This is my first article in my series of articles looking at various aspects of the JCT suite of contracts. In this article I explore the contract termination provisions open to the employer within the minor works, intermediate and standard forms of contract and what are the practical implications for employers and professionals.
Please note that this is not a legal commentary and we accept no responsibility for the advice contained within this article.
I am sure it will come as no surprise, but termination of any contract should only be considered as a weapon of last resort.
This is because there are often no winners, just stress and anxiety and the very act of terminating a contract often carries considerable risks to the party taking the action so careful consideration of all the aspects is required.
From an employer’s perspective issues to consider include: Do I have suitable grounds to terminate?, Who will complete the works post termination?, How much longer will it take and how much will it costs to complete?; and What are my risks by continuing with the status quo?.
In all my 20 year + working life I have only terminated two contracts so I would consider it a rarity. It can though be surprisingly tricky to undertake properly and to ensure the best possible outcomes.
What issues should be considered?
So faced with a contract which is not going well let us deal with the issues which need to be considered.
- Do I have suitable grounds for termination?
The grounds are set out within the section on termination and include insolvency of contractor and default by contractor. The defaults are then split down further and include suspension of the works, failure to proceed regularly and diligently, non-compliance with ‘CDM’ regulations concerning health and safety and in the case of the intermediate and standard forms of contract, assignment of the contract without the Employers permission. There are other provisions within the intermediate and standard forms, but I just want to focus on the main grounds.
Insolvency and suspension of the works require little analysis, but what about ‘failure to proceed regularly and diligently with the Works’? This is actually very tricky to determine as such a failure may actually be due to a host of reasons and the employer may be delaying the process through changes to the works or the operation of the payment provisions – I will cover payment provisions in a separate article, but maintaining cashflow is such a major aspect of all projects, this is often lurking behind most issues.
Also having been on the receiving end of some recent legal advice concerning this aspect it requires the employer to be very specific about what aspect of the works the contractor are failing to proceed regularly and diligently with, and crucially what actions are required in order to correct the default. It is simply no good writing to a contractor in line with the default notice provisions stating that the contractor is ‘failing to proceed regularly and diligently…’ and giving the contractor 7/14 days to rectify.
Anyone, pursuing such a route is opening themselves up to a counter claim once the contractor sets out his reasons for the delays and disruptions to the works and the loss he has suffered as a result of a hasty termination. You may also find that other claims materialise which the contractor had been sitting on and might have let go were it not for the termination.
The default notice therefore needs to clearly set out what actions are required of the contractor. This may include:-
- Preparation of a detailed programme setting out the works to completion
- Confirmation of key works orders
- Site management and labour commitments
- Confirmation of delivery dates from key suppliers
- Provisions of risk assessments and method statements
- Provision of design information (where there is contractor design)
- Mitigation measures proposed to address delays*
- Detailed explanation for delays incurred
*Mitigation is a requirement under clause 2.19.4. of the Intermediate Building Contract and clause 22.214.171.124 of the Standard Building Contract.
As you can see proof of action is paramount and in some instances, it might be reasonable to insist on speaking with third parties rather than receive filtered information via the contractor. This is a far better position that waiting for actions to materialise against a backdrop of poor performance, so such fore planning and proof of orders will provide some assurance that promises will be delivered.
Crucially this provides a clear set of tangible actions which need to be addressed within either 7 or 14 days whereupon the contract may be terminated.
This therefore requires a detailed knowledge and understanding of the project (and the contractor) to see what is happening and what corrective action is deemed necessary.
This shouldn’t just happen at the 11th hour, but should start from the outset so patterns of behaviour can be highlighted and indeed previous correspondence cited. The importance of good communication, no matter who is running the project, is really critical here. This should always be undertaken in writing so there is less scope for misunderstanding and ambiguity.
On smaller projects, it is common for there to be no professional involved, just the employer and contractor. It can therefore be a tricky balancing act, maintaining a positive ‘non-contractual’ relationship on the one hand and asserting ones position or dissatisfaction on the other, but to my mind the most important thing is to communicate clearly and consistently from the outset so there is a bank of data which can then be used to illustrate an issue and enforce an action. That can only really be in writing, but writing alone is no guarantee, it has to be good quality, ‘SMART’ communication.
As an RICS Expert Witness I routinely see chummy emails and Whats App messages and no real mention of the underlying issues so it is no surprise that parties can feel ambushed when things come to a head.
Arguably the worst situation to be faced with is a situation where a project is failing and through a break down in the relationship the reasons are not fully understood and therefore the rectification actions are not clear.
The other questions which need to be asked is ‘is my house in order?’. One needs to be very careful about pointing out problems with the contractor when his work has been frustrated by the actions of the employer. This may be from ‘late’ payments which have in turn affected the contractors cashflow and his ability to commit resources, outstanding information from the employer or his designers or significant changes to the works. Other delay events such as exceptionally adverse weather and the recent pandemic also need to be factored into considerations.
As you can see the position can quickly become very grey and not black and write so an intimate knowledge of the project, key benchmarks and the remaining works is necessary to maintain focus and objectivity.
The same approach should be taken where there are health and safety defaults.
On the subject of assignment, the JCT contract prohibit any assignment without the permission of the other party yet assignment issues have arisen in both of the cases I have been involved. In one instance the company name and ownership structure was changed to an anonymous third party (but with same company house number) and in the other the contractor asked for payments to be made to another company in his ownership. Such changes should be viewed sceptically and specific details requested notably insurances if the situation is allowed to persist.
If not then this can be grounds for termination.
- Who will complete the works post termination?
In both of the projects where the contracts were terminated we had an outline plan in place. On one of the project we first approached another main contractor, but the cost to complete was simply too high so the employer opted to pursue a construction management approach where they directly employed the tradesman and Record Associates acted as a construction manager and took responsibility for heath and safety, procurement of the remaining packages, materials procurement and general co-ordination. This offered less price certainty than a fixed price route, but the client decided to accept the risk in order to complete the works for a lower cost. The saving made was in the region of £80,000 plus VAT.
A similar route was followed with the other project but the employer took on a more hands on role.
Whichever way this needs to be a prime consideration and arguably needs to be at the back of one’s mind from the outset. Getting to know the sub-contractors and tradesmen should be routine as, apart from being polite and respectful, you never know how this might help down the line.
- How much longer will it take and how much will it costs to complete?
Another good question.
As a general rule, any project which is terminated might well cost more to complete and take longer to complete. This alone is explanation enough why this course of action is a route of last resort.
In terms of the costs to complete It is though important that one safeguards themselves as much as possible by avoiding any overpayments through the contract.
Accurate valuations of the works are therefore critical in this endeavour and often becomes a running battleground throughout many projects as a contractor will often seek to maximise the value of the works completed and minimise the value remaining. A detailed stock stake should be undertaken as part of the monthly valuation process, but this will need to be stepped up further when relations become stressed and a harder line needs to be adopted.
The key is to be fair, consistent and transparent from the outset. Underpinning this should be an accurate schedule of works (and costs) or bill of quantities against which valuations can be agreed. Without such a document then there is a clear and present danger of over payments occurring, which will weaken one’s contract position when the time arises.
This situation can be muddied further by lack of retention monies and advance payments.
All these points need to be addressed at the pre-contract stage when the contract is set up and then closely managed throughout the works.
- What are my risks by continuing with the status quo?.
It is clear from the above that two of the largest risks are that the works will costs more to complete and will take longer. By how much and by how long will be dependent on how well the project has been managed throughout.
Added to this this is also a risk of counter claim in the event of an ‘unlawful’ termination or claim for loss and expense associated with historic changes to the works, which had been supressed by the continuing contract.
All these risks can be mitigated through good contract administration or construction project management, but this needs to start with getting into the contract right in the first place and then robust administration thereafter.
The other risks which can be problematic concerns loss of guarantees and warrantees for the works, but these can often be preserved through the continuance of key sub-contractors. A word of caution though, this may come at a cost as the sub-contractors may not have been paid for the same works paid under the contract so additional payments may then be necessary. Oh the joys of contracting !
So, in summary the termination of a contract should be weighed up very carefully before progressing. Often this is the only tool in the box when the contractor goes into administration or liquidation.
To be in the best possible shape when one needs to take such action requires careful planning, which is based on solid contract management throughout.
As the years go by I am increasingly of the view that problems more often than not arise through poor communication so it is vital that clear communications are maintained throughout even if such communication is to express ones dissatisfaction or enforce the contract.
One of my most memorable projects was a warehouse development which was being constructed by John Sisk, a national contractor. Well they did everything possibly wrong and the project was headed in the wrong direction, but through persistent communication, often contractual, they understood our position and made the necessary changes to complete the project as a success.
Author: Julian Record is a Chartered Project Manager and Chartered Building Surveyor with over 20 years’ experience in construction project management and general building consultancy across the public and private sectors.