The fallout from FiTs
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With the Government’s decision on 31st October 2011 to cut the tariff to just 21p, the sun has definitely stopped shining on the Feed-in Tariffs Scheme. Many contracts and commitments will now look decidedly unappealing in the face of the cuts.
Many people will now be looking for an exit strategy from those contracts. Some exit strategies will be lawful, some won’t. With the benefit of first hand experience, we take a look at some of the dos and don’ts surrounding the thorny issue of contract termination.
Following the introduction of the FiTs scheme in April 2010, uptake has been tremendous. So much so that the FiTs scheme has become a victim of its own success, with the Government claiming that falls in the cost of PV equipment make the current FiTs levels unsustainable.
The result was a cut in the tariff from 43.3p to just 21p as of April 2012 for all installations undertaken after 12 December 2011. A period of industry-wide adjustment must now follow, with many enterprises and commitments sadly no longer viable. Naturally, many involved at all levels of the industry will be looking for an exit strategy from their contracts. Many contracts will provide that exit. Some won’t.
If you find yourself in the unfortunate position of needing to terminate a contract or you find yourself on the receiving end of a termination, think carefully. It is surprisingly easy to get a termination wrong. An unlawful termination can be an unpleasant thing, with the terminated party being entitled to claim damages.
Types of termination
The termination of a contract can arise in a number of different ways. Often termination is a unilateral measure (discussed below) forced on one party by the other. However, there is nothing to stop the contracting parties agreeing to end the contract. Parties involved in any such negotiations should be careful not to threaten their contracting partner with a termination if they don’t agree. Such a threat could in itself constitute a breach of contract.
If one of the parties has gone down the unilateral approach, then dust off your contract and read the relevant provisions very carefully. A well drafted contract may contain an express right of termination for one or both of the parties. Sometimes the right to terminate will be at the sole convenience of one of the parties; usually the employer. Sometimes the right to terminate will only arise on the occurrence of a certain specified event or default.
In the case of termination for convenience, exercise caution. Check that the termination for convenience provision is absolutely clear. As the Courts have made plain, unreasonable provisions, such as ones allowing the employer to terminate and pass work on to a third party, must be stated in unambiguous terms otherwise they may be unenforceable.
In the case of provisions allowing termination if a specified event or default occurs, whilst this may seem obvious, the event or default must have actually occurred. It is preferable to be able to point to previous correspondence or documents that set out that the event or default has actually occurred. If that document trail is not in place, the terminating party may have difficulty evidencing that the default or event has actually occurred.
Procedure is important
If either of the above routes are available, then the procedure set out in the parties’ contract needs to be followed. This procedure will inevitably involve the service of at least one written “notice”.
Under many forms of contract, including JCT, a two stage notice procedure is adopted, with an initial 7 day notice giving the defaulting party the chance to remedy their default. Only if the default persists after 7 days can you then terminate by a further notice.
The notice itself must slavishly follow the contractual requirements. If the notice falls down on any of the requirements, it is likely to render the termination unlawful, possibly opening the door on a claim against the terminating party. The following are typical requirements:
- The notice may have to be addressed to a specific person, often an “Authorised Representative” named in the contract;
- The notice may have to be transmitted/served in a very particular way to a particular address. A common requirement is for the notice to be sent by some form of specified recorded mail. Don’t assume that an email copy or ordinary post will suffice. Always check the address for the notice to be sent to;
- The notice may have to take a particular form, possibly one contained in a schedule to the contract. If so, this form should be used. If no form is prescribed, the notice should be simple. Less is more. It should simply set out that the specified default or event has occurred. It should use the exact words cited in the contract.
No express right to terminate? Consider common law termination
The above assumes that there is an express right to terminate built into the parties’ contract. Where there is no such right, the “common law” may assist. Under common law, a party can generally terminate if (and only if) there has been a “repudiatory breach” by their contracting partner. A repudiatory breach is a breach that is so serious it goes to the heart of the contract. Examples would include:
- A contractor refusing to carry out work or abandoning the site;
- An employer engaging another contractor to do the same work;
Only a very limited range of breaches will qualify as repudiatory. A string of minor but persistent breaches may ultimately add up to a repudiatory breach. But do exercise caution: if a party purports to terminate because of a breach that is not in fact repudiatory, it will have committed its own repudiatory breach of contract. Common law termination is therefore a high-stakes game. Don’t gamble unless you are sure there has been a repudiatory breach.
So what happens once there’s been a termination? A good contract will set out what happens. With termination for convenience clauses, the terminating party may well have to make a specified compensatory payment to the other party. This may be the price the terminating party pays for having the option to terminate at its convenience. Such provisions are particularly common in consultant’s appointments.
With a termination for a specified default, the provisions are likely to work more in the terminating party’s favour. Under JCT, if an employer terminates for default, the contractor generally doesn’t get paid (if at all) until the employer has had someone else complete the work (if required) and/or until the employer party knows the full extent of its losses.
Once the terminating party has pressed the button and terminated the contract, it should not expect the other party to be pleased. Termination is a notoriously contentious issue. The party on the receiving end of the termination will often take all the points available to it in arguing that the termination was unlawful.
Finally, it is worth noting that there are different kinds of “termination”. Often it will be the “termination of the employment of a party” and not the termination of the contract itself. This means that the party doing works or performing services is no longer obliged to carry on with them but other obligations, for instance, confidentiality obligations, live on. Whereas, “termination” can mean the wholesale ending of the contract, with the effect that all obligations cease. This kind of termination is less common.
Some final practical thoughts:
- Give consideration to and evaluate all potential “exit” options, including negotiation;
- Check the contract carefully to see what rights the parties have to terminate (if any);
- Ensure that the event entitling the terminating party to terminate has actually occurred;
- Ensure that the procedure in the contract has been followed rigorously;
- Regardless of which side of the fence you sit on, where appropriate, take early legal advice and guidance. In our experience, this will enable any risks to be controlled and managed without exposing the business to unacceptable financial consequences.
If you would like to discuss any of the issues raised in this article, please contact either:
Sean McCay. Partner and Head of Construction, Engineering & Projects, Pannone Solicitors: email@example.com, 0161 909 4670
Tom Holroyd. Solicitor, Construction, Engineering & Projects, Pannone Solicitors: firstname.lastname@example.org, 0161 909 4345