10 Default and termination
10.1 In design and build procurement, the consequences of any serious breakdown of relations resulting from default are likely to be even more complex and difficult to resolve than under traditional procurement. Should the contractor’s employment cease, the employer will be faced with a half-erected structure to complete, almost certainly with an incomplete design, and without the continuing services of the person responsible for completing it. If the contractor is unable to complete the project, it will remain liable for its design, even where the construction is completed by others. Clearly, this situation is very unsatisfactory for all parties and should be avoided if at all possible. However, problems can occur which are so serious that the other party may prefer not to continue with the contract, and for these more serious situations the contract contains provisions allowing for termination of the employment of the contractor.
Repudiation or termination
10.2 In any contract, where the behaviour of one party makes it difficult or impossible for the other to carry out its contractual obligations, the injured party might allege prevention of performance and sue, either for damages or a quantum meruit. This could occur in construction, for example, where the employer refuses to allow the contractor access to part of the site.
10.3 Where it is impossible to expect further performance from a party, then the injured party may claim that the contract has been repudiated. Repudiation occurs when one party makes it clear that they no longer intend to be bound by the provisions of the contract. This intention might be expressly stated, or implied by the party’s behaviour.
10.4 Most JCT contracts include termination clauses, which provide for the effective termination of the employment of the contractor in circumstances which may amount to, or which may fall short of, repudiation. The provisions in DB16 are very similar to those in SBC16. It should be noted that such termination is only of the contractor’s employment under the contract, and is not termination of the contract itself. The parties remain bound by the contract, and can bring actions for losses suffered through breach of its terms.
10.5 If repudiation occurs, it is unnecessary to invoke a termination clause, since the injured party can accept the repudiation and bring the contract to an end. However, the termination provisions are useful in setting out the exact circumstances, procedures and consequences of the termination of employment. These procedures must be followed with great caution because, if they are not administered strictly in accordance with the terms of the contract, this in itself could amount to a repudiation. This, in turn, might give the other party the right to treat the contract as at an end and claim damages.
10.6 Termination can be initiated by the employer (cl 8.4) in the event of specified defaults by the contractor, such as suspending the works or failing to comply with the CDM Regulations, or in the event of the insolvency of the contractor. Termination can be initiated by the contractor (cl 8.9) in the event of specified defaults by the employer, such as failure to pay an amount due, or where specified events result in the suspension of work beyond a period to be entered in the contract particulars. Termination might also follow the insolvency of the employer. In the event of neutral causes, which bring about the suspension of the uncompleted works for the period listed in the contract particulars, the right of termination can be exercised by either party (cl 8.11).
Termination by the employer
Figure 10.1 Termination by the employer
10.7 The contract provides for termination of the contractor’s employment under certain circumstances. DB16 expressly states that the right to terminate the contractor’s employment is ‘without prejudice to any other rights and remedies’ (cl 8.3.1). This termination can be initiated by the employer in the event of specified defaults by the contractor occurring prior to practical completion (cl 8.4.1), the insolvency of the contractor (cl 8.5) or corruption (cl 8.6). Where the employer is a local or public authority, circumstances as set out in regulation 73(1)(b) of the Public Contracts Regulations 2015 (conviction of various offences) will also give rise to the right to terminate (cl 8.6).
10.8 The procedures as set out in the contract must be followed exactly, especially those concerning the issue of notices (see Figure 10.1). If default occurs, the employer should issue a warning notice, which should specify the particular default (although not necessarily a detailed list of circumstances) (cl 8.4.1). If the default continues for 14 days from receipt of the notice, then the employer may terminate the employment of the contractor by the issue of a further notice within 21 days from the expiry of that 14-day period (cl 8.4.2). If the contractor ends the default or if the employer gives no further notice and the contractor then repeats the default, the employer may terminate ‘within a reasonable time after such repetition’ (cl 8.4.3). The employer must still give notice of termination, but no further warning is required. There appears to be no time limit on the repetition of the default. If, however, a considerable period has elapsed, it may be prudent for the employer to issue a further warning notice before issuing the notice of termination.
10.9 It should be noted that, to be valid, all notices must be given strictly in accordance with clause 1.7.4, i.e. ‘by hand or sent by Recorded Signed for or Special Delivery post’ (cl 8.2.3). It should be noted that this is not the same as the older wording ‘actual delivery’ so it is unlikely that fax or email would be acceptable, as it was in the case of Construction Partnership v Leek Developments. Notices sent by post are deemed to have been received ‘on the second Business Day’ after posting, unless there is proof to the contrary. As time limits are of vital importance here, it is usually wise to have receipt of delivery confirmed.
Construction Partnership UK Ltd v Leek Developments Ltd [2006] CILL 2357 (TCC)
On an IFC98 contract, a notice of determination was delivered by fax, but not by hand or by special delivery or recorded delivery. (A letter had been sent by normal post but it was unclear whether or not it had been received.) Clause 7.1 required actual delivery of notices of default and determination, and the contractor disputed whether the faxed notice was valid. The court had therefore to decide what ‘actual delivery’ meant. It decided that it meant what it says: ‘Delivery simply means transmission by an appropriate means so that it is received’. In this case, it was agreed that the fax had been received, therefore the notice complied with the clause. The CILL editors state that ‘on a practical level, this judgment is quite important’ because it had previously been assumed that ‘actual delivery’ meant physical delivery by hand. In their view, email could be considered an appropriate method of delivery, although that was not decided in the case.
10.10 The grounds for termination by the employer must be clearly established and expressed. The contract clearly states that termination must not be exercised ‘unreasonably or vexatiously’ (cl 8.2.1). Under clause 8.4.1.1, suspension of the work must be whole and substantial, and ‘without reasonable cause’. However, the contractor might find ‘reasonable cause’ in any of the matters referred to in clause 4.21. An exercise of the right to suspend work under clause 4.11 would not be cause for termination, provided that the right had been exercised in accordance with the terms of the contract. 10.11 The specified defaults which may give rise to termination are that the contractor:
- wholly or substantially suspends the design or construction of the works (cl 8.4.1.1);
- ‘fails to proceed regularly and diligently with the performance of his obligations’ (cl 8.4.1.2);
- refuses or neglects to comply with a written notice or instruction requiring the contractor to remove defective work (cl 8.4.1.3);
- fails to comply with clause 3.3 (sub-contracting) or clause 7.1 (assignment) (cl 8.4.1.4);
- fails to comply with clause 3.16 (CDM Regulations) (cl 8.4.1.5).
10.12 Generally speaking, only a serious default would justify termination, although any failure to comply with the CDM Regulations’ provisions which would put the employer at risk of action by the authorities would be sufficient.
10.13 The default that the contractor ‘fails to proceed regularly and diligently’ (cl 8.4.1.2) is notoriously difficult to establish. Careful records kept by the employer or the employer’s agent will be of utmost importance should the contractor decide to dispute this matter. ‘Default’ here means more than simply falling behind any submitted programme (relating to design and/or construction work), even to such an extent that it is quite clear the project will finish considerably behind time. However, something less than a complete cessation of design or construction work would be sufficient grounds.
10.14 In the case of London Borough of Hounslow v Twickenham Garden Developments, for example, an architect’s notice of determination was strongly attacked by the defendant, although the facts should be contrasted with the more recent case of West Faulkner Associates v London Borough of Newham. The employer would be wise to proceed with considerable caution, and should bear in mind that, without the first ‘warning notice’, it has no right to terminate the contractor’s employment.
London Borough of Hounslow v Twickenham Garden Developments (1970) 7 BLR 81
The London Borough of Hounslow entered into a contract with Twickenham Garden Developments to carry out sub-structure works at Heston and Isleworth in Middlesex. The contract was on JCT63. Due to a strike, work on the contract stopped for approximately eight months. After work resumed, the architects issued a notice of default stating that the contractor had failed to proceed regularly and diligently and that, unless there was an appreciable improvement, the contract would be determined. The employers then proceeded to determine the contractor’s employment. The contractor disputed the validity of the notices and the determination and refused to stop work and leave the site. The Council applied to the court for an injunction to remove the contractor. The judge emphasised that an injunction was a serious remedy and that, before he could grant one, there had to be clear and indisputable evidence of the merits of the Council’s case. The evidence put before him, which showed a significant drop in the amounts of monthly certificates and numbers of workers on site, failed to provide this.
West Faulkner Associates v London Borough of Newham (1992) 61 BLR 81
West Faulkner Associates were architects engaged by the London Borough of Newham for the refurbishment of a housing estate consisting of several blocks of flats. The residents of the estate were evacuated from their flats in stages to make way for the contractors, Moss, who, it had been agreed, would carry out the work according to a programme of phased possession and completion, with each block taking nine weeks. Moss fell behind the programme almost immediately. However, Moss had a large workforce on the site and continually promised to revise its programme and working methods to address the problems of lateness, poor quality work and unsafe working practices that were drawn to its attention on numerous occasions by the architects. In reality, Moss remained completely disorganised, and there was no apparent improvement. The architects took the advice of quantity surveyors that the grounds of failing to proceed regularly and diligently would be difficult to prove, and decided not to issue a notice. As a consequence, the Borough was unable to issue a notice of determination, had to negotiate a settlement with the contractor, and dismissed the architects, who then brought a claim for their fees. The judge decided that the architects were in breach of contract in failing to give proper consideration to the use of the determination provisions. In his judgment, he stated that ‘“regularly and diligently” should be construed together and in essence they mean simply that the contractors must go about their work in such a way as to achieve their contractual obligations. This requires them to plan their work, to lead and manage their workforce, to provide sufficient and proper materials and to employ competent tradesmen, so that the works are carried out to an acceptable standard and that all time, sequence and other provisions are fulfilled’ (Judge Newey at page 139).
Insolvency of the contractor
10.15 Insolvency is the inability to pay debts as they become due for payment. Insolvent individuals may be declared bankrupt. Insolvent companies may be dealt with in a number of ways, depending on the circumstances: for example, by voluntary liquidation (in which the company resolves to wind itself up); compulsory liquidation (under which the company is wound up by a court order); administrative receivership (a procedure to assist the rescue of a company under appointed receivers); an administration order (a court order given in response to a petition, again with the aim of rescue rather than liquidation, and managed by an appointed receiver); or voluntary arrangement (in which the company agrees terms with creditors over payment of debts). Procedures for dealing with insolvency are mainly subject to the Insolvency Act 1986 and the Insolvency Rules 1986 (SI 1986/1925). Under these provisions, the person authorised to oversee statutory insolvency procedures is termed an ‘insolvency practitioner’.
10.16 Under DB16, the contractor must notify the employer in writing in the event of liquidation or insolvency (cl 8.5.2). A contractual definition of insolvency is given in clause 8.1. Termination is not automatic, however, and this allows the appointed insolvency practitioner time to come up with a rescue package, if one is possible. It is usually in the employer’s interest to have the works completed with as little additional delay and cost as possible, and a breathing space may allow all possibilities to be explored. During this period, the contract states that ‘clauses 8.7.3 to 8.7.5 and (if relevant) clause 8.8 shall apply as if such notice had been given’ (cl 8.5.3.1). This means that even if no notice of termination is given, the employer is under no obligation to make further payment except as provided under those clauses (see paragraph 10.23). The contractor is relieved of the obligation to ‘carry out and complete the Works’ (cl 8.5.3.2). The employer may then take reasonable steps to ensure that the site, works and materials are secure and protected, and the contractor must not hinder such measures (cl 8.5.3.3).
10.17 There are several options for completing the works. The first is for arrangements to be made so that the contractor may continue with the work. Unless the insolvency practitioner has been able to arrange resource backing, this may not be a realistic option. If practical completion is near, however, and money is due to the contractor, it may be advantageous to allow completion under the control of the insolvency practitioner.
10.18 Alternatively, another contractor could be novated to complete the works. On a ‘true novation’, the substitute contractor will take over all the original obligations and benefits (including completion to time and within the contract sum). A more likely arrangement would be a ‘conditional novation’, whereby the contract completion date, etc. would be subject to renegotiation, and the substitute contractor would probably want to disclaim liability for that part of the work undertaken by the original contractor.
10.19 Deciding which of the options would best serve the interests of all the parties is a matter to be resolved between the employer, the insolvency practitioner and the contractor. A pragmatic approach to the issue of completion may be to continue initially with the original contractor under an interim arrangement until such time as novation can be arranged or a completion contract negotiated.
Consequences of termination by the employer
10.20 If the employer exercises its right to terminate under clause 8.4, 8.5 or 8.6, then completion will only be achieved through the appointment of a new contractor of the employer’s choice. Clause 8.7.1 gives the employer the right to employ others to complete the works and completion would include making good any defects in the work already carried out and completing the design. A completion contract might result from negotiation or competitive tender. The employer will have the right to use any temporary buildings, plant, etc. on site, including those which are not owned by the original contractor, subject to the consent of the owner (cl 8.7.1).
10.21 The employer may also require the contractor to:
- remove from the site any temporary buildings, plant, etc. which are owned by the contractor (cl 8.7.2.1);
- provide the employer with copies of all contractor’s design documents (cl 8.7.2.2);
- require the original contractor to assign the benefit of any sub-contracts to the employer (to the extent that the benefit is assignable) (cl 8.7.2.3).
10.22 If the employer decides to employ others under clause 8.7.1, such employment must be handled with care, as completion of a building started by another contractor is always difficult. A completion contract might result from negotiation or competitive tender, but the tender route may be advisable if there is much to complete as the employer may have to demonstrate subsequently that the costs incurred were reasonable. A record should be made of the exact state of completeness at the time of termination, including any defective work.
10.23 Following termination, clause 8.7.3 states that ‘no further sum shall become due to the Contractor under this Contract other than any amount that may become due to him under clause 8.7.5 or 8.8.2’ (i.e. the payment provisions following termination). It also states that the employer will not need to make any payments that have already become due to the extent that a pay less notice has been given (cl 8.7.3.1) or where the contractor has become insolvent after the final date when a pay less notice could have been issued (cl 8.7.3.2). This reflects section 111(10) of the HGCRA 1996 as amended and the judgment in Melville Dundas v George Wimpey. Therefore, if the contractor becomes insolvent after a certificate is issued, but before the final date for issuing a pay less notice, then to avoid any disputes the employer should issue a notice. It should be noted, however, that following a termination the employer may still be obliged to pay amounts awarded by an adjudicator (Ferson Contractors v Levolux).
Melville Dundas Ltd v George Wimpey UK Ltd [2007] 1 WLR 1136 (HL)
On a contract let on WCD98, the contractor had gone into receivership, entitling the employer to determine the contractor’s employment. The contractor had applied for an interim payment on 2 May 2003, the final date for payment was 16 May (14 days after application) and the determination was effective on 30 May 2003. The contractor claimed the payment on the basis that no withholding notice had been issued. By a majority of three to two, the House of Lords decided that the employer was not obliged to make any further payment. It was accepted that, under WCD98, interim payments were not contractually payable after determination and the House of Lords held that this was not inconsistent with the payment provisions of the HGCRA 1996. Although the Act requires that the contractor should be entitled to payment in the absence of a notice, this did not mean that that entitlement had to be maintained after the contractor had become insolvent, i.e. it was not inconsistent to construe that the effect of the determination was that the payment was no longer due. The Act was concerned with the balance of interests between payer and payee, and to construe it otherwise would give a benefit to the contractor’s creditors against the interests of the employer, something which the Act did not intend.
Ferson Contractors Ltd v Levolux A T Ltd [2003] BLR 118
Ferson was the contractor and Levolux the sub-contractor on a GC/Works sub-contract. A dispute arose regarding Levolux’s second application for payment; £56,413 was claimed but only £4,753 was paid. A withholding notice was issued, which specified the amount, but not the reason for withholding it. Levolux brought a claim to adjudication, and the adjudicator decided that the notice did not comply with section 111 of the HGCRA 1996, and that Ferson should pay the whole amount. Ferson refused to pay and Levolux sought enforcement of the decision. Prior to the adjudication, Levolux had suspended work and Ferson, maintaining that the suspension was unlawful, had determined the contract. It now maintained that, due to clause 29, which stated that ‘all sums of money that may be due or accruing due from the contractor’s side to the subcontractors shall cease to be due or accrue due’, they did not have to pay this amount. The CA upheld the decision of the judge of first instance that the amount should be paid: ‘The contract must be construed so as to give effect to the intent of Parliament’.
10.24 Following termination a notional final account must be set out, stating what is owed or owing, in a statement prepared by the employer (cl 8.7.4). This account must be prepared within three months of ‘the completion of the Works and the making good of defects in them’, which allows the employer a period to assess its losses due to the termination. The net amount shown on the account should be paid by the contractor to the employer (the more likely outcome), or by the employer to the contractor, as appropriate (cl 8.7.5).
10.25 One consequence of termination is that it often takes time for the contractor to effect an orderly withdrawal from site, and for the employer to establish the amounts outstanding before final payment. Should the employer decide not to continue with the construction of the works after termination, the employer is required to notify the contractor in writing within six months of termination (cl 8.8.1). Within a reasonable time following notification (or within six months of termination, if no work is carried out and no notice issued), the employer must send the contractor a statement of the value of the works and losses suffered within two months of the expiry of the six-month period, as required under clause 8.8.1.
Termination by the contractor
10.26 The contractor has a reciprocal right to terminate its own employment under clause 8.9 in the event of specified defaults of the employer (cl 8.9.1) or specified suspension events (cl 8.9.2), or insolvency of the employer (cl 8.10) (see Figure 10.2). The specified events must have resulted in the suspension of the whole of the uncompleted works for the continuous period stated in the contract particulars. In the case of specified defaults or suspension events a notice is required, which must specify the default or event. If the default or event continues for 14 days from receipt of the notice, the contractor may terminate the employment by a further notice up to 21 days from the expiry of the 14 days. Alternatively, if the employer ends the default or the suspension event ceases, and the contractor gives no further notice, then, should the employer repeat the default, the contractor may terminate ‘within a reasonable time after such repetition’ (cl 8.9.4). As for the employer, these notices must be given by the means set out in clause 1.7.4, i.e. ‘by hand or sent by Recorded Signed for or Special Delivery post’ (cl 8.2.3).
Figure 10.2 Termination by the contractor
10.27 The grounds of clause 8.9 differ from those that give the employer the right to terminate. They include failure to pay an amount properly due, and failure to comply with the contractual provisions relating to assignment under clause 7.1 or provisions relating to the CDM Regulations under clause 3.16. In addition, the contractor would have grounds where the carrying out of the whole or substantially the whole of the works is suspended for a period of one month (or any period stated in the contract particulars) due to ‘any impediment, prevention or default, whether by act or omission, by the Employer or any Employer’s Person’ (cl 8.9.2), unless it is necessitated by some negligence or default of the contractor.
10.28 The contractor should exercise particular care if considering termination due to what it considers to be an employer’s failure to pay. The contract specifically requires failure to pay ‘an amount properly due’, and not simply the amount for which the contractor might have applied. If the contractor has made an error in its calculations, the employer might be entitled to pay a lesser amount. In addition, the contract gives the employer rights to make various adjustments to and deductions from amounts due. The correct exercise of these rights would not amount to a failure to pay an amount properly due. If the contractor attempts to terminate the contract without justification, this will amount to repudiation, with serious consequences for the contractor. A more prudent course would be to raise the disputed payment in adjudication, while continuing to proceed with the works.
10.29 Termination by the contractor is optional in the case of the employer’s bankruptcy or insolvency (cl 8.10.1). The contractor must issue a notice and termination will take effect from the receipt of the notice.
Consequences of termination by the contractor
10.30 In the event of termination, the contractor must provide the employer with copies of all drawings and other information completed prior to termination (cl 8.12.2.2). It must also remove from the site all temporary buildings, tools, etc. (cl 8.12.2.1). The contractor should then prepare an account setting out the total value of the work at the date of termination, including the cost of design work and other costs relating to the termination as set out in clause 8.12.3. These may include such items as the cost of removal and any direct loss and/or damage consequent upon termination (cl 8.12.3.3 and 8.12.3.5). The contractor is, in effect, indemnified against any damages that may be caused as a result of the termination. This would not necessarily be the case if the contractor did not comply with the contractual provisions; such non-compliance might constitute repudiation.
Termination by either the employer or the contractor
10.31 Either party has the right to terminate the contract if the carrying out of the whole (or substantially the whole) of the works is suspended for the period inserted in the contract particulars (if none is stated, this is two months) because of force majeure, loss or damage to the works caused by any risk covered by the works insurance policy or by an excepted risk, civil commotion, the exercise by the government or a local or public authority of a statutory power, or delay in the receipt of statutory approvals or permissions which the contractor has taken all practicable steps to avoid (cl 8.11.1). The right of the contractor to terminate in the event of damage to the works is limited by the proviso that the event must not have been caused by the contractor’s negligence (cl 8.11.2). In addition, either party may terminate if work is suspended because of an employer’s instruction under clause 2.13 (discrepancies), clause 3.9 (changes) or clause 3.10 (postponement) which has been issued as a result of negligence or default of a statutory undertaker (cl 8.11.1.2).
Figure 10.3 Termination by either party
10.32 Notice may be given by either party, and the employment of the contractor may be terminated seven days after receipt of the notice, unless the suspension is terminated within that period. If work is not resumed after this period, the party may then, by further notice, terminate the contract (cl 8.11.1, see Figure 10.3). Where the employer is a local or public authority, the employer may issue a notice if circumstances in regulation 73(1) (a) or (c) of the Public Contracts Regulations 2015 (various breaches of the Regulations) apply (cl 8.11.3).
10.33 Detailed provisions are set out regarding the consequences of the termination. Clause 8.12.1 states that ‘no further sums shall become due to the Contractor otherwise than in accordance with this clause’, which in effect means that other provisions of the contract requiring further payment will cease to operate. The contractor must remove all temporary buildings, tools, etc. from the site (cl 8.12.2). An account is then prepared in the same format as for termination by the contractor (cl 8.12.3, see paragraph 10.30 above), except that, in this case, it may include amounts relating to direct loss and/or damage to the contractor resulting from a specified peril caused by the employer’s negligence.
Termination of named sub-contractor's employment
10.34 Where a named sub-contractor has been appointed under Supplemental Provision 1, the contractor may only terminate its employment with the prior consent of the employer, except in cases where the sub-contractor has become insolvent (Schedule 2:1.3.2). The contractor must first notify the employer of any intended termination, and then, if the employer consents, may terminate the contract, sending copies of the notices to the employer (Schedule 2:1.3.1 and 1.3.3). If such termination takes place, the contractor must complete any outstanding work (Schedule 2:1.4.1), and this shall be ‘treated as a Change’, except where the termination results from some default of the contractor or where the contractor has not obtained the prior consent of the employer (Schedule 2:1.4.2). For both exceptions, the contractor would have to complete the work at its own risk. Otherwise, the work would be valued under clause 5.2, and it may provide grounds for an extension of time and for a claim for loss and/or expense (cl 2.26.1 and 4.21.1).
10.35 The contractor is required to account for any amounts it recovers (or could have recovered) from the named sub-contractor using reasonable diligence (Schedule 2:1.4.3). This means that any additional amounts payable to the contractor as a result of the change would be reduced by any amounts the contractor could have recovered from the subcontractor.
10.36 As there are few restrictions on the terms under which the named sub-contractor is engaged, the sums that could be recovered may amount to very little. Some protection is afforded to the employer, however, by the requirement that the contractor includes the term set out in Schedule 2 paragraph 1.5 in any agreement with a named sub-contractor. This requirement is one of the more obscure examples of JCT drafting, but it is, nevertheless, an important clause. By this provision the named sub-contractor promises not to contend that the contractor has suffered no losses or that its liability to the contractor is reduced, due to the operation of the clauses in Supplemental Provision 1. The concern is that Supplemental Provision 1 has created a trap for the employer. As the contractor will, in due course, be compensated under Schedule 2 paragraph 1.4.2 for its costs in completing the work, the contractor will, in effect, suffer no losses. The sub-contractor might therefore claim that it is under no obligation to compensate the contractor. If this argument were to succeed, the contractor would not recover anything, and so would be unable to pass on any compensation to the employer. The Schedule 2 paragraph 1.5 provision is intended to break this vicious circle by preventing the sub-contractor from using this argument. This allows the contractor to claim losses from the sub-contractor, which it can then pass on to the employer.