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Sun July 22 2018

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No profit in termination

8 May Contract termination is a messy business. Mark Clinton, head of construction at Irwin Mitchell, reports.

The author, Mark Clinton, is head of construction at Irwin Mitchell
The author, Mark Clinton, is head of construction at Irwin Mitchell

Over the past two years or so, there appears to have been an increase in cases where construction contracts have been terminated.  When that happens, there often follows an argument as to who is responsible for the break-up and who should pay for the consequences.  That is just what happened in Redbourn Group Limited v Fairgate Development Limited. 

This was a case in two episodes.  In the first episode, the court decided who was responsible for the split.  Each party blamed the other saying that the other’s serious breaches amounted to a wrongful repudiation of the contract. The court decided that it was Fairgate that had repudiated the contract.   The second episode aired in the Construction and Technology Court last month and was all about the money.

When a contract is wrongfully terminated, the innocent party is entitled to claim damages for the losses he suffers as a result of the repudiatory breach.  In this case, Redbourn was engaged as development manager and project manager for a proposed development in Wembley, London.  Fairgate accepted that Redbourn were entitled to be paid for work done up to termination.  Redbourn also claimed sums they said they would have earned if the contract had proceeded.  First, they claimed the £200,000 which was payable on the grant of planning consent.  They said the grant of consent was inevitable.  They claimed a little over £1 million, which they said they would have earned for project managing the project.  Finally, in a display of great self-belief, they also claimed an additional performance fee of £250,000 for completion on time and on budget, although that claim was not ultimately pursued.  They gave credit for what they said it would have cost them to have provided the remaining services.  Effectively therefore, this was a loss of profit claim which is typically the type of claim that is made in a repudiation case (where the termination is under a procedure set out in the contract, the contract also usually sets out what can be claimed and the procedure for it).

It is not safe to assume that you will always be able to recover loss of anticipated profit in this type of situation.  This case is an illustration of that.  Damages for breach of contract are calculated to put the innocent party in the position it would have been in if the contract had been properly performed, insofar as that is possible.  Would Redbourn have been entitled to the sums it claimed if the contract had been properly performed by Fairgate?  In answering that question, the court proceeds on the basis that the parties will act in their own best interests in performing the contract, if it had continued. Sometimes, the party in breach would have had a right to terminate lawfully and the court will assume that it would have done so and accordingly any damages will only run up to the date when that termination would have taken effect.

Fairgate were not contractually obliged to proceed with the development or to approve any design of the scheme that might be produced.  They were therefore entitled to decide not to proceed with the project and therefore Redbourn did not have an unqualified contractual right to the profits it claimed.

In some cases where a party is exercising a discretion under a contract, it must do so rationally and in good faith.  The court did not decide whether that principle applied here but said, even if it did, in light of the difficulties that the project encountered (aside from the termination) Fairgate were entitled to decide not to proceed.  Assuming they would have acted in their own best interests and would not have proceeded, they were not liable to Redbourne for the damages claimed.

Termination is an area fraught with difficulty.  It should be handled with the greatest of care and caution.

 

 

MPU

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