Termination: make sure you follow what the contract says you need to do

In a previous article, we took a look at the importance of being honest when terminating an employee’s contract. It’s never going to be quick and easy, so it’s essential that employers comply with the contractual process of termination. The recent decision in Interserve Construction Ltd v Hitachi Zosen Inova AG shows just how important it is to understand and comply with this process for the termination of a construction contract.

The background

The case concerns the construction of an energy from waste plant in Hartlebury. In July 2015, the main EPC contractor sought to terminate its sub-contract with its subcontractor. The EPC contractor had issued a letter and made arrangements to remove them from site with immediate effect.

Whilst the sub-contractor could have justified immediate termination on a number of grounds, including those relied on by the EPC contractor, the contract stated that the EPC contractor:

“…may (at its absolute discretion) notify the Contractor of the default and if the Contractor fails to commence and diligently pursue the rectification of the default within a period of seven (7) Days… terminate the employment of the Contractor under the Contract.”

It was this that the sub-contractor used to argue that the contract hadn’t been terminated in the correct way, because the EPC contractor had not issued a notice and allowed a seven-day period for rectification of the default.

The case

 The EPC contractor tried to rely on reference to its “absolute discretion” under the clause, and argued that it was exercising this discretion in not allowing the seven days for rectification. But the court disagreed, holding that the notice and seven-day period for rectification was not optional but was a condition precedent. This meant that it had to be complied with prior to the EPC contractor having the right to terminate.

A termination event may have occurred, and it may have been in the EPC Contractor’s absolute discretion to terminate. However, the case demonstrates that the exercise of that discretion had been expressly limited by the terms of the contract, which means the necessary notice had to be given.

 Key points for employers

 The case is an important reminder that both parties must be clear on the rights surrounding termination, both when entering into a contract and when bringing one to an end.

When entering into contracts, make sure to:

  • Establish if there are any notice requirements and weather they are a condition precedent. Read the termination clauses carefully and look out for words such as ‘shall’, ‘subject to’ or ‘condition precedent’;
  • Check for any custom amendments to the timeframes for serving any necessary notices. The standard form can be amended to allow the notices to be given as early as possible.

When it comes to serving any notices, make sure to:

  • Comply with the form which the contract requires. This will normally mean giving the notice in writing, and should describe the circumstance relied on and reference the relevant contract provisions;
  • Serve the notices in the correct way. The contract might require it be served on a particular office or person, or in a specific way like recorded delivery.

If you skip out on the details, you could pay the price – even if there are genuine grounds for termination.

For more advice on the issue, you can contact Alison here.

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