Vous êtes sur la page 1sur 15

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

Topic 01: Suspension and Termination Topic Preview


This topic examines the legal issues that arise from the exercise by the employer or the contractor of its right to suspend performance of a construction contract and also to terminate a construction contract.

Topic Content
Introduction Despite the high level of consensus parties may have while negotiating a construction contract, it is wise to provide for the possibility of the relationship going sour. This is the reason standard form construction contracts contain terms entitling the parties to suspend further performance of their obligations under the contract or to bring their relationship to an end by terminating the contract. One of these rights is now guaranteed by statute i.e. the contractors right to suspend for non-payment, which applies regardless of the contractual terms. Consideration is given in this topic to the legal consequences of contractual terms conferring on contracting parties a right to suspend or terminate the contract. Suspension Suspension performance involves of the bringing by the construction for a contained in project the to a

temporary standstill

ceasing

specified

period the contract.

obligations

Suspension of a project is not intended as a permanent measure. The relevant construction contract should provide clear guidelines on how long a suspension may last.

Robert Gordon University 2014

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

Suspension by the Employer The right of an e mployer to suspend a construction contract is solely based on contract. There is neither a common law nor a statutory right for the employer to suspend a construction contract. However, this right is essential, allowing the e mployer to freeze its obligations under the contract without incurring the costs and finality that come with termination. It is important at the negotiating stage for the employer to ensure that its right to suspend is included in the contract terms. It is also at this stage that the employer should deal with the variety of issues highlighted below. Most modern UK standard forms provide for the employers right to suspend. Taking as an example one of the most widely used UK forms, the JCT Design and Build Contract 2005, this provides at clause 3.10: The Employer may issue instructions in regard to the postponement of the works and the design of the work or any part. It is clear from the wording of this clause that the employers right to suspend is not predicated on the fault of either party nor on the occurrence of any event. The clause entitles the employer to suspend at any time. Because of the unilateral nature of this clause, adequate safeguards are provided for the protection of the contractor. On the suspension of the contract by the employer under JCT contracts the following rights accrue in favour of the contractor:

the right to an extension of time (clause 2.26.2.1)

Robert Gordon University 2014

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

a right to payment for direct loss and/or expense (clause 4.20.2.1); and

a right to terminate the c ontractors employment if the postponement affects the whole or substantially the whole of the works for a period exceeding a pre-agreed longstop period (clause 8.9.2).

The longstop period is an important term often subject to negotiation. It sets the maximum permissible length of a suspension. For the contractor, it ensures that the employers right to suspend is not indefinite; and for the e mployer it is the limit within which the employer is expected to discontinue the suspension and re-commence its performance of the contract. In the JCT form if the parties fail to specify a longstop period, the contract defaults to a two-month limit. Where the c ontractor has to terminate the contract on account of the suspension having extended beyond the longstop date, the termination is classed as arising from the e mployers default, and this should entitle the contractor to loss of profit and damages. The contractor should however be careful to serve all notices required before the right to terminate is activated. It is usual for construction contracts to place liability on the

employer for all direct loss/expense arising from a suspension; this includes re-mobilisation costs, among others. There are other important considerations arising on the suspension of a construction contract by the employer which current standard forms do not adequately provide for. Contracting parties should make provision for the following:

Robert Gordon University 2014

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

Security of Materials: The parties should agree on how to store and secure the materials for the construction project to avoid deterioration, loss or damage, and deal with the extent of the employer's liability to pay for the costs of doing so. Right to Remove Machinery and Plant: The parties should agree on the extent to which the c ontractor is allowed to re-deploy plant and machinery being used for the project. This is to allow the employer to manage the costs of remobilisation more efficiently while allowing the contractor to mitigate any loss arising from lack of work resulting from the suspension. Performance bonds and Insurance: The parties should agree on how payment and other responsibilities under these ancillary contracts should be managed during the suspension period. Fluctuation: The prices of materials, goods, cost of labour and

other inputs of the work may increase during the period of suspension. It is important for the parties to agree on how this should be managed.

Suspension by the Contractor The c ontractor does not have a right at common law to suspend the contract. However, the Housing Grants, Construction and Regeneration Act 1996 provides the contractor with the right to suspend the contract. The right is tied to nonpayment by the employer. The statutory right has been incorporated into the various standard form contracts prevalent in the industry. A Contractor who is a party to a construction contract has the right under section 112 of the 1996 Act to suspend performance of its

Robert Gordon University 2014

Construction Contracts in Context BSM 613 Topic 01: Suspension and Termination

obligations under the contract on grounds of nonpayment by the employer. Clause 4.13.1 of the JCT Standard Building Contract 2005 edition (Revision 2 2009) provides that the final date of payment for an interim payment certificate is 14 days from the date of issue of the certificate. For contracts that do not specify the final date of payment, Construction apply.1 The procedure for enforcing the right requires the c ontractor to serve at least 7 days notice, after which, if the employer is still in default, the right to suspend is activated. The 1996 Act as enacted had some flaws regarding the right of the contractor to suspend the contract. These included the fact that there was no statutory provision for payment to the c ontractor of direct expenses and loss occasioned by the suspension. This meant that the contractor, in the absence of appropriate contractual provisions note that JCT already provided for this would be liable for the costs associated with the suspension. The Local Democracy, Economic Development and Construction Act 2009, the relevant provisions of which came October The 2009 Act provides for payment to the Contractor of the costs and expenses arising from suspension. into force in 2011,addresses these deficiencies in the 1996 Act. the statutory Scheme for Contracts introduced by the 1996 Act would

1 See, for England & Wales, the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998 No. 649).

Robert Gordon University 2014

Construction Contracts in Context BSM 613 Topic 01: Suspension and Termination

It also allows the c ontractor to suspend some, but not all, of its obligations. It is important to note that although the c ontractor may suspend further performance of its contractual obligations, the contractor remains liable for the continuing performance of statutory duties such as under the Construction (Design and Management) Regulations 2007. The contractor in exercising its right to suspend the contract must therefore not leave the site unsafe or fail to perform any other duties imposed by the CDM regulations. It is also important to remember that section 112(1) of the 1996 Act ensures that the exercise of the right to suspend by the contractor does not preclude it from other remedies available under the contract or at common law e.g. an action for damages. The contractor should also consider how the suspension may affect other members of the supply chain that are dependent on the contractor.

Termination Termination may be defined as the process whereby a contracting party unilaterally and before the completion of a project, brings a construction contract to an end either by a procedure set out in the contract or by applying rights arising under the common law. As the definition indicates, there are two routes t h at termination may follow. These are: Termination under the contract Termination under common law. Each of these will be examined in turn.

Robert Gordon University 2014

Construction Contracts in Context BSM 613 Topic 01: Suspension and Termination

1. Termination under Contract It is common practice for construction contracts to provide for the employer or the contractor to terminate the contract on the occurrence of specific events. The usual events entitling the employer to terminate the contract include subcontracting or assigning part or the whole of the works without authorisation, refusing to repair a defect that has been notified, and refusing to carry out an instruction by the e ngineer/architect, among others. The right for the c ontractor to terminate is historically linked to non-payment of sums due by the e mployer or the anticipation of the inability of the e mployer to meet its obligations under the contract. The c ontractors right to terminate has also extended in recent times to non-financial obligations such as failure to give access to the site and continuing a suspension beyond the agreed longstop date, among others.

In terminating in accordance with the contract, the parties should closely follow the terms of the contract and give any notice provided for under the contract. The risk in not following the terms of the contract is that the other contracting party is at liberty to treat the termination or notice as a repudiatory breach of contract and to sue the terminating party for damages. The right to sue for damages on wrongful termination was highlighted in the case of HDK Ltd (trading as Unique Home) v Sunshine Ventures Ltd and others [2009] EWHC 2866 (QB) (23 November 2009). In this case, the contractor had been engaged to carry out works at a flat and a care home. After the work had commenced the e mployer, dissatisfied with the pace of the work, sent a letter to the c ontractor that the works are required to be completed urgently. Two months after the letter was sent the

Robert Gordon University 2014

Construction Contracts in Context BSM 613 Topic 01: Suspension and Termination

works were still not complete, so the e mployer terminated the contract. The main question in the case was whether the letter requesting urgent completion was sufficient to make time of the essence of the contract, thus rendering the failure entitling termination of the contract by the employer. The court held that the letter did not state the expected completion date and consequence of failure to complete on that date, and that the letter was therefore insufficient to make time of the essence of the contract. Accordingly, there was no discernable basis for the termination; the termination was wrongful and the contractor was entitled to damages. by the contractor to complete two months later a breach of contract

Meaning of words or phrases used to ground termination To allow the contracting parties to adhere closely to the terms of the contract it is important for the draftsman to be clear and precise about the grounds on which a party may terminate a construction contract and to define appropriately any general words that are used. One phrase often inadequately defined is material breach. This expression regularly features in contracts down the supply chain of the construction process. The drafting usually states that the parties may terminate the contract on a material breach of the contract by either party. There is no generally accepted legal definition of this expression. The court considered the meaning of the expression material breach in the case of National Power plc v United Gas Company Limited [1998] All ER (D) 321. In this case the plaintiff had contracted to sell gas to the defendants. The contract provided for termination with immediate effect on a

Robert Gordon University 2014

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

material breach being committed by either party if the defaulting party failed to remedy such breach within seven days. As the contract offered no definition of the term material breach, the question arose as to whether the failure of the plaintiff to provide the defendants with requested information, and a failure to remedy this default within seven days, were sufficient to be classed as material breach under the contract. The plaintiffs argument that material breach was synonymous with fundamental breach was rejected as the court took the view that since the contract had provided for the right to remedy the breach it would be inaccurate to describe the breach as fundamental. However the court found in favour of the plaintiff, holding that the breach complained of was of minor commercial consequence and in the opinion of the court did not constitute the material breach the parties had in contemplation. It is important for contracting parties to be unambiguous when drafting termination rights in construction contracts. The ideal position is for the contract to specify exactly what conditions, or events of default, entitle a party to terminate the contract, and what the meaning of the relevant terms are in the context of the contract. Most standard form construction contracts provide a list of events of default, and the parties are at liberty to supplement these.

Termination by reason of Insolvency There is no general right for an innocent a contract on the party basis to of terminate the

insolvency of the other party. Such a right can only arise as a contractual term. However, the insolvent party may terminate certain contracts by operation of law; and where a liquidator is appointed, the liquidator may disclaim onerous property including

Robert Gordon University 2014

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

unprofitable contracts. See generally Re Catherine et Cie, Ltd [1932] 1 Ch 70.

2. Common Law termination Apart from the right to terminate by contract following any conditions set out in the contract, a party is additionally entitled to terminate at common law. The important distinction is that termination under common law follows less strict procedures than contractual termination. Ian Duncan Wallace, in Hudsons Building and Engineering Contracts (12th Edition, Sweet and Maxwell, 1995 at page 1243, paragraph 12.003), expresses the view that such termination does not depend on any express contract terms, and offers the party so terminating more flexibility than termination under the contract. Indeed it requires no specific course of action from the party other than to act reasonably. Termination of a contract at common law requires that the defaulting party commits a breach of a contract term that is deemed to be a condition of the contact and not a warranty. The latter entitles the innocent party to damages but does not afford any termination right. A term is a condition if it is classified in that way by statute (e.g. Sale of Goods Act 1979), or by case law, or if it is agreed to by the parties or implied from the nature of the contract. A condition is usually an essential term that goes to the root of the for contract. breach The breach of such a fundamental term of contract. See generally Mayhaven entitles the innocent party to rescind the contract and sue for damages Healthcare Ltd (2009) EWHC 2634 (TCC).

Robert Gordon University 2014

10

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

Termination of Contracts in Construction Law This section explores in more depth some issues arising from termination of contracts under UK construction law.

Termination during adjudication

The position of the law on the liabilities of the parties where the employer terminates a contract during the adjudication process came up for determination in the case of Westwood Structural Services Ltd v Blyth Wood Park Management Company Ltd [2008] EWHC 3138 (TCC). In this case an e mployer terminated the contractors employment under the contract while an adjudication was pending but before the adjudicator had reached his decision. The issue for determination was whether practical completion had been achieved by the contractor. The contractor took the view that it had achieved practical completion, while the e mployer took the opposite view. The adjudication process was in progress when the employers contract administrator sent a letter requesting the contractor to stop work because of concerns over defective work. The contractor sought a declaration from the adjudicator that practical completion had been reached and that the c ontract administrators letter amounted to repudiatory breach of the contract. The adjudicator declined jurisdiction on the question of the correctness of the employers termination. He held further that the contractor was entitled to payments totalling 40,000 plus VAT for work carried out up to practical completion and ordered payment within 7 days.

Robert Gordon University 2014

11

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

On receiving the decision of

the adjudicator, the employer

commenced adjudication where it requested that the adjudicator declare that it was under no obligation to pay the amount set out in the first adjudication until practical completion had been achieved by the replacement c ontractor. The c ontractor relied on clause 7.2.3 of the underlying contract - JCT Minor Works Contract 1998, which provides that:

Upon determination of the employment of the Contractor... the Employer shall not be bound to make any further payment to the Contractor that may be due under this Agreement until after completion of the works and the making good of any defects therein. . ..

In this second case, the adjudicator held that the termination was proper. However he stated that the sums in the first adjudication had fallen due before the termination and that the words further payment applied to sums not due before termination. More importantly, the adjudicator held that the clause in question did not apply to adjudicators decisions. On appeal by the employer to the court, it was held that the finding of fact by the adjudicator indicated that the payments were due approximately two months before termination by the e mployer, and thus the e mployer could not rely on clause 7.2.3 to avoid the The judge commented obiter that payment. made by an

decisions

adjudicator may not be caught by clauses such as 7.2.3.

Robert Gordon University 2014

12

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

Termination for minor breach The question that arises under this heading is whether a party to a construction contract may terminate the contract on the basis of a minor breach. In Dominion Corporate Trustees v Debenhams Properties Limited [2010] EWHC 1193 (Ch) the plaintiffs agreed to lease from the defendants a retail unit which was under construction. The agreement included a clause that the parties may terminate on the failure of either party to keep to its obligations under the contract. One of the terms of the contract was that the plaintiff would make three staged payments to the defendants on specific dates. The plaintiff was late with stage two payment by two days. Although it had informed the defendants earlier that the payment was likely to be late its attempt to pay up two days later was refused by the defendants. The defendants, relying on the term of the contract which stated that a failure by either party to perform its obligations under the contract entitled the other party to terminate the contract, argued that the termination was correct, contending that time was of the essence of the contract. The court held that the defendants were not entitled to terminate the contract. The court took the view that although the contract had indicated that the failure of performance of any of its obligations entitled the other party to terminate the contract, a reasonable man would infer that this stipulation covered important breaches only. There were many obligations, some very minor, and the failure to perform one of them could not be held to terminate the contract. The court also commented that since Debenhams had been informed that the payment was going to be late, it could have given prior warning that it was intending to terminate the contract.

Robert Gordon University 2014

13

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

Termination at will This concept was introduced after the civil war in the United States and was confined in those early days to government contracts. Its aim was to reduce the liability of government on the termination of a contract that was in progress but which it no longer had any use for (e.g. a contract for extra war infrastructure after the war was over). The contractor was entitled on termination at will to payment for work done and reasonable profit on that but denied any claims in respect of work not yet done and profit that could have arisen from such works. Termination at will is fast becoming a regular feature of UK construction contracts. See the NEC 3 (ECC) clause 90.2 where it is provided in favour of the e mployer. Also, see generally the cases of Hadley Design Associates Ltd v Westminster [2003] EWHC 1617 (TCC) [2010] EWHC 3119 (Comm). and BP Exploration Operating Co Ltd v Dolphin Drilling Ltd (The Byford Dolphin)

Topic Activities

Jack has amended the standard form construction contract being used in his transaction with Jill so as to read: Before the Contractor can suspend this contract for non-payment, he must give the Employer 30 days notice. Jill seeks advice on whether she can proceed to suspend after the 7-day period as stated in the statute or whether she has to wait for 30 days as provided in the contract prepared by Jack and signed by the parties.

Robert Gordon University 2014

14

Construction Contracts in Context BSM 613

Topic 01: Suspension and Termination

References
John Uff, Construction Law, 11th Edition, Sweet & Maxwell, London, 2013. Ian Duncan Wallace, Hudsons Building and Engineering Contracts, Sweet and Maxwell, London, 1995. Also refer to the cases quoted in this note.

Vous aimerez peut-être aussi