remains to be seen whether the judge would have reached a different conclusion had adjudication not been an option for the contractor. 

Bester could terminate for abandonment

Bester was entitled to rely on its contractual right to terminate for abandonment of the works by the contractor.  The judge considered whether the prevention principle (that a party cannot require another to comply with an obligation where that party has itself prevented compliance), could in theory assist the contractor, in light of claims it had been locked off site.  However, she found that the prevention principle was of narrow application and there must be some “prevention in fact”.  Here, there had been no such prevention, as it was the contractor who had purported to terminate, stopped progress on site and made no attempt to resume works and it could not point to locking of the site (which on the evidence, Bester was not responsible for), as a reason not to carry out the works.

Liquidated damages and termination

In Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ, the Court of Appeal found that liquidated damages (“LDs”) were not payable in a situation where completion of the work never took place. Cockerill J reiterated the principle applied in Triple Point that whether LDs are enforceable once a contract is terminated will depend on the wording of the LD clause.  In Triple Point the phrase “up to the date PTT accepts such work” was a fairly clear “marker” that completion was key to the LDs being claimable.  While the drafting will be crucial, Cockerill J observed that it would be more usual for LDs to accrue up to the date of termination.  On the facts, the LDs for delay in favour of Bester were still available up until termination occurred and even though the contract provided it with separate compensation payments (albeit for different losses) upon a termination event.

Comment

The case highlights the value of including clear and specific termination rights in contracts plus the importance of complying with any contractual mechanisms required for termination rights to arise.  Clients are often concerned about their rights to terminate for non-payment and this is a reminder that such a right will not always arise automatically.  It also reinforces the principle that the validity of liquidated damages provisions after termination will depend on their wording in each case, with the outcome in Triple Point anticipated to be the exception rather than the norm.