Termination & Suspension clauses in construction contracts

Legally speaking in a contract there is very small differences between Termination clauses and Suspension clauses. Although there is now a Statutory Right to suspend works in construction contracts for non-payment.

It is therefore imperative when agreeing a contract, particularly for the supply of goods and services a termination and suspension clause should be included, if for nothing else to ensure the reasons for suspension cannot be regarded as termination. As this would usually come about when there is some dispute and / or claim between the parties, this only seeks to reinforce the requirement for clearly defined suspension clauses, that may lead to termination, but not when first triggered.

Termination clauses in construction contracts

Standard form of contract will contain express provisions on the rights of either party to terminate the contract in defined circumstances. By way of an example, if the contract is in effect a Sub Contract and therefore a further party is the employer, an insolvency event of the employer would allow the contractor to terminate the contract with the sub contract.

Non-contractual rights to terminate

The contract is entered into and usually implies that the parties will diligently carry out the works being contracted for within prescribed timeframes and then the obligation on the other party would be to make regular payment on a fair and reasonable basis. Usually under the services being contracted for the party providing the services would be required to “carry out and complete” the services, The definition of complete will usually even be defined in its own right, so there is no ambiguity in this that can lead to dispute.

Even with these terms there can still be reasons why the contract would end up being terminated, such as the following:

Frustration

Frustration can occur when neither party has defaulted on the contract but circumstances have intervened to prevent the contract from being performed as originally intended making further performance of the contract is impossible, illegal or significantly different to the circumstances and understanding when the parties entered into the contract.

Where frustration occurs the contract automatically terminates and the parties are excused from their future obligations, although any accrued liabilities remain.

It is therefore vitally important to ensure (and in effect for both parties to agree) that frustration has occurred, justifying the termination. This would be to avoid by consequence of terminating for frustration to being in breach of contract, where frustration has not actually occurred.

By way of examples, where a contract becomes more expensive to perform through any number of issues which should have been considered as part of the negotiation of the value of the contract, this will not be a frustration event or where an event is set out as being possible and how it is dealt with is set out as an effective potential variation (change) to the contract this will not be a frustration event.   Case law gives some examples of events that are not frustrating events. The parties need to be wary of Force Majeure clauses and their potential overlap. This will be investigated further in a later post.

An event that could be regarded as frustration would be where an employer instructs an architect to design a house to be built by a Contractor on a piece of land that the employer is in the process of purchasing. If the sale of the land falls through, the contract would be frustrated as the design for will no longer be required.

Repudiation

Repudiation occurs when a party commits a breach of contract sufficiently serious that it entitles the injured party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract. If this is a material or anticipatory breach will depend upon the severity and effect of the breach, and whether it goes to the root of the contract.

Certain extreme types of breach will amount to a clear repudiation of a construction contract, such as:

  • Refusal to carry out work;
  • Abandonment of the site
  • Removal of plant by the contractor;
  • Employing other contractors to carry out the same work;
  • Failure by an employer to give access to the site.

These examples above are clear and unambiguous and grounds for repudiation. However other breaches may not be clear-cut and like frustration need to be clearly grounds to ensure that where the injured party treats the contract as repudiated as a consequence of the breach, which is not repudiatory; this will be wrongful termination and be a breach in its own right.

Whilst damages for repudiation may be higher than for other for other breaches, the parties should ensure they have that all important right to terminate for repudiation before doing so and where possible should try to utilise a more clear cut contractual right to terminate if available.

Further repudiation by one party will not by itself bring an end to further contractual obligations, the repudiation has to be accepted by the injured party. While there is no prescribed form of acceptance, it must be unequivocal acceptance by both parties. Where both parties accept the contract is repudiated, each side is released from performance of their respective unperformed obligations and damages are assessed under the normal rules and payable by the party at fault. The principle of these damages is to put the injured party in the same position they would have been in had the contract been properly completed.

However if the injured party does not accept the repudiation it “affirms” the contract is to continue, it is still entitled to claim damages for the breach but the contract will continue.

A further difficulty can be where the injured party instead of accepting repudiation, inadvertently “affirms” by their actions that contradicts acceptance or is equivocal in some way. This in itself could lead to the injured party being in breach of contract if it stops performing its obligations in the mistaken belief repudiatory breach has been accepted.

Just to confuse matters in this complex and complicated area of contract law, in some cases a breach may give the injured party the right to terminate for repudiation and a defined right under the contract.

In these circumstances the injured party does not necessarily have to elect to use one right or the other. However where exercising the contractual right is inconsistent with acceptance of repudiation, where the consequences of terminating under the contractual right are different or the response to the breach is less than unequivocal the injured party will be taken to have “affirmed” the contract and will have to rely on the contractual right rather than repudiation. As stated previously this could have consequences in relation to the level of damages for the breach.

Contractual rights to terminate

Termination clauses in contracts give parties right to terminate in certain circumstances and usually are in relation to breaches of specified contractual obligations as well as Force Majeure events which will be investigated separately.

Termination for convenience

Termination “at will” or “for convenience” wording can be inserted into a contract allowing one party to terminate without having to establish that some event has occurred or breach has been committed by the other party.

By way of an example, where an employer reconsiders the use to which land where they cannot secure financing for the whole of the project or cannot secure anchor tenants’ the contractor finds the project will be unprofitable or too risky, or the project has been suspended for a significant period with no prospect of it being recommenced could be grounds to terminate “at will” or “for convenience”. This could in effect reduce the possibility of dispute or claim later and the termination would be in the long term interests of the parties.

Traditionally this form of provision has been less common than those permitting termination for default in some of the un-amended standard forms. Employers in New Engineering Contract (NEC) 3 and the majority of Public / Private Partnerships (Private Finance Initiative and Private Finance Initiative 2) (PFI & PFI2) do have these rights usually. However, contractors and consultants are rarely given the right to terminate for convenience.

 Precedent and Compensation with terminate “at will” clauses

In these matters the only way to fully determine if the termination was legal and lawful is by having it determined by the courts. The matter could be subject to Adjudication, however the losing party would in all likelihood not accept the finding if they were to suffer financial loss.

As Public / Private Partnerships are a concept that originated in Australia, historically the English courts have looked to the Australia system for guidance around  termination “at will” or “for convenience.” It has been established through case law that in the absence of sufficient wording, it will be a breach of contract to exercise a termination for convenience clause simply for the employer to obtain a better price to complete the works from another contractor. This would be consistent as in effect it’s a higher form of “subby bashing” if we take the view the Employer and Contractor as effective in a Sub Contract arrangement. Further it has been established that a contract may provide no express limitation on when, or in what circumstances, a termination for convenience clause can be operated.

To be effective, termination for convenience clauses need to provide for contractor compensation. Standard forms do contain these clauses and there is a precedent that where compensation is provided for in the contract in clear, unambiguous terms it will usually be enforceable.

The key phrase there is “clear wording” as this will be required before a termination for convenience clause can be fully effective. Unreasonable provisions, such as allowing the employer to pass work on to a third party, must be stated in clear, unambiguous terms otherwise they will be unenforceable.

The courts have also determined that the use of omissions clauses to tackle bad bargains cannot be used as an omissions clause to get out of what it now considers to be a bad bargain. It is further doubtful (although not tested) if this type of clause could be relied on exclusively by an employer to switch contractors in the event of dissatisfaction with the current contractor’s work.

Case law precedent warns us that even if the contract does contain an express provision dealing with termination for convenience trivial breaches may preclude termination and harsh objectives need clear wording otherwise termination will be seen as an intrusion on the contractor’s right to finish the work. It has further established that work transferred between contractors is questionable and an employer cannot use an omissions provision to get out of a bad bargain, and it is also doubtful it can be used if the employer is dissatisfied with a contractor’s performance a termination clause should provide for compensation to avoid being treated as unenforceable because it is unfair.

Suspension clauses

As stated at the outset there is a very close relationship between suspension and termination. Dependent on how the clause is drafted the end result of a suspension clause may be much the same as a termination clause in that either party will have the right to terminate the contract at the end of the agreed suspension period where the reason for suspension has not been removed

The issue is that when negotiating terms and conditions of a contract in an effect to ensure the termination clauses are consistent and adequately protect both parties, defined suspension terms tend to be overlooked.

Just as with termination clauses, suspension can take many forms and the onus is on what is agreed between the parties. It should be stated that the terms and mechanism for suspension should be well defined to ensure that this in itself does not result in a dispute.

One of the key reasons to suspend previously was for non-payment; this is now a statutory right with the changes in the Local Democracy, Economic Development and Construction Act [2009].

Broadly speaking the justification for suspension clauses will be similar to termination. Suspension could be a sensible mechanism for example to be used by one party where the scope and proposed outcome of a project has changed significantly but without the constraint to allow it to be developed. A suspension here for a mutually agreed timeframe would benefit both parties, if kept within certain boundaries. There could for example be agreement on a demobilisation and remobilisation cost during the suspension. This would be on the basis all parties have the desire to complete what was started, but just to a different scope. An example would be where historical artefacts are discovered that mean a proposed development has to have a significant re-design to allow for this. It would be far more sensible to suspend the works while the optioneering takes place that to let design to continue where it may only be subject to further re-design.

However it must be considered that conventional wisdom is that in the absence of an express contractual term it is difficult to argue that a general right to suspend exists in law as the courts have consistently refused to recognise such a right, save for the statutory provisions. This makes a defined suspension clause a sensible inclusion to benefit both parties.

When this clause is drafted however care needs to be taken to ensure that lifting the suspension is dealt with as well as the practical consequences of suspension and how long a contract can be suspended for before termination may occur

 

In conclusion as this is a complex and subjective area on contract law, where using these clauses you must proceed with caution. Where these clauses are going to be invoked you need to be absolutely clear that you strictly follow the contract’s notice and procedural requirements.

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