Terminating construction contracts in the UK: practicalities and pitfalls

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It can also charge mobilization fees, and apply a premium to its price. Typically, it will take several months before these costs can be recovered from the licensed contractor, if applicable. At this point the company being made redundant may have become insolvent and, even if it is solvent, it is likely to say that the costs incurred are excessive and should have been better mitigated by the employer – which can easily end up out of pocket .

There is also the practical challenge of sounding out a replacement contractor before termination, which must be done with extreme caution. Obviously, you don’t want to terminate until you have a plan B in place, but the law is that you can’t omit work and give it to another party without risking being in breach under the existing contract. In a termination scenario, this can be difficult to manage – especially when the market is small and there are only a handful of contractors to choose from.

Intervene to complete the work

If the work is nearly complete, the resilient party could take over from the contractor and manage the supply chain to completion. Often the collateral guarantees between the employer and the subcontractor allow for this eventuality through stage rights or there may be an obligation for the contractor to novate the subcontracts upon termination. However, this option also has its drawbacks.

A particular challenge for employers on most troubled projects is that disputes will have arisen between the contractor and the supply chain. By entering into a subcontract, the employer may in principle accept liability for all sums due to the subcontractor.

There are also challenges in supply chain management. Unless the employer is experienced or employs a specialist construction manager, the project could spiral even further out of control and all important ‘as built’ documentation may not be properly assembled at the end of the job.

Similarly, care should also be taken to identify which members of the supply chain should actually be retained. Replacing a labor contractor performing earthworks may not be controversial. Finding an alternative process contractor on a large waste treatment plant will be difficult, if not impossible, once the project has reached a certain stage.

Additional features

Care should be taken to ensure that the work to date is assessed accurately, soundly and defensibly at the time of termination. This can be done by the existing professional team or by an independent quantity surveyor.

Accurate valuation is key to understanding the value of properly executed work to completion points; as well as the value of the work remaining to be done.

In a fault-based scenario, the financial reconciliation will involve a review of the additional costs of completion and, possibly, the costs and losses caused to the employer as a result of the termination. These sums will then be deducted from sums otherwise due to the Contractor, resulting in a sum due one way or the other.

Steps must also be taken to ensure continued access to project-specific information and intellectual property held by the terminating party, as well as continued rights to use materials and equipment – the ownership of which should, as the case may be. applicable, be vested in the non-terminated party. The seamless transfer of the relevant insurance must also take place, so that the site is always insured.

Understand what rights and terms will survive termination. In addition to the parties retaining their rights and responsibilities prior to termination, contracts are typically drafted so that a number of contractual provisions survive termination.

Many of these points also apply to the party receiving a purported termination. Understanding the intricacies and delicate considerations will allow the terminated party to understand their rights, remedies, and options, so that the terminated party does not have everything their way.

Potential pitfalls

Termination can go wrong in four main ways: procedural, elective, healing, and affirming. These may result in loss of termination rights or invalid termination.

If a party claims to be terminating a contract but is following the wrong procedure, has waived its right to terminate by election, the violation has been corrected, or it has confirmed the contract before attempting to terminate, it may have terminated for invalid grounds and, that in itself is likely to be a repudiatory breach capable of being accepted by the other party. In these circumstances, the tables can be turned and rather than being the party seeking to recover substantial losses, the party that attempted to terminate may end up having to pay substantial damages to the other party.

Procedure

In the event of termination within the framework of the contract, it is imperative that the terminating party strictly respects the contractual procedure.

The notice should be clearly titled and ideally refer to the clause under which it is issued to avoid any doubt. The notice must also be addressed to the correct person, issued by the correct method of service and provide any information specifically prescribed in the contract.

Certain contractual termination events may result in immediate termination; or there may be a two-step process (usually a notice of default followed by a notice of termination if the default is not cured within a specified period of days). The terminating party must correctly follow the procedure and schedule provided for in the contract.

Election

Generally, there are two ways to finish:

  • common law in the event of repudiatory breach of contract.

To learn more about contractual and non-contractual termination rights, see our Out-Law guide to terminating and suspending construction contracts.

Parties often attempt to terminate “in the alternative”, relying on a number of different grounds to preserve all of their termination rights. The terminating party must be extremely careful here because they could unwittingly “opt out by election” if they try to rely on two termination rights that have inconsistent consequences.

Cure

The right of termination may be lost if the defaulting party “cures” the breach prior to termination. The breach must exist on the date on which the injured party intends to terminate the contract.

The terminating party can easily be wrong here, especially when the contract requires notice of default and a time for rectification before termination. For a delay-related violation, clear records are needed to show that the rate of progress is less than it should be or that onsite resources are less than they should be at the date of termination. It is often useful to have a “measured mile” from the start of the project, showing what could be achieved – so that the rescinding party can point this out as evidence that the contractor or sub-contractor is no longer proceeding steadily and with diligence in its work. Even then, the situation can become murky if the licensed party can invoke instructions, variations, or purported acts of prevention as excuses for lost productivity.

Affirmation

After termination, a party cannot act as if the contract still binds them without potentially losing their right to rescind. This is important because even where there are – or were – valid grounds for termination, those grounds can be lost as events evolve and through the conduct of the parties.

Alternatives to Termination

Given the very significant risks of bad termination, it is always interesting to consider alternatives to the termination of the contract.

If the contractor can terminate for non-payment, it may be better to help the employer overcome their short-term financial difficulties and keep the work moving forward so that their right to payment continues to roll, otherwise the funds real.

Similarly, where the employer locks the contractor into a low fixed price contract where most of the risk has been transferred to the contractor, it may be better to ‘cure’ the contractor – for example through short-term installments – and to continue to hold the contractor to its original contract.

Employers can also determine if there is a bond or other security available that can be called. This can be a less risky way to unlock the cash needed to get the project back on track.

If there is only a dispute between advancement or entitlement to payment, rather than terminating and wrestling with the offending party through costly, risky and lengthy termination proceedings, parties could seek to resolve the underlying dispute through formal means (e.g., arbitration or litigation) or a less formal form of dispute resolution procedure to resolve issues and get the contract back on track.

When the relationship between the parties is still intact, settling “in the sand” and changing the terms that are causing problems (such as changing payment terms or omitting part of the perimeter) can restore order. .

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