| Date | 19 May 1999 |
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| Judgment | Ellis Tylin Limited -v- Co-operative Retail Services Limited, TCC 8 March 1999 |
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| The Issue | Operation of express contractual provisions for termination of contract. |
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| Implication |
Strict compliance with the contract terms as to termination must be shown, whilst the terms must be construed in a manner which does not flout ordinary business common sense. |
printMost standard forms of construction contract carry provisions for determination of the employment of the contractor as a consequence of certain specified defaults. It is also a common feature of term contracts, for example for maintenance services, that both parties will be entitled to bring to an end the contract upon specified notices and procedures. These determination, or "break", clauses must be operated with caution. The party who fails to strictly comply with the terms of the contract may find that it has been held to have repudiated the contract. Under the general law repudiation is thought to arise in two circumstances. Firstly, where there has been a breach of a condition of the contract. Here, by using the term "condition" lawyers intend something much more restrictive than the general understanding given to "conditions of contract" widely and sometimes inappropriately used in the construction industry. The use of the word "condition" in its legal sense means a term which the parties agreed, either expressly or by implication of law, to be such that any breach would entitle the other to terminate the contract. Secondly, a breach of a "fundamental" term may amount to repudiation. This is thought to arise when the breach is so grave as to have the effect of substantially depriving the other party of the intended benefit of the contract. Termination of contract was examined in the recent case between Ellis Tylin Limited -v- Co-operative Retail Services. Co-Operative Retail Services Limited (CRS) is a national retailer which operates from approximately 730 premises across the country. In early 1996 it contracted with Ellis Tylin the task of maintaining and repairing mechanical and electrical plant within its various premises. The contract was for a period of three years with provision for revision of rates of payment at the end of the first and second years. Disputes arose as to the scope and responsibility for works carried out under the agreement and the operation of the contract came to an end three months after the end of the first year. Clause 18 of the agreement concerned the review of fees for the maintenance services and the rights of either party to terminate the contract in the event that agreement could not be reached. Disputes arose as to whether the proper mechanisms for termination had been applied and the court was asked to consider these questions as preliminary issues. It was acknowledged that the right of Ellis Tylin to terminate the agreement pursuant to clause 18 only arose if Ellis Tylin first took the action described within that clause. This involved making a written proposal for the revision of the amount of the fees after the expiry of ten months from the date of commencement of works. CRS argued that Ellis Tylin had failed to follow this procedure. Counsel for CRS submitted that clause 18 of the contract should be construed either as a determination clause or as a break clause comparable to the type of provision found in leases. Strict compliance was required. The act of contractual determination was one which deprived the other party of the benefit of the contract it had concluded. His Honour Judge Bowsher QC reviewed text books on the subject of contractual termination. In Chitty on Contracts (27th edition), it was stated "the terms of the termination notice may provide that notice can only be given after a specified event. Prima facie, the validity of the notice depends on the precise observance of the specified event". In The Interpretation of Contracts by Kim Lewison QC, it is stated "An option to terminate is construed in the same manner as any other option, and accordingly any condition must be strictly complied with. Any condition precedent must be strictly fulfilled. The clause must be exercised strictly in accordance with its terms." Hudson's Building and Engineering Contracts (11th Edition) states, "Exact and meticulous compliance by the determining party with any formal or procedural requirements laid down in the termination clause, for example, as to notices or time limits, will usually be required if a contractual termination is to be successful." Judge Bowsher added however, that words in a contract should be given a natural and ordinary meaning and he quoted Lord Diplock when he said in Antaios Cia Naviera SA -v- Salen Rederierna AB: "If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense." Judge Bowsher concluded that whilst Ellis Tylin had given notice earlier than the time period set down in the contract, there could be no doubt of the intention that negotiations should take place for a revision of the fee. Taking into account all the evidence he concluded that Ellis Tylin had given valid notice of termination of the agreement. However, subsequent evidence showed that the parties had in fact agreed revisions to the fees to be submitted for the second year of the contract. Accordingly the notice of the termination had been overridden, and could not be regarded as a valid notice. By ceasing to work following expiry of its invalid termination notice, Ellis Tylin had repudiated the contract.
CJ-9920
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