8
Termination
8.1 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.
8.2 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.
8.3 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.
8.4 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.
8.5 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 if at all possible. 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
8.6 The client may terminate the contractor’s employment under clause 12.2 CBC or clause 12.4 DBC. The reasons listed as giving grounds for termination by the client are covered in clause 12.1 of CBC and clause 12.3 of DBC. These state that the client may terminate the contractor’s employment if the contractor:
- abandons the works;
- fails to proceed regularly and diligently;
- consistently fails to comply with instructions;
- is in material breach of the contract.
8.7 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. 8.8 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. 8.9 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:
8.10 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 of invaluable assistance. 8.11 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. 8.12 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 CBC and 12.3.3 DBC). 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. 8.13 The concept of a ‘material breach’ (cl 12.1.4 CBC and 12.3.4 DBC) 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, MW11 (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. 8.14 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’. 8.15 It is suggested that any of the following might constitute a material breach:
Abandoning the works
Failing to proceed regularly and diligently
Consistently failing to comply with instructions
Material breach of contract
Termination by the contractor
8.16 The contractor may terminate its employment under clause 12.4 CBC or clause 12.6 DBC. The reasons listed as giving grounds for termination by the contractor are covered in clause 12.3 of CBC and clause 12.5 of DBC. These state that the contractor may terminate its employment if the client:
- fails to pay the contractor when payment is due;
- is in material breach of the contract.
8.17 This is not as precise as the equivalent clause in JCT contracts, which states ‘does not pay by the final date for payment the amount due … and/or any VAT properly chargeable on that amount’ (e.g. IC11, cl 8·9·1·1). In the RIBA Building Contracts there is a certain ambiguity, i.e. ‘Fails to pay the contractor [what?] when payment is due’. It is suggested that the ‘what’ is the amount that has been certified in the case of CBC, or the amount invoiced in the case of DBC, and that the clause does not extend to situations where the contractor is contending that the amount certified/invoiced is less that the amount it considers is ‘due’. The ‘amount due’ should be read in the context of the contract as a whole, i.e. it is as set out in section 7 of the contracts. 8.18 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:
Failure to pay the contractor when payment is due
Material breach of contract
Termination by either party
8.19 Either party may terminate the contractor’s employment due to insolvency, bankruptcy or frustration.
Insolvency or bankruptcy
8.20 Clause 12.5 of CBC and clause 12.7 of DBC state:
8.21 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 an up-to-date JCT contract (e.g. the IC11, 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.
8.22 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.
Frustration
8.23 Clause 12.6 of CBC and 12.8 of DBC state:
8.24 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 6.1.1), and similarly have accepted various risks under clauses 9.1–9.4, such as ‘damage caused by: fire; lightning; …’ (cl 9.1.3). 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.
Procedure for terminating
8.25 Whatever the grounds for termination, the procedure is the same and 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 of CBC or clause 12.3 of DBC and stating the reason for the termination. This is an essential first step, as a client that attempted to terminate the contractor’s employment without it would be in 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.
8.26 All notices relating to termination are to be sent by recorded delivery as set out in clause 11.12, and are effective from the date of delivery. In addition, as this is a serious step, which could ultimately bring the project to an end, it would be advisable for the contract administrator to discuss it with the client beforehand.
8.27 At the second stage, the client may issue a notice of termination (cl 12.2 CBC and 12.4 DBC). 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.
Consequences of termination
8.28 The consequences of termination are set out in clauses 12.7–12.10 (CBC) and clauses 12.9–12.12 (DBC). The clauses are primarily concerned with payment.
Payment
8.29 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, CBC; cl 12.9, DBC). They also establish when the balance is to become due (cl 12.8 and cl 12.9, CBC; cl 12.10 and cl 12.11, DBC).
8.30 Unfortunately, in the case of CBC these clauses are not as clear as they might be. Clause 12.8 says: ‘Subject to clause 12.9.3, the balance shall be due for payment within 30 days of either …’. A little later, clause 12.9.1 states: ‘If the Employer terminates the Contractor’s employment under the Contract, no further payment shall become due to the Contractor’, and clause 12.9.3 states: ‘Payment shall only become due after the Works are completed or, if the Works have been discontinued, 180 days after termination’.
8.31 Clauses 12.9.1 and 12.9.3 appear to contradict each other; the first states that payment is not due, but the second states that payment shall become due, but only after a specific period.
8.32 In unpicking these clauses, first it has to be assumed that all parts of clause 12.9 deal with the situation when the employer has terminated (although the clause is not structured that way). Second, clause 12.9.1 is probably intended to mean ‘shall not become due immediately’ or perhaps ‘shall not become due within 30 days’. Third, if this analysis is correct, then the 30-day limit in clause 12.8 will only apply in situations where the contractor has terminated its employment, and is not relevant to situations where the employer has. The sequence is illustrated in Figure 8.1.
8.33 It should be noted that clause 12.9.2 contains an important protection for the employer, i.e. that any amount that may have become due by the time of the termination does not need to be paid in situations where the employer 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).
8.34 In the case of DBC the timing is more straightforward. If the contractor terminates its employment, 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 12.10). If the customer terminates, then ‘clause 12.10 shall not apply until the Works are completed or, if the Works have been discontinued, until 180 days after
Figure 8.1 Payment on termination – CBC
Figure 8.2 Payment on termination – DBC
termination’ (cl 12.11), which would mean that neither an application nor a certificate should be issued until after one of these conditions is met. The sequence is illustrated in Figure 8.2.
Access to the site and security
8.35 If the contractor’s employment under the contract is terminated for any reason, clause 12.10 (CBC) and clause 12.12 (DBC) state 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.
8.36 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.