How (and how not) to terminate a construction contract and other issues...

Terminating a construction contract is rarely straightforward. In many cases, the contract will set out specific grounds for termination and a procedure for bringing the contract to an end.

However, a failure to strictly comply with all of the contractual requirements is likely to lead to termination being ineffective, which can itself put the terminating party in breach of contract and exposed to a claim for damages.

This was recently considered in the case of Struthers and another v Davies (trading as Alastair Davies Building) and another [2022] EWHC 333 (TCC) (Struthers). In this not uncommon factual scenario, the Technology and Construction Court (TCC) grappled with competing evidence from experts over alleged variations, defects, remedial works and costs, as well as attempted termination of the contract by the Claimant homeowners and repudiatory breach by the Defendant contractor.

This blog post will look at key points raised in Struthers and the Court’s approach to some common issues which are relevant to many construction disputes.

The facts:

• The Claimants (Mr and Mrs Struthers) engaged the Defendant (Davies) by a construction contract in March 2015 to carry out certain building works at their home, including the construction of a new extension. The contract contained a completion date of 10 August 2015.
• The project suffered from delays. The Defendant failed to provide any completion programme for the works, and carried out no further work after 10 December 2015.
• The Claimants engaged another contractor to complete the works. Following investigations by the new contractor and advice from an independent expert, the extension was demolished and rebuilt.
• The Claimants attempted to terminate the contract in January 2016 and claimed the cost of the remedial works, and certain consequential losses, from the Defendant.

Issues considered by the Court:

Expert evidence

Both parties provided expert evidence in support of their position in relation to the extent of the alleged defects, the requirement for remedial works and the costs of those works. The Court noted that this evidence was key to the determination of this case. The Court clearly stated that it preferred the evidence of the Claimant’s expert (Mr R) to that of the Defendant’s expert (Mr M) for the following reasons:

1. Mr R had the benefit of having visited the site before and during the remedial works, giving him first-hand knowledge of the situation on site.
2. Mr R was willing to discuss and comment on Mr M’s views. However, Mr M declined to discuss or comment on Mr R’s views. The Court found this surprising, given Mr M’s role as an independent expert and noted that his evidence “lacked persuasive weight”.
3. Mr M suggested that the absence of foundations shown in a photograph was “because an unknown third party had removed them”. The Court found this to be an unheralded and unsupported accusation.
4. When commenting on the role of the Building Control Officer (BCO), Mr M suggested that one of the BCO’s whose evidence was put forward “might not be a BCO at all and that the report might not be [his] own view”. The Court found that this, rather odd, accusation cast considerable doubt on Mr M’s impartiality and his views.
5. When addressing quantum, the Court found that Mr M’s calculations were not transparent and he sought to rely on figures discussed during without prejudice meetings. By contrast, the Court noted that Mr R’s figures were supported by objective reasoning and his own expertise.

Variations

The Defendant argued that the contract had been varied during the course of the works, due to updated drawings being provided during the course of the works and that the contract terms were varied by agreement and/or conduct. The Court dismissed both of these arguments. The Court held that it was usual for updated drawings to be provided, and taken account of, during the course of the works and that these remained "Contract Documents". Further, the contract contained a standard-type clause requiring any change to the contract to be in writing and signed by both parties. Therefore there could not have been any change to the contract terms in the absence of such a written agreement.

Reasonableness of remedial works and the duty to mitigate loss

The Defendant argued that it was not reasonable to demolish and re-build the extension and that alternative remedial works should have been considered and that the Defendant should only be responsible for the minimum remedial works that would have been required to remedy the defects. Regarding the costs of the remedial works, the Defendant further argued that the costs were inherently unreasonable as no competitive tendering had taken place, and that the costs exceeded the original costs of the works.

The Court did not have sympathy with either of these arguments. In particular, the Court noted that the Defendant should have known the Claimants would take expert advice on the defects and that it was reasonable for them to follow the resulting expert advice - in this case to demolish and rebuild the extension, foundations and steelwork. The fact that the costs of doing so were not the "minimum" that could have been incurred does not make them unreasonable.

With regard to the Defendant’s criticisms of the costs claimed, the Court stated that reference to original costs of the works was of little assistance. There was also no criticism of the Claimants due to the lack of competitive tendering for the remedial works. The Court held that it is well-known that the costs of completing another person's work can often, if not always, be much higher than the work would have cost had the original personal completed the work. That in itself proves nothing as to the reasonableness of the costs of completion by others. The real and indeed only question is whether the completion costs incurred by the Claimants were objectively reasonable and the Court was satisfied on the basis of Mr R's evidence that they were.

Termination by the Claimants 

On 11 January 2016 the Claimants sent a Notice of Termination to the Defendant in accordance with the construction contract. The contract required that such a Notice should be sent by the Contract Administrator. In this case, the Notice was sent by the Claimants (although it complied with the contract requirements in all other respects). As the Notice was sent by the wrong party under the contract, it was held by the Court to be invalid. 

Repudiatory breach by the Defendant

The Court held that by the 11 January 2016 the Defendant was in repudiatory breach of contract. The Court helpfully set out a number of failures by the defendant, which the judge considered together and separately to amount to repudiatory breach, including:

• Refusing to purchase materials for the works
• Using materials the Claimants had paid for on other jobs
• Failure to progress the works (and confirming that he would not until finishing other jobs)
• By 10 December 2015 there was a failure to proceed regularly and diligently

Therefore (rather luckily for the Claimant) the Court held that the Claimant’s Notice of Termination operated as acceptance of that repudiatory breach, even though it was not a contractually valid Notice.

Consequential losses

The Claimants claimed a number of heads of consequential losses and liquidated damages. In this case, the Court allowed the Claimants to recover under the following heads of loss:

• Liquidated damages (as provided for in the contract)
• The cost of rental accommodation for six months during the remedial works along with council tax, storage costs and post redirection costs during that period
• Additional mortgage interest and financing fees from the remedial/completion works
• The installation of a temporary floor covering and cooking facilities at the property
• General damages for physical inconvenience and discomfort and associated mental suffering (awarded at £5,000 per Claimant)

In the event, the total sum awarded to the Claimants (including the cost of the remedial works and the consequential losses noted above) was £349,943.67.

Key takeaways

• In this case the Court has provided helpful guidance on its approach to expert evidence, claims for variations, the reasonableness of proposed remedial works and the extent of a Claimant’s duty to mitigate its losses. These are all common themes in construction disputes and parties will do well to consider the Court’s comments on these issues when putting together their own claims in the future.
• This case also serves as a useful reminder of the types of consequential losses which may be recoverable.
• Finally, and perhaps most importantly, this case underlines the fact that when terminating a construction contract, the terminating party must follow any contractual termination procedure in its entirety. Any deviation from that process is likely to render the termination invalid. 

In this case the Claimants were saved from their error on termination by the Defendant’s repudiatory breach, but that secondary argument is unlikely to be available to many Claimants. Otherwise, a failure to terminate the contract correctly may itself constitute a repudiatory breach and expose the Claimant to a claim for damages by the Defendant. So if considering how to terminate a construction contract, make sure to read the contract termination procedure…and then perhaps read it again…