Quantity Surveyor Nick McGuire examines how to get the best outcome when a contract is brought to a premature end
Termination under a Construction Contract is an extremely onerous task.
It is often a minefield of notices which need to be issued, with associated notice periods, allowing the opportunity to rectify … followed by more notices and notice periods. All of this must be followed meticulously, to the exact wording and timing of the contract.
The advice given to many fledgling construction professionals of “don’t do it unless you have to, don’t do it unless you have the right to and always, always follow the provisions of the contract or the consequences are dire” rings true. But what are the consequences?
In simple terms a party that claims to have terminated the contract using a contractual termination provision – when they have no right or entitlement to do so – may in fact be in repudiatory breach of the contract. This is because the terminating party is evidencing they no longer intend to be bound by or perform their obligations under the contract.
What can the innocent party do in the event of such a breach? They have the option to either affirm and make the other party complete the contract, or accept the other party’s repudiatory breach preferably expressly in writing, or impliedly by leaving site and completing no further works.
The wronged party, in exercising the latter option, can expect to be paid for the contract works completed up to the point of the repudiatory breach. They may also be able to claim for damages, including loss of profit, on the remaining works. It is for this reason that if the contractual termination provisions are not followed exactly, then “the consequences are dire”.
Here’s an example:
Let’s say the main contractor is contractually entitled to terminate the employment of the subcontractor for a number of reasons, one of which is the failure to rectify notified defects within a specified period of, say, 14 days. The main contractor raises the notice, required by the subcontract, specifying the defects and notifying that the defects are to be rectified within 14 days. However, within that ensuing 14-day period the main contractor closes the site to all subcontractors, due to Covid-19, for example.
The 14-day period for rectification of the defects expires and the site remains closed. The main contractor may now believe that it has the contractual right to terminate the employment of the subcontractor at any time by further notice. The main contractor raises a further notice in accordance with the subcontract terms, terminating the employment of the subcontractor, and states that in accordance with these terms the subcontractor is not entitled to any further payment until the completion of the subcontract works by others.
By terminating the subcontract this way the main contractor has failed to consider the implications of closing the site and the impact this had on the effectiveness of the contractual termination provisions. The subcontractor may raise its concerns regarding the effectiveness of the termination notice and may also elect to accept the main contractors repudiation of the subcontract.
The case above is not completely hypothetical. At Cooper & Hall we recently assisted a client with a very similar problem to that described. We represented our client in a first adjudication, resulting in the adjudicator deciding a wrongful termination by the main contractor and a payment to the subcontractor for all the work carried out at the date of repudiation. We then assisted in a second successful adjudication, providing an honest and unbiased report to the adjudicator detailing the level of profit that the subcontractor would have expected to make if allowed to complete the remaining works.
A formal decision in relation to “wrongful termination” is very much dependent upon the facts of each case. We at Cooper & Hall have the necessary expertise and experience to assist and advise on matters of termination among other contractual difficulties. If you require any assistance with a matter of this kind, or any other contractual issues, please contact us. We will give you an honest appraisal of the options available to you.