Interserve Construction Ltd v Hitachi Zosen Inova AG

Where a contractual termination power is expressly made subject to a further clause, that clause may operate as a condition precedent to termination. The construction depends on the contract as a whole and the objective meaning of the language used.

Words such as at its absolute discretion may confer a choice whether to begin a contractual process without making the resulting procedural protection ineffective. They may also prevent the exercise or non-exercise of that choice from giving rise to waiver or other adverse consequences.

The claimant was engaged under a design and build subcontract for civil works at an energy-from-waste plant. The defendant purported to terminate under clauses 43.1(h) and 43.1(q), relying on alleged failures to proceed regularly and diligently and material breaches.

The claimant sought a declaration that clause 43.1A required the defendant first to give notice of default and allow seven days for rectification before exercising the termination power. The defendant argued that the words granting it an absolute discretion whether to operate clause 43.1A meant that the notice and rectification period were optional.

1. The court granted the declaration sought. It held that, where termination was sought under clauses 43.1(h), 43.1(p) or 43.1(q), the defendant first had to issue a notice under clause 43.1A and allow a seven-day period in which the claimant could commence and diligently pursue rectification.

2. Applying the contractual construction principles stated in Wood v Capita [2017] UKSC 24, the court treated interpretation as a unitary exercise directed to the objective meaning of the contract, read as a whole and tested against its commercial consequences. The contract was a complex commercial document negotiated by sophisticated parties, so its wording received substantial weight.

3. The natural meaning of subject to Sub-Clause 43.1A was that the termination right under clause 43.1 was conditioned by clause 43.1A. The same expression was used elsewhere in the contract to limit or circumscribe a right. The defendant’s construction would make the words redundant and would leave the additional right under clause 43.1A substantially illusory.

4. The words at its absolute discretion did not remove the condition precedent. They gave the defendant a choice whether to commence the notice and rectification process, and clarified that failing to do so would not itself establish waiver or an absence of default. The claimant’s argument concerned the defendant’s right to terminate, rather than a free-standing right in the claimant to rectify.

5. The court granted no further declarations. The alternative argument concerning acceptance of repudiatory breach was not determined.

Not stated in the judgment.