UK: The Show Must Go On - Contracting Strategies For The Impact Of Brexit (Part 2)

Change Is Inevitable, Cancellation, Termination And Descoping
Last Updated: 11 July 2016
Article by Steven Cannon

As the stories of internecine warfare within the political parties continue in the press, this is our first paper in a series on short/medium term contracting strategies following Brexit and its immediate consequences. Following the weekend it is clear that the direction of the construction and engineering markets remains as unknowable as the identity of the country's leadership, their likely policies, the source of their mandate and the attitude of their European and worldwide counterparts. Faced with this uncertainty, it seems likely that many purchasers of building and engineering services might want to hit the 'pause' button on their projects to consider whether to hold, scale back or even cancel them.

As promised this paper will consider the options available to purchasers regarding the suspension and, perhaps ultimately, the termination of existing projects, or the variation of them, perhaps so as to achieve completion of them more quickly or at lower cost. It will also consider steps and arguments that contractors may deploy to prevent such scenarios or to benefit from them. We will also look at the twilight zone in which contracts not yet fully signed off might have become effective through the conduct of the parties, a situation readily found by the highest courts when the evidence of agreement on all fundamental contractual terms points that way.

Let's Wait a Moment - Suspension

Without express terms permitting suspension, an Employer who simply suspends the performance of the works while he makes up his mind is living very dangerously. There is no common law right of suspension – English law will allow a wronged party to terminate a contract in the right circumstances but never to suspend (the exception being the statutory right of a contractor to suspend for non-payment under section 112 of the HGCRA, following the service of notice of intention to suspend,).

The consequences of wrongful suspension are potentially very serious indeed. If an employer wrongfully suspends the works, or tries to prevent the contractor from performing its works in some other manner (for instance by not handing over the site or by the slow release of design information) then, at the very least, the Contractor will be entitled to make a claim in damages and/or under the contract for the delay/disruption caused. In extreme circumstances, such a suspension/interference may give rise to the Contractor having a right to terminate the contract for breach. Not only will this defeat the very purpose of suspending, rather than terminating, it will have identical consequences to a wrongful termination by the employer (please see below).

Whether a contract may contain specific provisions for suspension by the employer depends upon the chosen contract form. For instance, under the JCT DB 2011 form there is no express power on the part of the employer to instruct a suspension of the whole or part of the works. Although the employer has limited powers to impose changes to access, working practices or sequencing of the works (clause 5.1.2) these powers are highly unlikely to allow a significant suspension of the works. The one possible exception to this is where the parties have agreed that Clause 2.4 applies, in which case the employer may defer the giving of possession of the site or relevant part of it for a period of up to 6 weeks. This would amount to a suspension (with consequences in terms of extensions of time and loss and expense being claimable by the contractor) if the project is at its very outset.

NEC3 Option A provides a broad power that "The Project Manager may instruct the Contractor to stop or not to start any work and may later instruct him that he may re-start or start it." Naturally the exercise of this power is a Compensation Event. Whether this power is intended to allow a suspension of all of the works for commercial reasons is unclear, particularly in circumstances where the parties are obliged to act in a spirit of mutual trust and cooperation with each other, and we anticipate that a contractor could argue forcefully that it does not. The broad nature of the drafting of this provision, the fact that it appears independently and outside the context of (say) the discovery of defective or dangerous works, the fact that there is a right to compensation for time/money and, perhaps most importantly, the termination provisions which provide for rights of termination where no instruction for a re-start has been issued within 13 weeks) strongly suggest that this is a full blown right of suspension for the benefit of the employer, albeit limited to 13 weeks in duration.

But I thought We Had a Deal!

Cancelling a project where the parties have been in negotiations but have yet to conclude a binding agreement should be relatively straightforward and risk free – generally there is no obligation under English law for parties to negotiate in good faith and a contractor which has invested considerable time and resources into a tendering process, but has yet to conclude terms, is unlikely to be able to force the employer to proceed to enter into a contract or recover its costs. The exception to this is where a contractor has supplied a benefit to the employer on a common understanding that some payment will be made. This is likely to be difficult to demonstrate in respect of participation in a bidding process.

The situation can be very different where, despite the parties having not yet signed a contract, the parties have been conducting themselves in such a manner that it would objectively appear that they are in contract together. A court will look at the detail of this conduct, and try to ascertain whether all of the terms essential to the formation of a contract have been agreed by the parties, to attempt to discover if a contract has been formed. These issues often arise where the parties began the works subject to a letter of intent or an early works agreement but then subsequently go beyond the relevant caps on time, scope and/or price without either party ceasing to perform the works. Over recent years the Courts have become increasingly willing to find that a fully binding contract has arisen, even in circumstances where the parties had used express language in their negotiations intended to prevent a contract from arising (such as the words 'Subject to Contract'). As the Supreme Court said in RTS v Muller (2010) where the parties had been conducted themselves as if they were in contract, any 'subject to contract' wording in the negotiations must also have been waived.

Letters of intent, early works agreements and contract formation have long proved to be sources of serious disputes, not only in respect of the unwinding of contracts or contractual negotiations, but also in respect of the valuation of works.

It's Over!

'Termination', 'determination', 'discharge for repudiatory breach' - whatever name you use attempting to pull out of a contract, any attempt can be incredibly risky. This is particularly so in circumstances where one or other party terminates for repudiatory breach or operates a contractual termination machinery so as to bring a contract to a conclusion for breach. We will deal with termination in the event of contractor insolvency in a later paper.

Termination for Convenience

Some forms of contract permit termination at the employer's convenience but a party considering whether or not to take such action better make sure that (1) it follows the contractual provisions to the letter; and (2) fully understands the hidden costs/potential liabilities of exercising such a right. The FIDIC forms (see for example Clause 15.5 of the Silver Book) do allow termination for convenience, albeit that the employer may not terminate in order to execute the works himself or to engage another contractor to do so. The costs associated with termination for convenience are somewhat high and unknowable – Clause 19.6 allows the contractor to claim all of its costs for work incurred to date in accordance with the contract plus "any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the works." The contractor, however, is not entitled to recover the profits he would have made had he been permitted to complete the works.

Neither the JCT nor the NEC3 terms permit termination for convenience. If an employer is determined to determine the contractor's employment he will need to fall on the mercy of the contractor and negotiate an exit. Unless the contractor has its own good reasons for getting out of the contract, it is likely that a significant ransom will be extracted for such a release.

Termination for Breach

Termination for breach is notoriously tricky and the issues to consider, and punishments for getting it wrong, are set out below. Often construction contracts will have provisions which will permit termination in particular circumstances and these often include "material breach" or similar grounds. These contractual methods often have complex notice provisions which must be followed to the letter and also dictate the parties rights against one another in the event of successful termination. In addition to these contractual rights of termination for breach, the innocent party may also be able to rely upon his rights under the common law – i.e. to treat himself as discharged from further performance under the contract by 'accepting' the guilty party's 'repudiatory breach'. A 'repudiatory breach' is a fundamental breach of a contract or one which goes to the very root or heart of it. Unless the contract excludes it, there is nothing to stop the innocent party from attempting to get the benefit of both processes, i.e. a contractual termination and a termination at common law, at the same time so as to hedge his bets.

The difficulties of terminating a contract for breach, and the consequences of getting it wrong (see below) have led to a huge quantity of case law over the years on the tests and hurdles faced by parties seeking to get out of a contract. This paper is not the correct place to look at this case law in detail but, as a snapshot:

A common test to see if the threshold allowing termination has been reached is to ask whether breach of one party deprives the innocent party of "substantially the whole benefit" of the bargain he entered into. This is a very high threshold and difficult to demonstrate – the Court will normally be asked to take into account a myriad of facts, circumstances and consequences and it is frequently difficult to predict the outcome of a decision on this issue.

Often the abandonment or renunciation of the contract by one party (i.e. walking off site, refusing to perform unless additional conditions are met by the other party) is easier to demonstrate as grounds for termination.

Sometimes a series of moderate breaches can, when taken together, reach the threshold of sufficient seriousness to constitute a 'repudiatory breach,' where none of them individually would do.

Sometimes further action must be taken by the innocent party to change a relatively minor fault into one which will permit termination. The classic example here is payment, where late payment in itself will not normally allow the creditor to terminate. However, the creditor may be able to manufacture a repudiatory breach if the creditor puts the payer on notice that he is in breach, and that should payment not be made within a (reasonable) further period, then the creditor will treat him as being in repudiatory breach – this is often known as 'making time of the essence'. If the creditor can get this process right he can change a breach which would not permit termination into one that will. However, this is still not without risk.

Finally, the law requires the innocent party to elect whether to "accept the repudiatory breach" and treat himself as discharged (i.e. terminate) or to "affirm the contract" (i.e. insist on the performance ) and claim damages instead. Most behaviour of an innocent party which tends to show that he is operating the contract (employers issuing instructions, contractors making applications for payment, etc.) will affirm the contract leading to a permanent loss of the right to terminate. Delay is also the enemy here, although careful attempts can be made to reserve the innocent party's rights while he decides how to act.

Getting it Wrong

The consequences of a wrongful termination are a little like playing Russian roulette. If you cease performing a contract because you think that the other party's conduct is so despicable that you ought to be released from your own obligations (i.e. he is in repudiatory breach) then, if a Court or adjudicator subsequently disagrees with you, by ceasing to abide by the contract yourself you will probably have committed your own repudiatory breach of contract. This will normally permit the other party to terminate on the basis of your own despicable conduct instead.

In terms of consequences, if an employer incorrectly asserts a right to terminate, and is himself found by the court to be in repudiatory breach then (subject to any limitations in the contract), he will be liable to pay for the work done to date, the cost of the contractor demobilising and disentangling itself from the site/the job plus the profits that the contractor would have made/overheads that would have recovered, had the contractor been permitted to complete the works. The employer would potentially be left with a partially completed project, a demobilised contractor and a liability to write a substantial cheque for both damages and court costs in the contractor's favour.

The secret is to make and to implement any decision to terminate a contract not so quickly as to do so before any right has arisen, not so slowly as to run the risk of any right expiring, balancing the commercial gains of successful termination against the potential losses of getting it wrong, whilst exercising the judgment of Solomon in assessing all of the surrounding circumstances and thereby accurately predicting the opinion of the court/adjudicator. This is often harder than it sounds.

Descoping – "I'll tell you what – we'll just omit the balance of the contract works..."

Whenever an employer wishes to cancel the works in difficult circumstances, someone will always come up with this ruse. While it is true that modern building and engineering contracts contain very wide powers for employers/their agents to change the scope of works by issuing a variation instruction (see for instance the definition of "Change" at clause 5.1 of the JCT DB 2011), and these powers appear unfettered on the wording of the various standard form contracts, the Courts have historically read those wide powers in a manner which does not permit a change to the very nature of the bargain between the parties.

There are three important points to bear in mind here:

First, where there is an insistence by the employer that the contractor obeys an instruction to fundamentally change the scope of works, so that the scope is now of an entirely different nature to that bargained for by the parties, such insistence can amount to a breach of contract by the employer, possibly a repudiatory breach. An omission of a very substantial amount of works, tantamount to cancellation of the project, might well meet this test; it is easy to imagine that a Court may have little sympathy for an employer who arrogates to himself the effective power to terminate for convenience when the contract says nothing of the sort.

Second, it is a well-established general rule that an employer may not omit works from a contract with the intention of doing it himself, or letting the works to another contractor, . JCT and NEC3 are silent on this issue and so are likely to be subject to this principle. The FIDIC terms make this position clear (see clause 13.1). By way of warning employers should be careful of communications, whether internal or external, which demonstrate that the true nature of the decision to omit is, in fact, to defer the omitted works, for instance by using terms like 'suspend' or 'mothball'. If the Employer then engages another contractor to finish the works when the economic outlook changes it may find itself subject to a claim from the first contractor for damages.

Third, employers should also be aware of the hidden costs of successfully omitting a significant chuck of works. In some circumstances it may have the effect of relieving the contractor of the effect of a period of historic delay (the major forms do have a provision for shortening the time for completion ) and a contractor will probably argue that it is entitled to be paid for any inefficiencies incurred/profits foregone as a consequence.

Conclusion

It is a risky strategy to attempt to substantially descope, suspend or terminate a live contract without a clear contractual right to do so, or without agreement from the other party. Any decision to do so will need to be balanced against the potential outcome of getting it wrong. However, this doesn't mean that it is not a valid strategy – many terminations have been ultimately agreed on a commercial basis following one party asserting a right to terminate, descope or suspend in circumstances where, on closer analysis, the existence of that right is suspect to say the least

In our next paper we will assume that contracts continue, and will look at the likely strategies of employers, contractors and sub-contractors relating to performance of the works and payment in these uncertain times.

This is the second in a series of updates - click here for the first article.

The Show Must Go On - Contracting Strategies For The Impact Of Brexit (Part 2)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.