Seminar for HKIS on: "Non-Payment and Termination of Contracts"

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1 Seminar for HKIS on: "Non-Payment and Termination of Contracts" 13 May 2014 Joyce Leung, Associate Projects (Engineering & Construction) Practice

2 Contractual Termination Conditional upon: 1. an event - receivership, liquidation, termination of Main Contract 2. notice being given - by Employer - by Main Contractor / Sub-Contractor

3 Termination at Common Law What amounts to repudiation Repudiation / renunciation occurs when one party by words or conduct evinces an intention not to perform, or expressly declares that he is or will be unable to perform, his obligations under the contract in some essential respect Chitty on Contracts

4 Stocznia v Gearbulk Holdings [2009] EWCA Civ 75 one precludes the other? can be consistent; intention to treat contract discharged one may invoke the other except with markedly different consequences

5 Termination: A legal gamble? improper termination repudiation itself examples: - insufficient notice - non-contractual grounds - termination procedure not strictly followed - not fundamental breach a matter of facts

6 Termination of Sub-Contract HKIA Standard Form of Nominated Sub-Contract (1986 Edition) Clause 20 "(a) If the Sub-Contractor shall make default in any of the following respects viz.: (i) If without reasonable cause he wholly suspends the carrying out of the Sub- Contract Works before completion thereof;

7 Termination of Sub-Contract (Cont d) (ii) If he fails to proceed regularly and diligently with the Sub-Contract Works; (iii) If he refuses or persistently neglects after notice in writing from the Main Contractor to remove defective work or improper material;

8 Termination of Sub-Contract (Cont d) then, if such default shall continue for ten days after a notice by registered post or recorded delivery specifying the default has been given to him by the Main Contractor, the Main Contractor may without prejudice to any other rights or remedies thereupon by notice by registered post or recorded delivery determine the employment of the

9 Termination of Sub-Contract (Cont d) Sub-Contractor under this Sub-Contract; provided that notice in pursuance of this clause shall not be given unreasonably or vexatiously and shall be void if the Main Contractor is at the time of the notice in breach of this Sub-Contract; or."

10 Formalities of Notice Service a. mode of service notice by registered post or recorded delivery

11 Formalities of Notice (Cont d) b. time for service - first notice after the default - second notice if such default shall continue for ten days after first notice

12 Formalities of Notice (Cont d) Q: When can the employment of a subcontractor be terminated soonest from now? - first notice served today? - by registered post? - date of posting or date of receipt? - what is the first date when second notice can be served? - day of posting / receipt included?

13 Formalities of Notice (Cont d) How strict? Engineering Construction Pte Ltd v Attorney- General of Singapore (1998) 14 Const. L.J days between notices specified - first notice posted on 18 April second notice posted on 25 April termination invalid

14 Formalities of Notice (Cont d) Contents a. First Notice specify the defaults - one of the grounds - general or specific

15 Formalities of Notice (Cont d) b. Second Notice - sensible connection in time and content - determine the employment of contractor - contractual provisions - without prejudice to any other rights or remedies

16 Validity of Termination 1. Validity of notices 2. Whether defaults in fact rectified a. without reasonable cause suspends work?

17 Validity of Termination (Cont d) b. fails to proceed regularly and diligently c. refuses or persistently neglects after notice to remove defective work or improper material 3. Unreasonable or vexatious? 4. Whether party terminating itself in breach

18 ATAL Technologies Ltd v Stratech Systems Ltd, CFI [2011] Stratech to supply, install and maintain an Automated Vehicle Registration System (AVRS) Stratech failed to deliver equipment on time ATAL denied Stratech of the letter of credit facility Stratech threatened to activate tokens to shut down the AVRS 18

19 Termination 17 March ATAL gave 5 days to remedy 21 March Stratech denied any breach; ready to deliver but for letter of credit 23 March ATAL gave 7 days notice to terminate 30 March ATAL terminates sub-contract 19

20 ATAL entitled to terminate? 78% equipment not ready for delivery Time of the essence? 5 days too short to remedy not genuine warning ATAL not entitled to treat sub-contract rescinded BUT Illegitimate threats by Stratech = repudiatory breach? 20

21 Economic duress Elements wrongful threat made without legitimate commercial justification giving rise to overwhelming pressure Stratech made plain in 21 March letter it would turn off AVRS if ATAL did not accede to payment demands No point giving Stratech more time to change its mind Continuing threat = repudiatory breach => terminate 21

22 Termination of Main Contract: Non-payment HKIA form: "(a) The Employer does not pay to the Main Contractor the amount due on any certificate within the Period for Honouring Certificates and continues such default for seven days after receipt of a notice from the Main Contractor stating that notice of determination under this Condition will be served if payment is not made within seven days from receipt thereof; or (b) The Employer interferes with or obstructs the issue of any certificate due under this Contract;" 22

23 At common law repudiation? single interim payment vs repeated nonpayments valid reasons for non-payments: e.g. deductions for LDs, valuation depends on the circumstances intention not to be bound honest mistake?

24 Creatiles Building Materials v To's Universe Construction, CA [2003] P to spray coating to a building D agreed to pay: - 10% on signing - 30% upon materials delivered on site - the rest by interim payments every 14 days D refused to pay first interim payment after repeated warnings P left the site and accepted the repudiation

25 Arguments against repudiation 1. Honest belief that coatings were applied in the wrong sequence. 2. Not a fundamental breach because: - P made a large profit - already paid 40% - no prejudice to financial position

26 Findings no right to suspend work if payment withheld deliberate refusal to make an interim payment could amount to repudiation profit and payments made irrelevant not paying and expecting P to continue working

27 Findings (Cont'd) change payment method from cash to credit no requirement to apply coatings as suggested by D no evidence of bona fide mistake loss of profit awarded

28 Deduction/Set-off available to justify non-payment unless expressly excluded applies to both contractual and common law termination Clinton Engineering v Tridant Engineering, CFI [2005] deductions up to 30% of amount claimed misapprehension of entitlement not intention not to be bound

29 Hongkong Underground Engineering v Welcome Construction, CFI [2005] drainage works lump sum remeasurement contract payment within 30 days of receiving invoice late and part payment of 5 invoices P suspended works and accepted D's repudiation on 26 May 2001 D? accepted P's discontinuance of work as repudiation on 1 June 2001

30 The Circumstances 1 st invoice P invoiced $324,400 on 28 December 2000 D adjusted to $274,000 D estimated $100,000 based on labour and machinery costs paid on 18 January 2001

31 The Circumstances (Cont'd) 2 nd invoice P invoiced $338,400 on 2 February 2001 D adjusted to $288,000 D paid $150,000 on 13 February 2001 with no calculation

32 The Circumstances (Cont'd) 3 rd invoice P invoiced $138,400 on 27 February 2001 D approved amount on 27 March 2001 D paid the sum on 17 May 2001

33 The Circumstances (Cont'd) 4 th invoice P invoiced $446,400 on 31 March 2001 D did not receive it

34 The Circumstances (Cont'd) 5 th invoice P invoiced $894,400 (cumulative) on 28 April 2001 D adjusted to $704,000 and deducted previous payments and LDs of $270,000; invoiced amount adjusted to $46,800 not due yet as at 26 May 2001 but made LD deductions clear

35 Repudiation? Court: Creatiles not pay invoiced or assessed amounts paid operational expenses for 1 st invoice not pay according to contractual term figure plucked out of the air for 2 nd invoice

36 Deduction of LDs no basis to deduct LDs honest mistake? Creatiles genuine, bona fide interpretation vs clear inconsistency and acting in good faith no defence D repudiated the contract

37 Acceptance or Affirmation election: acceptance or affirmation for termination, repudiation must be accepted clear and unequivocal termination both under contact and at common law may be treated as affirmation

38 Damages on Termination by Contractor Contractual provisions Clause 26 value of works executed loss/expense for variation or disturbance value of unfixed materials reasonable cost of removal loss and/or damage caused by determination

39 Damages on Termination by Contractor (Cont d) Common law position as if the contract had been performed contract price less sums paid less cost of completing the remaining work

40 Damages on Termination by Employer Contractual provisions Clause 25 Loss and/or damage caused to Employer by the determination Set-off against sums paid/due to Contractor 40

41 Damages on Termination by Employer (Cont d) Common law position cost of completing the work plus additional cost due to termination less balance of contract price for remaining work LDs due Contra-charges, set-offs, etc

42 Things to watch out for 1. Express right to terminate - two-tier approach 2. Employer's right to suspend - how long? right to terminate? 3. Back-to-back termination provisions at subcontract level - events for termination - compensation

43 Joyce Leung Associate Direct line: Hogan Lovells has offices in: Abu Dhabi Alicante Amsterdam Baltimore Beijing Berlin Brussels Budapest* Caracas Colorado Springs Denver Dubai Dusseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Houston Jeddah* London Los Angeles Madrid Miami Milan Moscow Munich New York Northern Virginia Paris Philadelphia Prague Riyadh* Rome San Francisco Shanghai Silicon Valley Singapore Tokyo Ulaanbaatar* Warsaw Washington DC Zagreb* "Hogan Lovells" or the "firm" refers to the international legal practice comprising Hogan Lovells International LLP, Hogan Lovells US LLP, Hogan Lovells Worldwide Group (a Swiss Verein), and their affiliated businesses, each of which is a separate legal entity. Hogan Lovells International LLP is a limited liability partnership registered in England and Wales with registered number OC Registered office and principal place of business: Atlantic House, Holborn Viaduct, London EC1A 2FG. Hogan Lovells US LLP is a limited liability partnership registered in the District of Columbia. The word "partner" is used to refer to a member of Hogan Lovells International LLP or a partner of Hogan Lovells US LLP, or an employee or consultant with equivalent standing and qualifications, and to a partner, member, employee or consultant in any of their affiliated businesses who has equivalent standing. Rankings and quotes from legal directories and other sources may refer to the former firms of Hogan & Hartson LLP and Lovells LLP. Where case studies are included, results achieved do not guarantee similar outcomes for other clients. New York State Notice: Attorney Advertising. Hogan Lovells All rights reserved. * Associated offices