| Date | 29 April 2008 |
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| Judgment | Laing and Morrison Knudson -v- Aegon Insurance Company Ltd, 29 July 1997 86 BLR 70 |
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| The Issue | Whether the exercise of an express power of termination under a contract excludes the acceptance of a repudiatory breach. |
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| Implication |
A contractual termination may also amount to an acceptance of a repudiation, where there is a coincidence between the contractual grounds and the common law grounds. Where these grounds do not coincide, the exercise of the contractual determination will generally be viewed as neither acceptance of the repudiatory breach, nor affirmation of the contract. |
printMost standard forms of contract provide express clauses entitling either party to terminate the contract in the event of certain specified matters. The effect of such clauses will be, in the case of a contractor, that it will cease to be under its primary obligation to carry out the works, but the contract will remain in force to set out an exclusive code as to what is to happen thereafter. The relationship of such contractual termination provisions with the common law was examined in the recent case of Laing and Morrison Knudson -v- Aegon Insurance Company Ltd. Laing Morrison Knudson (LMK) had entered into contract with Glaxo for the construction of a medical research establishment at Stevenage, for works to the value of approximately £700m. LMK were a type of management contractor and under the contract had agreed to "provide and be personally responsible for the management, organisation, supervision, co-ordination and integration of the construction". To fulfil this obligation, LMK were to sub-contract all the construction work and were to be fully responsible for the acts and omissions of its sub-contractors, subject to the provisions of clause 6.22. Clause 6.22 provided the usual restriction on liability of the management contractor, whereby providing LMK fully discharged its obligations under its agreement, it would be reimbursed its reasonable costs incurred in respect of default by a sub-contractor. LMK sub-let certain of the mechanical installations to M F Kent (which subsequently changed its name to Kentz). In January 1994, before Kentz had completed the contract works, administrative receivers were appointed. LMK immediately served upon Kentz a notice of termination under the provisions of the sub-contract. The present action concerned the refusal of the surety to pay under the terms of a performance bond the costs incurred by LMK or Glaxo in completing the mechanical works following this determination. Reference was made to the 1984 case of Perar -v- General Surety and Guarantee Company with which there appeared to be certain similarities. In that case, it was held that once the contractor's employment had been automatically determined under the provisions of the contract following appointment of administrative receivers, the contractor had no obligation thereafter to continue with the works and therefore was not in breach for failing to do so. Since the contractors were not in breach, the surety did not become liable under the bond. Whether the operation of the express determination provisions could properly co-exist with the right to accept a repudiatory breach, therefore lay at the heart of the present case. It is generally thought that in the event of a repudiatory breach, the innocent party may either elect to affirm the contract, if that is possible, or accept the repudiation and so bring the contract to an end. Each action is irrevocable. Since a contractual determination provision by its very nature affirms the contract, in the sense that it seeks to preserve the rights and obligations of either party under the contract, it was argued that this was inconsistent with an acceptance of repudiation at common law. The court was asked to assume that the contractor was in repudiatory breach at the date of the termination, although it was acknowledged that the appointment of an administrative receiver would not of itself amount to repudiation. His Honour Judge Humphrey Lloyd QC considered that these matters were nicely balanced. He saw that there was much attraction in the argument that the determination provisions of the contract ought to be capable of being operated without recourse to legal advice. He considered that this lay behind the wording of the relevant clause, which was stated to be "without prejudice to any other legal right or remedy" which the contractor would otherwise possess. Judge Lloyd noted that acceptance of a repudiation must be clear and unequivocal. In his view the exercise of the contractual right to terminate could not be treated as such an acceptance. Neither however could such a contractual letter of termination be treated as an election not to repudiate the contract, and thus an affirmation of it. "In my judgment it is not possible to characterise LMK's actions as an election not to treat the contract as repudiated when it exercised an express contractual right to terminate performance of the works but without prejudicing any other rights." It seems the key consideration was that the determination was made in accordance with the provisions of the contract, whilst preserving the normal rights of common law against the contractor. Providing therefore that there was no intervening conduct on the part of either party which amounted to an affirmation of the contract, then the sub-contractor remained in repudiatory breach. The action of LMK in terminating the contract was properly to be viewed therefore as merely clearing the decks to enable LMK to be able to carry out and complete the works which Kentz was not going to do. Accordingly LMK were entitled in principle to the additional cost of completing the sub-contract works.
CJ-9816
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