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Termination – a risky business

Termination is a last resort and a high-risk strategy. Get it wrong and a party could find themselves in repudiatory breach of contract.

This was highlighted in the recent case of PBS Energo AS v Bester Generacion UK Ltd & Anor where both parties had purported to terminate the contract and the court had to decide whether either parties’ termination was in fact valid. The judgment considers several issues including termination, the prevention principle and the Court of Appeal’s judgement in Triple Point.

PBS and Bester entered into a sub-contract for the engineering, procurement and construction and commissioning of a biomass fired energy generating plant. Payment of the contract price was to be made by way of milestone payments. The contract was based on an amended form of the FIDIC 1999 Silver Book for EPC/Turnkey Projects. The judge held that the purported termination of the contract by PBS was not valid and that it was Bester who had validly terminated the contract. The judgement provides several points of interest:

  • Can a failure to determine an extension of time claim be grounds for termination? PBS alleged that by Bester failing to determine an extension of time claim, Bester committed a material breach exposing PBS to liability to pay liquidated damages for delay. The judge disagreed and held that if a claim for an EOT was rejected by Bester this was not final as the issue could be referred to adjudication: “To find that there was a material breach when PBS elected not to get a determination via adjudication would cut across the scheme of adjudications…”.
  • Is failure by an employer to pay a milestone payment a ‘substantial’ breach under the contract? Clause 16.2(b) of the contract, entitled the contractor to terminate if “the Employer substantially fails to perform his obligations under the Contract”. The judge held that late payment would not necessarily trigger a right to terminate under clause 16.2(b) and that the contractor had other remedies available to it including interest provisions and suspension of the works. The judge did comment that a “payment obligation which was particularly large” or “repeated failures to pay” may fall within clause 16.2(b) and trigger a right to terminate. However, here the judge concluded that a failure to pay an instalment of 5% of the £14.2 million contract price “would not constitute “substantially failing to perform the obligations under the Contract” so as to entitle termination under Clause 16.2(b)”.
  • Prevention principle – can the prevention be hypothetical to succeed? – One of the grounds upon which Bester sought to terminate the contract was based on the abandonment of the works by PBS. The parent company of PBS argued that PBS had been locked off the site. It argued that to allow Bester to terminate on this ground would be to allow Bester to insist on PBS performing its obligation to attend site which Bester itself had rendered impossible. The judge held that this is “a classic example of the prevention principle being invoked in inapposite circumstances”. On the factual evidence the judge concluded that it was PBS who had locked the site. The judge held that there could be no prevention where on the facts PBS did not return to the site to remedy the breaches: “There can be no prevention where the exclusion relied on is one which lies at PBS's own door”

The right to terminate for failure to pay needs to be drafted in the clearest of terms in a contract. Terminology such as “substantial breach” is open to interpretation and may give rise to disputes (depending on what interpretation suits a party’s case once the contract is underway). The judgement is also a reminder that the prevention principle is “a focused principle of narrow application”. To be successful a party needs to demonstrate on the facts that prevention occurred. In this case it was argued that PBS did not need to attempt to get back on site because this would have been prevented. The judge described the argument as “a nice example of a hypothetical prevention”.

The judge’s comments in relation to the decision in Triple Point Technology Inc v PTT Public Co Ltd (2019) are also worth noting. When deciding if a clause allows liquidated damages to survive termination, the judge made clear that “in deciding which of three outcomes (no application, application up until termination, and application beyond termination) is correct in any given case will turn on the wording of the clause in each case”.

PBS Energo AS v Bester Generacion UK Ltd & Anor [2020] EWHC 223 (TCC) (07 February 2020)

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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