If a contractor is in delay, when can you terminate?

By Simon Tolson, Partner, Fenwick Elliott

In our last edition of IQ,1 Simon Tolson wrote about when you can terminate a contract for a failure to proceed regularly and diligently. But if your contract makes no provision that a contractor must proceed regularly and diligently, can you still terminate if the contractor falls into delay?

Does delay on the part of a contractor amount to a repudiation of the contract? 

Delay is, of course, one of the areas that arise most frequently in practice.  It can be particularly prevalent during a recession as the reason for the main contractor’s lack of progress is invariably due to his subcontractors’ cash-flow problems and a lack of materials being ordered as credit limits with suppliers are reached.    Delay on the part of the contractor can be one of the main signs that all is not well with his supply chain.  In most instances, of course, delay is expressly dealt with in the contract and the issue that usually arises is whether the contractor is proceeding regularly and diligently.  But what if you cannot go down that route?

So does delay on the part of the contractor amount to a repudiation of the contract?  As a rule of thumb, and where time is not of the essence (discussed below), delay does not amount to a repudiation.  As ever, though, it depends on the circumstances.   If the contractor’s delay means that he cannot or will not carry out the contract, then it may amount to a repudiatory breach if the delay deprives the innocent party of substantially the whole benefit of the contract.2

Even if the employer is on reasonably certain grounds that the delay amounts to a repudiation of the contract then it is almost always necessary to notify the contractor of this before accepting that repudiation.

In Felton v Wharrie3 the plaintiff had agreed to demolish some houses for the defendant within 42 days. This date was missed and when asked by the employer whether it would take one, two or three months to complete, the contractor said that he could not say.  The contractor carried on with the work and two weeks later the employer ejected the contractor from the site.  It was held that the employer had no right to do so because he had failed to inform the contractor that he treated such a response as a refusal to carry out the work and he should not have waited two weeks.  Essentially, the employer must act quickly and communicate any dissatisfaction with the contractor’s performance. 

Time of the essence

What is the effect of making time of the essence and how can it be done?   

The first point to note is that time is not of the essence in relation to the whole contract.   The issue is whether time is of the essence in relation to a particular obligation.  Time is not considered of the essence unless:

1. the parties state that a term relating to time must be strictly complied with; or
2. the nature of the subject matter of the contract or the surrounding circumstances show that time should be considered of the essence; or
3. a party who has been subjected to unreasonable delay gives notice to the other party and makes time of the essence.

In construction contracts points (1) and (2) are rarely an issue.   Construction contracts do not tend to make the timing for the performance of any obligations of the essence.  Similarly, the subject matter of the contract is not such that completion should be considered of the essence.  Instead, it is point (3) which is relevant.  Despite the comprehensive provisions in standard contracts dealing with time, there are circumstances where the employer is entitled to make time of the essence.

The effect of making the contractor’s obligation to complete the works of the essence is essentially to put the contractor on notice that unless he completes by a specified date the employer will treat this as a repudiation of the contract.  Unsurprisingly, getting this process right is not without its pitfalls for the employer. 

This has been considered recently in HDK Limited v Sunshine Ventures & Others4 and includes a useful overview of the law in this area.  The case concerned three separate building contracts.  HDK (the contractor) sought payment of outstanding sums and Sunshine (the employer) was claiming damages for non-completion and defects in the works.  In a nutshell, the contractor was late in completing his works. The employer was becoming increasingly frustrated with progress, and on 26 September 2006 wrote to the contractor requiring him to “complete the work … as soon as possible”.  He then wrote again on 30 September 2006 requiring the contractor to “complete the outstanding works as a matter of urgency”. On 24 November 2006 a letter was issued to the contractor terminating the contract.  The issue was whether the September letters had the effect of making time of the essence and essentially setting up the ground for the termination in November.  It was held that they were not.  They failed on two grounds.  First, they did not convey in clear terms that unless the notice was complied with the employer would treat the contract as at an end.  Second, they did not specify a date by which the contractor was to complete.  The result of the failure to properly make time of the essence meant that the termination letter of 24 November was effectively a repudiation of the contract on the part of the employer.

Conclusions

In summary, the points the employer needs to bear in mind when wishing to make time of the essence as a result of delay on the part of the contractor are:

1. a reasonable time for performance must have elapsed;
2. the notice to the contractor must set out a requirement for completion by a specified date;
3. the specified date for completion must not be unreasonably soon in the circumstances judged at the time the notice is given;
4. the notice must make clear that the employer will treat the failure to complete by the specified date as a repudiation by the contractor (i.e. the contractor must be in no doubt as to the consequences of failing to complete by the date specified); and
5. the employer himself must not be committing a breach of contract which is affecting the contractor’s ability to complete. 

What amounts to a reasonable time for performance to have elapsed will, of course, depend on the circumstances.  A court will take into account the original agreed date for completion, the effect of any variations and the conduct of the parties. 

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• 1. See this article from International Quarterly 15.
• 2. Shawton Engineering Ltd v DGP International Limited and DGP Ltd [2006] BLR 1, CA
• 3. See Hudson’s Building and Engineering Contracts, eleventh edition at para 4.214
• 4. [2009] EWHC 2866 (QB)