Termination – you’re fired

I have noted communications recently from a number of our clients about their increasing concerns regards receiving an initial termination notice and we have been asked to advise on how best to deal with these situations. It is also notable that these notices are often being issued as a contractor reaches the concluding stages of a contract, and one wonders if this is some sort of cynical attempt to claw some money back from the contractor.

The JCT/SBCC Contracts deal with Termination at Section 8 and my advice to readers of this article is to go off and familiarise yourselves with what the contract says. There are clear and specific requirements in terms of issuing notices and if you are issuing a termination notice then you need to make sure that you comply with what the contract says, and if you’re on the receiving end then the same principle applies.

In the event that you receive a termination notice based on some of the grounds I will deal with below, you will have to ensure that you have sound defenses to any allegations that are made in relation to your progress and performance on site, and this cannot be emphasized too strongly enough.

However, before I get into the substance of this analysis, I want to reiterate the strong message that we have been sending out to the industry about making sure they keep proper and detailed records of their progress on projects. This is a matter that has been dealt with at length in the CICV Best Practice Guide and in other articles that I have written and many other consultants in our industry emphasize the same message of records, records and more records.

These records should include contemporaneous correspondence, letters and emails, minutes of progress meetings with the architect/CA, the employer and subcontractors, updated programmes and revisions to programmes, photographs/videos, electronic diaries, labour and plant material records, CVI’s, RFI’s, delay notices and applications for extension of time.

I want now to deal with the grounds for Termination by the Employer as set out in the JCT/SBCC conditions, at Clause 8.4 which states:

Default by Contractor

“8.4.1 If before Practical Completion of the works, the Contractor:

8.4.1.1 without reasonable cause wholly or substantially suspends the carrying out of the Works.”

So, what does that mean?  This undoubtedly is where comprehensive records will assist the contractor to identify the cause as to why they had to suspend the whole or part of the work. Let me give you a recent example where the finishes contractor was unable to make progress in a high-rise building because defects in the structure were discovered and remedial works had to be carried out and therefore progress of the whole project was effectively suspended until these measures were completed. So, the reasonable cause bit is that the contractor had to suspend the whole of the work.

Clause 8.4.2 is undoubtedly the most troublesome clause for a contractor for a number of reasons, and it states, “fails to proceed regularly and diligently with the performance of his obligations under this Contract”.

In my experience receiving this as grounds for termination will often be accompanied by a host of reasons generated by the employer as to where the contractor was not proceeding as required and again if the contemporaneous records are in place, the contractor should be able to use this as a shield to defend their position.

It may well of course be the case that during the project the employers side has been recording allegations of delay and/or nonperformance by the contractor and these really do need to be responded to at the time and not to be left undefended and hanging in the air.

So, I get what does this clause actually mean? First, I deal with “fails to proceed”. The benchmark often used by the employer in my experience is to demonstrate the contractor’s performance against the agreed programme if the contractor has not been able to meet the programme periods and the records will show why that was the case, and who was responsible.

Now turning to the provision “regularly and diligently” this has attracted a lot of comment and analysis during my time in the construction industry. In responding to termination notices on behalf of clients the type of supporting information we have looked at includes considering if the contractor has carried out the work in a logical sequence and without stoppages, or if there have been stoppages what were the reasons for these, and has the contractor complied broadly with the programme, and/or have there been delays and disruption on the part of others, and has there been disruption in relation to accessing areas, and what do the labour records demonstrate on a day by day basis and were there periods of time when labour was reduced, then what were the reasons for that.

In relation to the diligently the dictionary definition is “diligently means working or doing something with a lot of care and effort”. Again, in my experience when we try to demonstrate that the contractor was working with reasonable skill care and attention and had the necessary resources of labour plant and materials available and on site and were working efficiently.

The contractor needs to avoid leaving the site for long periods of time unless they could clearly demonstrate that access was not available to them, or reducing labour without justification, or shuffling labour about to resource other projects, which quite often happens.

An analysis of this particular contractual provision is not new territory and there have been a number of authorities by the courts, and I am particularly attracted by the comments of the court in GLC v Cleveland Bridge and Engineering [1984] the court noted that these terms meant effectively “get on with it”.  So, the contractor should ensure that during the duration of the work that they are able to demonstrate that they got on with it and if for any reason progress was delayed as a result of defaults by others, then that should be recorded and notified at the appropriate time. My advice to our clients is don’t gather the information together the moment after a termination notice comes in but make sure that your records are continually up to scratch and that you’re notifying the employer of factors that are causing delays which are out with the contractor’s control.

The next provision to look at is Clause 8.4.1.2 which states “refuses or neglects to comply with a notice or instruction from the Employer requiring him to remove any work, materials or goods not in accordance with this Contract and by such refusal or neglect the Works are materially affected”.

I frequently see this clause being relied on particularly where there is an argument from the employer in relation to defective workmanship, and where remedial works are required and there can be a lot of to-ing and fro-ing between the contractor and the employer over a period of time until the frustrations build up and the Employer issues a termination notice.

Now in many instances the Contractor has a sustainable case, and the allegation of defective workmanship is not justified, and this could be a specification issue, or a design error, but my advice is frequently to comply with instruction on a without prejudice basis and to argue the matter on another day or after completion of the contract. This is based on the premise that termination can be a very costly event for the contractor, and my view is that it is not worth exposing the contractor to that risk and it is best to take the issue on the chin and deal with it at a later date.

One potential solution is to use the Conflict Avoidance Process [please refer to the website of the Conflict Avoidance Coalition] to bring in a third party to examine the issues and to provide non-binding recommendations to both sides with a view to trying to get a satisfactory and an amicable resolution.

There are two other clauses that deal with “specified defaults”. Clause 8.4.1.4 states “fails to comply with clause 3.3 or 7.1”. Clause 3.3 refers to Consent to subcontracting and clause 7.1 deals with Assignation.

Clause 3.3 requires the contractor to have the Employer’s consent to subcontract the whole or any part of the Works, and also the Contractor shall not subcontract the design for the works without the Employer’s consent.

Clause 7.1 states that “neither the employers nor the contractor shall without the consent of the other assign this Contract or any rights thereunder.”

It is not my intention to deal in this article with the procedures for giving notices in relation to clause 8.4 and these are clearly specified in clauses 8.4.2 and 8.4.3 and it is absolutely imperative that these notice provisions are complied with to the letter. It is such a critical matter that contractors will often require to take advice from a consultant and/or a solicitor to make sure that the notice provisions are fully complied with.  Contractors should also consider the recent Supreme Court judgement in Providence Building Service v Hexagon Housing Association Ltd which focused on the notice requirements in the JCT Design and Build 2016 contract.

Before concluding this article, I want to refer to Clause 8.11 which is headed “termination by other Party and regulations 73 1 (A) of the PC Regulations”.

Clause 8.11.1 states “If before practical completion, the carrying out of the whole or substantially the whole of the uncompleted Works is suspended for the relevant continuous period of the length stated in the Contract Particulars by reason of one or more of the following events”.

First, looking at the Contract Particulars in relation to clauses 8.11.1.1 to 8.11.1.6 parties need to complete the Period of suspension, and if none is stated the period is two months.

There are 6 events stated: force majeure, Employers instructions under clause 2.13, 3.9 or 3.10, loss or damage to the works occasioned by any risk covered by the Parts insurance policy or by An Accepted risk; civil commotion or the threat of terrorism etc; an epidemic; the occurrence after the Base date of certain legislation and delay in receipt of any permission or approval for the purposes of Development Control Requirements.

If any of the above events occur then in compliance with clause 8.11.2, either party may upon the expiry of the relevant period of suspension give notice to the other that unless the suspension ceases within 7 days after receipt of that notice, he may terminate the Contractor’s employment under this Contract. Failing such cessation within that 7 day period he may then by a further notice terminate that employment.

In a further article, I will deal with the financial consequences of termination insofar as this affects the Employer and the Contractor. This article is a high level analysis of the termination provisions, which is a very serious matter in construction contracts and requires careful management, and our clients are recommended to take external advice before taking this step or being on the receiving end of a termination notice.

In a separate article I will deal with the termination provisions in NEC 4, and in the meantime would refer any reader to NEC Bulletin 54: Termination, attached.

Now one final point for the readers of this article to consider is that not all contractors will use the JCT/SBCC forms of subcontract and will their own bespoke subcontracts and the termination provisions in these need to be carefully considered, and you often see a provision called Termination at Will Clauses.

These clauses allow one party to terminate the agreement without needing to prove a breach the clause is often used by main contractors to terminate subcontracts at their discretion. However, this carries a significant risk for the subcontractor, as there may not be able to complete the job as planned, and may not have a guarantee of profit.

It is critical at tender stage to ensure that you have a Contract Review carried out by your own commercial managers by an external consultant to highlight clauses like this.

Next up I will look at the Subcontract provisions.

len@buntonconsulting.co.uk

07769 670089

FIS publishes short blogs by its Consultant Len Bunton on contractual and commercial issues he experiences when supporting FIS members and the wider community – it is designed to help FIS Members avoid common traps and build on the FIS focus on collective experience. The blogs are published fortnightly as FIS member only content and released to SpecFinish two weeks after publication.

Len provides an initial free one hour consultation to FIS members to discuss and review specific issues and to help develop a strategy to address. Should further advice and support be necessary, thereafter then Len will agree the necessary fee levels with each FIS member.

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