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Dan Sherlock

Partner - Sevenoaks and Ashford

23rd June 2022

Terminating a Construction Contract

Terminating a Construction Contract – get it right or you will pay dearly for your mistake

In May 2020 the Construction Leadership Council published ‘Best Practice Guidance’ encouraging collaborative behaviour between employers and contractors, specifically to take the heat out of COVID-related disruption.  Employers were encouraged to waive termination triggers, and many did.  But with cash becoming very tight and expensive to borrow I predict a trend away from this working culture.

I recently acted for an employer who had been told by their main contractor half way through a large project that the contractor company was effectively insolvent after diverting interim payments upwards of £300,000 and using it to prop up other unconnected projects. The rather alarming effect of this was that the contractor was unable to pay its sub-contractors and suppliers.  Astute readers might consider this to be quite a big problem, and they would be right.

Because the contractor made this disclosure informally and had not actually become insolvent within the definition given within the contract (for example 8.1 of the JCT Design & Build 2016 – by entering into administration or voluntarily winding up) an immediate termination on such grounds was not yet possible.

The clients had no intention of hanging around whilst they waited for the contractor to fold and so resolved to serve a termination notice under a different right and on grounds of default.  I had to advise that non-payment of sub-contractors and suppliers was not a valid ground as it was not a breach of any particular contract term.  It could be a breach if it caused delay as failing to proceed diligently is an actionable breach, but that had not yet occurred. If the employer has served such a notice and terminated for incorrect reasons then the employer would have themselves been in breach of contract and the contractor would have had a claim for damages.

The contract had varied the JCT pro-forma and made performance – or lack of it – defined by very specific KPIs.  Care needed to be taken to draft the grounds for termination by very specific reference to all those KPIs that were not met at the date of serving notice.

Notice of termination under all pro-forma contracts such as the NEC and JCT suites (and most bespoke ones) will require you to follow a stricter set of formalities so as to be correctly triggered under the contract.  This catches many an unwary developer since termination clauses demand strict compliance – they are never to be seen as a normal communication.

A Construction Contract can be terminated in a number of ways:

  1. Mutual agreement – this is often an overlooked option and might be easier than you think if parties have stopped effectively communicating as both sides might be looking for a convenient exit.
  2. Frustration – where events have created an inability for one or both sides to perform. It is right to add that this situation has to be exceptionally serious which is much rarer than you might believe.
  3. Contractual termination – be very careful to make sure one or more of the stated grounds to terminate can be proven to exist. The contract must also permit termination rather than restrict the innocent party to claims for damages only.
  4. Repudiation – a right outside of the written contract and at common law to terminate where the breach by the other side has been so serious as to go to the root of the contract. It must have extinguished most of the benefit of the contract to the innocent party, making it unfair for them to continue in their obligations. Be warned, wait too long and the right will soon evaporate. Also, some breaches are not so serious as to qualify and may create only damages claims. This is a very complicated ground to use and care must be taken.

You need to get this right as you might have just a brief period of time and the one chance to get it right.  Take appropriate advice and always follow the contract.

Contact our dispute resolution lawyers in Sevenoaks, Ashford, Brighton & Hove, and Uckfield

If you would like assistance regarding a construction contract or if you have questions regarding a dispute matter, please contact Dan Sherlock, Partner in Rix & Kay’s Dispute Resolution Team. Dan specialises in construction law disputes including Construction Act claims, and offers dispute resolution and reputation management advice that works to protect and recover what matters most to you, whether it involves business or personal property. Tel: 01732 441750 Email: DanSherlock@rixandkay.co.uk 

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