9
Termination
9.1 Given the complexity and unpredictability of construction operations, it would be unlikely that a project could proceed to completion without breaches of the contractual terms by one or other of the parties. This is recognised by most construction contracts, which usually include provisions to deal with foreseeable situations. These provisions avoid arguments developing or the need to bring legal proceedings as the parties have agreed in advance machinery for dealing with the breach.
9.2 A clear example of this is the provisions for liquidated damages – the contractor is technically in breach if the project is not completed by the contractual date, but all the consequences and procedures for dealing with this are set out in the contract itself.
9.3 However, some breaches may have such significant consequences that the other party may prefer not to continue with the contract, and for these more serious breaches the contract will contain provisions for terminating the employment of the contractor.
9.4 In any contract, if unforeseen events mean that it becomes impossible for the contractual obligations to be fulfilled, the contract is sometimes said to be ‘frustrated’ and it may be set aside. In addition, 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 where, for example, the client refuses to allow the contractor access to part of the site. Where it is impossible to expect further performance from a party, the injured party may claim that the contract has been repudiated. Repudiation occurs when one party makes it clear that it no longer intends to be bound by the provisions of the contract. This intention might be expressly stated, or it might be implied by the party’s behaviour. In addition to these common law rights, construction contracts normally include express provisions allowing the parties to terminate the contractor’s employment should serious situations occur, including but not necessarily limited to those that would amount to frustration or repudiation.
9.5 The idea of terminating the contractor’s employment is something that most parties would seek to avoid if at all possible. Dealing with the consequences of termination, and the prospect of having to engage another contractor to complete a half-finished building, are difficult and stressful, and generally parties are better off trying to resolve their differences. However, sometimes the situation becomes so difficult that no other option is feasible. In such circumstances, the RIBA Building Contracts, like all other standard contracts, set out reasons and procedures for termination.
Termination by the client
9.6 The clauses relating to termination are identical in both versions of the contract. The client may terminate the contractor’s employment under clause 12.2, with the reasons listed as giving grounds for termination by the client covered in clause 12.1. This states that the client may terminate the contractor’s employment if the contractor:
- abandons the works;
- fails to proceed regularly and diligently;
- fails to comply with instructions;
- is in ‘material breach’ of the contract.
9.7 This would require that the contractor has made no appearance at the site for a significant period of time and has failed to satisfactorily explain why. An absence of a day or two would probably not be significant, but if there is no response to enquiries from the contract administrator, it would be sensible for the contract administrator to issue a notice of termination straight away. 9.8 The phrase ‘regularly and diligently’ appears in many contracts, and has been the subject of much litigation. The client already has a remedy for slow progress and late completion, in the form of liquidated damages, so a generally poor performance is not normally considered sufficient to justify termination. The phrase means more than simply falling behind any submitted programme, 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 work on site would be sufficient grounds. 9.9 In the case of London Borough of Hounslow v Twickenham Garden Developments (1970), for example, the contract administrator’s notice was strongly attacked by the defendants. In a more recent case, however, the contract administrator was found negligent because it failed to issue a notice. In West Faulkner Associates v London Borough of Newham (1992) the court stated:
9.10 However, although failure to comply with a master programme would not by itself be a breach, it may be some evidence of failure to proceed regularly and diligently. This is where careful records will help to establish a case, and the regular updates to programmes and the records of discussions at progress meetings may be invaluable. 9.11 In any event, the right to terminate for failure to progress should not be used lightly. In particular, a client that realises the liquidated damages might not compensate it sufficiently should be advised that termination cannot be simply thought of as a convenient alternative. Generally, the failure has to be of reasonable significance, and here the programme would be of considerable help, particularly if it shows the resources to be deployed; if the resources actually deployed are substantially less than planned over a period of weeks, then a default could normally be established. 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. Work on the contract stopped for approximately eight months due to a strike. 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 employer 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 Borough 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 Borough’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 Borough 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 contractor, Moss, which, 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 architect. 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 architect, which then brought a claim for its fees. The judge decided that the architect was 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). 9.12 In JCT contracts, failure by the contractor to comply with just one instruction may be enough to terminate, but in the RIBA Building Contracts, as the plural is used, it appears something more is needed (cl. 12.1.3). This may well depend on what is involved. For example, if an instruction relates to health and safety, structural stability, security, compliance with legislation, etc., then failure to comply with repeated instructions relating to the same matter may be enough. Where it is more detailed or cosmetic, failure to comply with numerous instructions regarding a wide variety of matters may be needed. 9.13 The concept of a ‘material breach’ (cl. 12.1.4) giving a right to terminate is something that will be unfamiliar to those who normally use JCT contracts. Potentially, it is far wider in coverage than the more specific list of reasons to terminate given in, for example, MW16 (where the defaults include suspension without reasonable cause, failure to proceed regularly and diligently, and failure to comply with the CDM Regulations). However, it is frequently cited as a cause in other contracts, particularly bespoke ones. There are no absolute rules as to what types of breach would be considered ‘material’; clearly they would need to be more than simply a trivial or a technical breach, but something less than a repudiatory breach. 9.14 So how serious and significant would a breach need to be to be considered material? Generally, it will depend on the nature of the project, the impact on the client and the circumstances surrounding the breach. The case of SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd gives some guidance. SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd [2013] EWHC 2916 (TCC), [2013] EWHC 3202 (TCC)
Punj Lloyd was the Indian parent company of an insolvent contractor that had undertaken the construction of a low-density polyethylene plant on the old ICI site at Wilton for SABIC, the employer. SABIC terminated the contract for poor performance and commenced litigation. The court held SABIC’s termination justified, although it did not amount to a repudiatory breach. It considered that there were aspects of the contractor’s conduct that amounted to deliberate decisions not to comply with all of its contractual obligations, one of which was instructing its subcontractors to demobilise. However, the court’s view was that, as at all material times the contractor stated its intention to bring the project to completion, that could not necessarily be equated with a renunciation of its side of the bargain. In that case, the contractor’s conduct came close to being repudiatory but ‘didn’t cross the line’. 9.15 It is suggested that any of the following might constitute a material breach:
Abandoning the works
Failing to proceed regularly and diligently
Failing to comply with instructions
Material breach of contract
Procedure for terminating
9.16 The procedure for termination under clauses 12.1 and 12.2 follows a two-stage process. First, the contract administrator must issue the contractor with a notice of intention to terminate, referring to clause 12.1, and stating the reason for the termination. This is an essential first step, and any attempt to terminate the contractor’s employment without it would be a breach of contract. Although not essential, it may be sensible for the contract administrator to set out exactly what would be needed for the default to be rectified.
9.17 All notices relating to termination are to be sent by recorded delivery as set out in clause 11.9, and are effective from the date of delivery. In addition, as this is a serious step that could ultimately bring the project to an end, it would be advisable for the contract administrator to discuss it with the client beforehand.
9.18 At the second stage, the contract administrator may issue a notice of termination (cl. 12.2). Before the notice can be issued, the contractor must have failed to remedy the default within 14 days of receiving the initial notice of intention to terminate. It would, of course, be essential that the contract administrator discusses this with the client before taking this step, as essentially termination of the contract should be a matter for the client to decide.
Termination by the contractor
9.19 The contractor may terminate its employment under clause 12.4. The grounds for termination by the contractor are covered in clause 12.3, which states:
9.20 As with termination by the client, a breach would need to be more than merely trivial, but not as significant as a full repudiatory breach. It is suggested that any of the following might constitute a material breach by the client:
9.21 A notable change since the last edition of the form is the removal of the ground ‘failure to pay the contractor when payment is due’. In order for the contractor to terminate for failure to pay, the failure would have to be significant enough to amount to a material breach. 9.22 The procedure for termination follows a similar two-step process, i.e. first the contractor issues a 14-day notice then, if the situation is not resolved, it may terminate its employment by means of a further notice (cl. 12.4).Material breach of contract
Termination by either party
9.23 Either party may terminate the contractor’s employment due to insolvency, bankruptcy or frustration.
Insolvency or bankruptcy
9.24 Clause 12.5 states:
9.25 Unlike JCT contracts, no definition of insolvency is given. This may be sensible as the definition under the law may change over time, and this is a matter of statute rather than compliance with contractual provisions. However, as a guide the parties could consult the current definition in a JCT contract (e.g. the IC16, cl. 8.1) or other up-to-date text. If there is any doubt about the matter, the client should seek expert advice, as this is an issue that could have serious consequences.
9.26 It should be noted that, unlike in many of the older versions of JCT contracts, termination is not automatic upon insolvency or bankruptcy, and positive action is required by the other party to bring the contractor’s employment to an end. However, in this case it is a single-step process, and only one notice is required to effect the termination. No time limits are given, which is sensible as it may be some time before the situation is clear. In some cases the parties may wish to continue to work together for some time in order to complete as much of the project as possible.
Frustration
9.27 Clause 12.6 states:
9.28 The clause is broadly worded, and it is suggested that ‘any event not caused by (and not the responsibility of)’ should be interpreted in a practical way. For example, the parties have assumed liability for various matters under clauses 6.1 and 6.2 (both contracts) that may not have been caused by them, such as loss of or damage to the works (cl. 6.2.1), and similarly the client has accepted various risks under clauses 9.1 to 9.3, such as force majeure and the actions of a utility company. It could be argued that having accepted liability the party is ‘responsible’ for the consequences. However, it is quite possible that these events might result in work ceasing for 60 days, and it is suggested that, provided a party did not actually cause the problem, it ought to be able to terminate the contractor’s employment should this occur, even though under the contract it accepted liability for or the risk of this event.
9.29 No procedure is set out for terminating under this ground. For practical reasons some form of notice would obviously be needed, and it may be sensible to also issue a warning notice, following the procedure set out in clauses 12.1–12.4; however, there would be no obligation to do so.
Consequences of termination
9.30 The consequences of termination are set out in clauses 12.7–12.10. The clauses are primarily concerned with payment. It should be noted that in all cases the termination clauses refer to terminating the contractor’s employment, not to terminating the contract therefore any clause referring to the consequences of termination or the liability of either party would still apply, unless the contract provides otherwise.
Payment
9.31 The contracts explain how the balance due is to be calculated in situations where the client has terminated the contractor’s employment, and in situations where the contractor initiated the termination (cl. 12.7). They also establish when the balance is to become due (cl. 12.8 and 12.9).
9.32 If the client terminates the contractor’s employment, the client is entitled to the costs for completing the work with another contractor, and any other reasonable costs consequent upon the termination (cl. 12.7.1). The balance is not due until all the work has been completed (cl. 12.8).
9.33 If the contractor initiated the termination it is entitled to all costs and losses incurred. The balance is due within 14 days of the contractor submitting an application for payment, or of the contract administrator issuing a payment certificate, whichever occurs first (cl. 12.9).
9.34 It should be noted that any amount which may have become due by the time of the termination does not need to be paid in situations where the client has issued a pay less notice, or if the contractor has become insolvent before the final date for payment (this reflects the position as set out by the House of Lords in Melville Dundas v George Wimpey).
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. 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.
Access to the site and security
9.35 If the contractor’s employment under the contract is terminated for any reason, clause 12.10 states that the contractor shall:
- lose its right to access the site;
- remove all its materials and equipment within a reasonable time;
- no longer be responsible for the security of the site.
9.36 This is a sensible clause, which makes the position clear to the parties should termination occur. The client should note that it will immediately become responsible for the site, and will probably need to take steps to ensure that it is secure and complies with any health and safety or other statutory requirements. The client will also need to allow the contractor access to remove its materials and equipment; the contractor should give reasonable notice of when it intends to do this so that arrangements can be made.