Do the dispute resolution provisions of a contract survive the termination of the contract?

We have recently dealt with a case where an NEC3 contract was terminated by the Employer. Our client then invoked the provisions of Clause 93.1 [Payment on termination] and referred the matter to adjudication. The Employer then tried to argue that since the contract had been terminated, they were no longer bound by the dispute resolution provisions in the Contract.

Which then begged the question, do the dispute resolution provisions of a contract (the NEC3 in this instance) survive termination of the contract? What are the effects or consequences of termination of the contract?

This issue was discussed in the case of Heyman v Darwins Limited: HL 1942. The court in this case found that an arbitration clause will survive a repudiatory breach. The court held that:

If one party to a contract repudiates it and that repudiation is accepted, then “By that acceptance he is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded.’ The primary obligations under the contract may come to an end, but secondary obligations then arise, among them being the obligation to compensate the innocent party. The original rights may not then be enforced. But a consequential right arises in the innocent party to obtain a remedy from the party who repudiated the contract for his failure in performance.

In some construction contracts, termination is often expressed as termination of the contractor’s employment under the contract as though to emphasize that the contract itself is not terminated and that some of its provisions, particularly those for assessing amounts due and dispute resolution, remain in force. What is in fact “terminated” is the future performance of the contract – that is, the primary obligations of the parties that have been partially performed at the time of termination and those that would have fallen due for performance had the contract not been terminated.

This is also the case with Clause 90.1 of the NEC3 which states that:

Clause 90.1

90.1 If either Party wishes to terminate the Contractor’s obligation to Provide the Works he notifies the Project Manager and the other party giving details of his reason for terminating. The Project Manager issues a termination certificate to both Parties promptly if the reason complies with this contract [my emphasis].

The clause is expressed in terms of the termination of the Contractor’s obligation to “provide the works”. “To provide the works” is defined in Clause 11.2(13) as to do the work necessary to complete the Works in accordance with this contract and all incidental work, services and actions which this contract requires.

In terms of common law, what obligations survive termination of a contract?

While termination puts an end to the primary obligations of each party, there are other obligations which may survive termination. Those obligations could be:

• Obligations that arise when there is a breach of contract. If the contract is terminated in those circumstances, the parties’ primary obligations are substituted by a secondary obligation that is imposed on the party in default which requires it to pay compensation to the other party. This secondary obligation to pay compensation survives termination of the contract.
  • For example, in the construction context, upon termination of the contract by either party, the contractor is relieved of its primary obligation to carry out and complete the works. If, however, the contract was terminated as a result of the contractor’s default, the law imposes a secondary obligation on the contractor requiring it to pay compensation to the owner. That compensation will usually comprise any additional cost incurred by the owner in completing the works that is over and above the contract price.
• Obligations that are ancillary to the main purpose of the contract. These may be of a substantive or procedural nature. Examples of this type include an agreement to refer differences or disputes to arbitration, an obligation not to disclose confidential information and an agreement as to the choice of forum.

Therefore, even though the contract is terminated, the following obligations would still survive termination:

• Dispute resolution provisions
• Assessing of amounts due; and
• Confidentiality provisions

A party cannot claim that since the contract has been terminated, they are discharged from all obligations in terms of the contract, including the secondary obligations that come into effect after termination.

Author: Nombuso Shange, Associate.