Absolute Discretion Has Limits

Construction disputes are a rich source of argument in the courts, and where the contract affords one party a 'discretion' with regard to its rights or obligations under the contract, disagreement can arise as to when this becomes operative. Recently, an argument on that point reared its head.

When building work on an energy and waste plant failed to progress satisfactorily, the firm that commissioned the design and build contract (the employer) terminated the contractor's employment and removed it from the site. The clause relied on to terminate the employment contained a sub-clause allowing the employer 'at its absolute discretion' to notify the contractor of defaults and to terminate the contract if it did not 'commence and diligently pursue' rectification within seven days.

The employer argued that, by not exercising its discretion under the sub-clause, it had the right to terminate the contract without giving the contractor the opportunity to put things right. The contractor disagreed.

The Technology and Construction Court favoured the contractor's interpretation of the wording. The employer was required to notify the contractor and then give it seven days to rectify the issue. Only after that would it have absolute discretion to terminate the contract.

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It would be hard to see why a contractor would accept, in normal circumstances, a contract which could be terminated instantly if a defect in work occurred. It is in a way surprising that this case reached court, as rectification by another contractor would normally take longer to organise than a week. It is probably indicative of a situation which had already deteriorated.