Terminating a Construction Contract: Getting it Right

Terminating a contract: getting it right 3 June 2014

Ben Worthington, Senior Associateben.worthington@olswang.com | + 44 20 7067 3541

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Introduction

• types of termination

• termination under the JCT SBC 2011

• wrongful termination

• “termination at will” clauses

• good faith / co-operation clauses and termination

• the power to omit work

• practical tips

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Types of termination

• when can a party terminate a contract?

• common law termination

• termination under standard form building contracts

• contractor performance

• contractor insolvency

• employer non-payment

• force majeure

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An example…the JCT SBC 2011

• Detailed provisions setting out:

• the grounds for termination

• The relevant procedure (i.e. notices)

• terminating party must not act unreasonably or vexatiously (see Reinwood Limited v L.Brown and Sons [2008]

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The grounds for termination

• The Employer can terminate the contract if the contractor:

• wholly or substantially suspends the Work;

• fails to proceed regularly and diligently with the Work;

• refuses or neglects to comply with an instruction from the CA requiring him to remove work, materials or goods which are not compliant AND by such refusal the works are materially affected

• sub-contracts the works without consent

• assigns the contract without consent

• fails to comply with certain CDM regulations

• Contractor insolvency

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Recognising a failure to proceed regularly and diligently

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West Faulkner Associates v London Borough of Newham (1994) 71 BLR 1 – the contractor must proceed:

“continuously, industriously and efficiently with appropriate physical resources so as to progress the work steadily towards completion substantially in accordance with the contractual requirements as to time, sequence and quality of work”.

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The procedure

• two stage procedure for terminating the contract. The CA must serve:

• a notice specifying the nature of the default;

• a termination notice terminating the contractor's employment under the contract.

• Note the strict time periods:

• termination notice can only be served where the contractor continues with a specified default for 14 days from the default notice.

• right must be exercised within 21 days of the expiry of the 14 day default period

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Wrongful termination

• wrongful termination = repudiatory breach of contract

• innocent party entitled to damages

• no right to "reinstate" the contract

• Losses might include

• demobilisation costs

• supply chain costs

• finance and hire charges

• redundancy payments

• loss of profits

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Termination at will clauses• what is a termination at will clause ?

• are they lawful?

• drafting tips:

• % complete condition precedent

• rights for both parties

• compensation for terminated party

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Good faith clauses and termination

• TSG Building Services Plc v South Anglia Housing Limited: either party, for no, good or bad reason could terminate at any time before the contract term was completed.

• Mid Essex NHS Trust v Compass: the Trust was entitled to exercise absolute right to terminate regardless of good faith clause.

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Can I omit work?

• What is the purpose of the omission?

• Abbey Developments Ltd v PP Brickwork Limited (2003) – “It is implicit in most contracts that an owner who exercises a power to omit work must genuinely require the work not to be done at all, and cannot exercise such a power with a view to having the work carried out by someone else.”

• Clear words required to over turn this assumption

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Key considerations

• What's your strategy?

• Is there a reputational impact?

• Who will finish the work?

• What are the costs?

• Are there other (better) remedies available?

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Practical tips

• Check the contractual grounds

• Get your documents in order

• Follow the contractual procedures rigorously. Check:

• notice periods

• Who to serve / address for service

• grounds are set out properly

• Be consistent in correspondence

• Mitigate loss

• Do not delay

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If you receive a notice…

• Keep a tight reign on communications

• consider starting a formal dispute resolution procedure

• consider scope for commercial settlement

• respond firmly

• emphasise breaches by the terminating party

Any questions?