10 January 2019

The risk of terminating a construction contract

Imperial Chemical Industries Limited v Merit Merrell Technology Limited [2017] EWHC 1762 (TCC) (“ICI v MMT”)

In this case, ICI attempted to terminate a contract because of alleged breaches by MMT. The Court held the employer had no right to terminate and therefore that it was liable for the termination costs and losses. This highlights the risks of terminating construction contracts.

What happened in the case?

  • In 2012, MMT and ICI contracted for MMI to carry out work associated with the construction of ICI’s new paint manufacturing facility.
  • On October 2014, ICI instructed MMT to stop all welding, claiming defects and quality issues.
  • In January 2015, ICI instructed MMT to recommence welding in some areas.
  • By letter dated 17 February 2015, ICI terminated MMT’s contract, based on the alleged defects and quality issues.
  • MMT disputed the factual and legal basis of the termination.
  • The TCC therefore had to decide who terminated the contract and whether they were entitled to do so.

Decision

The High Court decided in favour of MMT – that ICI had wrongfully terminated the contract and MMT and were therefore entitled to its losses. The basis of the decision was as follows:

1.    As a matter of fact, the grounds used by ICI to terminate were simply not issues at the time of termination by ICI.

2.    As such, ICI was not entitled to instruct MMT to leave site. By doing so, ICI was in fact in repudiatory breach of contract.

Conclusion

This case highlights the risk of terminating a contract when you are not entitled to. If you are considering termination of a construction contract it is advised to consult your lawyers – if you get the process wrong or the grounds wrong, you will find that you are in repudiatory breach and liable for damages for that breach. This will often prove expensive.

For more information, or advice on Construction contracts, contact a member of our Construction team.