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Take care when terminating your construction contract: a cautionary tale
The High Court recently handed down judgment in the case of Green Deal Marketing Southern Limited v Economy Energy Trading Limited , a case which turned on whether the defendant energy suppliers, E was within in its rights to terminate its contract with the claimant marketing company, G. E alleged that G had failed to meet contractual key performance indicators (KPIs), and had terminated the contract in the belief that this failure, without more, was valid grounds for termination in accordance with the terms of the contract.
While this judgment was made in the context of a partnering arrangement for the sale and supply of gas and electricity, the Court’s findings will be applicable to and of interest to any commercial arrangements which include KPIs. The judgment is particularly relevant to construction in the context where multiple contracts may be let under a single framework agreement or other partnering arrangement or where the contractor’s performance is assessed over an extended period (such as facilities and maintenance contracts).
More broadly, this case provides a further illustration of the risks associated with proceeding with performance in the absence of a formally executed contract and the dangers associated with exercising termination rights and, as such, is more wide ranging than first appears.
G was engaged under a series of agreements with E to visit households who took their gas and electricity from the larger energy suppliers to try to persuade them to switch to the defendant.
Although GDM initially provided its services under a formal partnering agreement, the relationship was subsequently governed by signed Heads of Terms which was intended to form the basis of agreement pending agreement of a formal contract within 90 days of commencement. A formal contract was not subsequently entered into and the parties’ ongoing relationship was governed by the Heads of Terms.
The Heads of Terms provided that the agreement would cover a fixed period of 3 years, after which time a review meeting would be held to renegotiate or fix the terms of the agreement. In relation to KPIs, the Heads of Terms provided the following:
"GDM agrees to adhere to the below minimum targets:
- Volume of cancellations and % against sales – Target 15%
If GDM fails to achieve the KPIs and does not remedy such failure within a reasonable period of time, EE shall be entitled to terminate the agreement.”"
G failed to meet the cancellations target of 15% in each and every month from the outset of the relationship in May 2015 until its conclusion in January 2017. As a result, E summarily ended the relationship on the basis that G had, inter alia, failed to adhere to agreed KPIs.
On the issue of breach, the Court found that G agreed to adhere to the minimum targets outlined in the Heads of Terms and was persistently in breach of the KPI for cancellations in circumstances where it had exceeded 20% in all but three months from May 2015.
In making its determination on termination, the Court noted that the contractual termination provisions clearly envisaged that a failure to achieve the KPIs was capable of remedy and therefore rejected E’s submission that strict and absolute compliance with the KPIs was a condition which gave an immediate right to terminate in the event of breach. Giving judgment, HHJ Keyser QC, held that the termination provisions were to be construed as permitting E to terminate if, when GDM failed to comply with a KPI, it required GDM to achieve compliance within a reasonable time, and GDM failed to do so.
Although it was found that G was aware of its non-performance in respect of KPIs, the Court found that E’s failure to give notice of a requirement to achieve compliance with KPIs within a reasonable time before terminating the contract was fatal to its ability to exercise its termination rights lawfully.
It therefore followed that the right to terminate the contract for failure to achieve the KPIs had not arisen such that E’s conduct (in renouncing the contract) amounted to a repudiatory breach which was accepted by G and for which it was entitled to compensation.
While this case illustrates the importance of giving notice of non-performance in relation to KPIs if a party intends to rely on such failure as basis to terminate, it also serves a useful reminder of the dangers of exercising contractual termination rights without reference to the relevant contractual provisions. In this case, the contractual right to remedy any breaches of KPIs deprived E from terminating without notice.
The case also serves as a reminder that the scope of Heads of Terms (or letters of intent) may be wider than contracting parties may have anticipated and may be found to apply in circumstances that the parties had not envisaged.
As a final point, it can be seen that contractual termination provisions should be drafted carefully to avoid unintended consequences. In particular, it is noted that it would not have been open to the Court to find that the failure to achieve KPIs needed to be notified if the contractual termination clause had been drafted to remove any reference to G being required or entitled to remedy any breach of KPIs within a reasonable time.
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This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.