It is common in construction contracts for the parties to bluff and posture. In Driltech Ground Engineering Limited v. Group Plan Contractors Limited, the Hong Kong Court of Appeal considered the effect of a threat by a sub-contractor to re-tender an element of the sub-sub-contract works. Did the threat allow the sub-sub-contractor to bring the contract to an end and sue for damages?
Group Plan was a sub-contractor carrying out work at the junction of Hiram’s Highway and Clearwater Bay Road. By a sub-sub-contract, Group Plan engaged Driltech to carry out piling works for retaining walls at two locations. The first element of the works was carried out between September 1997 and January 1998. The second element (retaining wall no.1) was originally due to commence in September 1998, though by mid August it was known to both parties that commencement would be delayed to October or November.
On 5 June 1998, Group Plan wrote to Driltech asking for a breakdown of their pre-drilling rates. The letter also stated:
"Besides we have heard a rumour that you would wind up your Company soon. Please clarify the situation."
Having received no reply, on 14 August 1998, Group Plan wrote:
"Our letter […] of 5 June 1998 inquiring the status of your Company refers. As discussed earlier, you informed us you had difficulties to carry out the remaining bored pile works at retaining Wall No. 1. We notify you that we are inviting tenders for the above mentioned work. We also confirm that the additional costs incurred will be deducted from your account."
On 28 August 1998, Driltech responded:
"We do not understand why you have to invite tenders for the ‘remaining bored pile works at Retaining Wall No. 1’. Were you suggesting that you had terminated or would terminate the Sub-Contract? Should your answer be affirmative, we must state that your said statement amounted to a breach or anticipatory breach, as the case may be, and that the same in itself was a repudiation of the Sub-Contract which we would have no hesitation to accept. We demand that you clarify the same within seven days hereof, failing which we would take that you have repudiated the Sub-Contract and would accept the same."
On 5 September, Driltech wrote again saying that in the absence of a reply, Group Plan was taken to have repudiated the sub-sub- contract (that is, that Group Plan had shown that it did not intend to honour its obligations under the sub-sub-contract) and that Driltech accepted the repudiation thereby terminating the sub-sub-contract.
Mr Justice Burrell made the following findings:
- Any rumours to the effect that Driltech was to be wound up were without foundation and did not entitle Group Plan to terminate the sub-sub-contract.
- Although there had been no truth in Group Plan’s statement that it was inviting tenders, Driltech was unaware that Group Plan had been bluffing until after it had sent its letter of 5 September stating that it accepted Group Plan’s repudiation of the sub-sub-contract.
Burrell J held that Group Plan had wrongfully repudiated the sub-sub-contract and that Driltech had validly accepted that repudiation. He awarded damages for the repudiation in the sum of HK$230,000. Group Plan appealed.
Dismissing the appeal, the Court of Appeal found that Group Plan’s letter of 14 August was a plain and unequivocal renunciation of the contract. "It stated in bald terms that the defendant was seeking others to carry out Repudiation and acceptance the RW1 works and that all additional costs were to be to the plaintiffs account. Nothing could be plainer. The defendant was declaring that it was no longer contractually bound to have the work done by the plaintiff."
Most construction contracts entitle the employer to terminate the contract if the contractor is wound up. However, employers seeking or threatening to employ contractual termination provisions should ensure that the circumstances justifying such a termination actually exist. Failure to do so may result in the purported exercise of a right to terminate itself amounting to a repudiation of the contract, because the employer is showing a clear intention no longer to be bound by the contract. If the contractor accepts the employer’s repudiation, the contract will terminate and the employer may be liable for the contractor’s losses (including loss of profit) arising out of its repudiation of the contract.
© Herbert Smith 2002
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