The UK's leading contractor site. 200,000 monthly unique visitors.

IR35 Testing

Contractor Doctor: Do I owe my agency damages after it terminated me for being ill?

Dear Contractor Doctor

I was a week into a new contract and I have just been terminated by my agency for breach of contract after taking time off due to sickness. The agency subsequently sent me a £3,000 invoice for loss of earnings it claims arose as a result of my breach of contract.

Although I am a limited company contractor, the first contract I was sent, which I signed and returned, was in my name personally. The agency sent a second contract, which included a clause saying the agency would be due compensation for lost earnings in the event of me giving early notice or being in breach. I did not sign this contract.

Do I owe my agency compensation for breach of contract caused because I was off sick?

Thanks,

Harry

Contractor Doctor says:

“There are several points of law according to which the contractor may not be in breach of contract for being unable to supply his services due to illness,” explains Roger Sinclair of contractor legal specialist Egos.

“It is also possible that the wording in Harry’s contract does not actually require his personal service on every working day. And even if it did, he may not be in breach, and so may not be liable for the agency’s demand for compensation for loss of earnings.”

Which contract applies and dictates the terms of the agreement?

According to Sinclair, the first step in this situation is to determine which of the contracts the agency sent to the contractor actually applies: “We would need to examine the trail of correspondence, but on the facts disclosed, it would appear that only one contract is in place, and that is the first one between the agency and the contractor personally.”

This may be significant, because Harry has explained that this contract does not include a clause that gives the agency the right to compensation for loss of earnings in the event that the contract is terminated by the contractor early, or because the contractor is in breach

Although if he is in breach, it is likely that he would be liable for the agency’s losses, and be required to put them in the position in which they would have been, had the contract not been breached, regardless of any express contractual provision to that effect.

It is also significant because if there were to be any liability arising from a breach of contract, it would rest with Harry personally and not with his company.

What does the contract say?

“The next step is to look at the terms in the contract,” continues Sinclair. “Is it a contract that requires personal services to be provided on every working day? Increasingly, many contracts do not specify this. Unless the contract specifies the contractor must turn up each working day, and he does not, then there would not necessarily be a breach – in which case, there would be no liability.”

Although this does not seem relevant in Harry’s case, if the contract contained a right of substitution, and if there was a contractual obligation to provide the services on every working day, that might make it harder for him to avoid being in breach if he did not turn up as a result of illness, and if he did not send a substitute.

“Is it a contract that requires personal service? Does the contract specify that it must be Harry and no one else? If so, the contract would need to be very clear in its wording for Harry’s absence to be interpreted as a breach.”

Illness as a valid reason for not providing service

Sinclair highlights that there are points of law which may confirm that the failure to deliver a service because of illness would not constitute a breach of contract. He explains: “There are two common law principles in which a term may be implied in a contract. One is ‘officious bystander’ and the other is ‘business efficacy’.

“In this case, it will be the ‘officious bystander’ principle which may apply. If you imagine two people negotiating a contract, and an ‘officious bystander’ who interrupts saying ‘should you not have a term providing for X, Y and Z?’. If the negotiating parties would have replied testily, ‘yes of course’, then this principle may apply, and a term may be implied into the contract to that effect.”

In this case, Sinclair suggests that if an officious bystander had asked the question what if Harry is ill?’, the courts may well take the view that the parties would have answered testily ‘well of course he couldn’t work if he was ill, that wouldn’t be a breach’ – and so a clause may well be implied in the contract that this is an acceptable reason for the services not to be provided. As a result, there would be no breach of contract and no liability to the agency.

Is the contract ‘frustrated’?

Sinclair notes that there is yet another point of law that may apply to this case, which is the concept of ‘frustration’: “A contract may become frustrated if a post-contract event makes the completion of the contract either impossible or radically different from what had originally been intended, or if the contract is deprived of its commercial purpose.”

A contract may become frustrated if a post-contract event makes the completion of the contract either impossible or radically different from what had originally been intended

Roger Sinclair, Egos

Sinclair provides a real-life example: “In 1966, a contract between the band the ‘Barron Knights’ and its drummer was held by the courts to have been frustrated as a result of the drummer being too ill to perform. So a contractor’s illness, in a situation when both the contractor and the client intended the services to be performed personally, may result in the contract being frustrated.”

If a contract is deemed to be frustrated, then Sinclair confirms that it releases both parties from any further contractual obligations. Any money that has been paid may be repayable, less any expenses already incurred. And where one party has enjoyed a considerable benefit before the contract ended, the other party may be entitled to recompense.

Sinclair concludes: “In this case, I suspect it is very unlikely that there was a breach of contract. The contractor should, after confirming his position by taking professional legal advice, tell the agency that it has no case.”

Published: Monday, October 14, 2013

If you need an accountant or are thinking of switching accountant please complete the enquiry form below:

InTouch accounting are our chosen partner for providing specialist accounting advice to contractors.

  • We only send your data to our chosen partner. More on how we use your data.

© 2018 All rights reserved. Reproduction in whole or in part without permission is prohibited. Please see our copyright notice.

Contractors handbook