Contract termination: Breaking up isn’t always hard to do
Termination, much like a messy break-up, is something that parties to a construction contract often seek to avoid at all costs, even when projects are suffering as a result. However, recent statistics show that the average value of a construction dispute in the UK has increased by more than 35% since 2015 from approximately £20m to £27m, according to Arcadis’ Global Construction Disputes Report 2017: Avoiding the Same Pitfalls.
Two chief causes of the increase were found to arise from a failure to: properly administer the contract; and understand and or comply with contractual obligations.
Termination is fertile ground for potential disputes. It is a key contractual remedy that is often deployed too late, without proper prior consideration, and often in breach of the contract procedure. In such circumstances, it is highly likely to incur a claim from the bruised ego of the terminated party. However, if undertaken correctly, this remedy should be more “conscious uncoupling”, à la Gwyneth Paltrow and Chris Martin, than a costly break-up. After all, in its ideal form, termination should involve parties parting amicably, retaining mutual respect.
Termination, much like a messy break-up, is something that parties to a construction contract often seek to avoid at all costs, even when projects are suffering as a result. However, recent statistics show that the average value of a construction dispute in the UK has increased by more than 35% since 2015 from approximately £20m to £27m, according to Arcadis’ Global Construction Disputes Report 2017: Avoiding the Same Pitfalls.
Two chief causes of the increase were found to arise from a failure to: properly administer the contract; and understand and or comply with contractual obligations.
Termination is fertile ground for potential disputes. It is a key contractual remedy that is often deployed too late, without proper prior consideration, and often in breach of the contract procedure. In such circumstances, it is highly likely to incur a claim from the bruised ego of the terminated party. However, if undertaken correctly, this remedy should be more “conscious uncoupling”, à la Gwyneth Paltrow and Chris Martin, than a costly break-up. After all, in its ideal form, termination should involve parties parting amicably, retaining mutual respect.
Pre-termination process
At the outset it is essential to consider the practical requirements of termination and your objectives. This will, of course, depend on where you stand in relation to the contract; for example, a key consideration for an employer may be how to mitigate delay or disruption, while a key consideration for a contractor or consultant may be outstanding payments.
At this stage it is crucially important that, in discussions with third parties, you express no binding commitment or intention of terminating. If you do and the other party becomes aware (as so easily happens in an industry where everyone knows everyone) you risk a claim for renunciation, ie demonstrating an intention to no longer be bound by the agreement. This could result in a claim for any unpaid fees and damages, including loss of profit.
Prior to the date when termination becomes effective, no third party should carry out the services being provided by the contractor/sub-contractor/consultant under the terminated contract, including staff in your own organisation. This risk applies equally on mothballed projects where services have been suspended and the employer now plans on recommencing work while terminating certain project members.
Remember that during the period of suspension the services have not necessarily come to an end; therefore, allowing a third party to carry out services during the suspension or prior to the date of termination may arguably evidence an intention by the employer to no longer be bound by the agreement.
The contractual process
The next key issue is the contractual process for termination. Mistakes at this stage will make a potential claim more likely. The procedure can vary considerably, eg the JCT, NEC and FIDIC forms of contract all vary in terms of termination processes, as do bespoke contracts. It is also important to consider the notice provisions, including how notice of termination is given and how/when it will be deemed served, eg clause 1.7 of the JCT.
Carefully consider the drafting of the notice(s) of termination and mirror the language of the contract. For example, if there is a defined notice period prior to termination (eg 14 days’ notice in writing) the notice should not suggest that termination is effective immediately. While this may seem obvious, simple drafting errors are surprisingly common and can be used to demonstrate a breach of termination procedure.
Another risk arises from pre-meetings/calls giving informal prior warning of termination. It is essential that any notice of termination is given in accordance with the contract and it is best to save any courtesy “it’s me, not you” discussions until after this has been served.
It is also advisable to diarise the date termination is effective. Remember that from the date notice is given until the date of termination, the contract remains in place and the contractual obligations continue to apply to both parties.
A practical suggestion to avoid any later dispute as to when termination took place is to issue a second letter providing confirmation on the effective date. This also serves to remind both parties of their obligations following termination and encourages the terminated party to flag any breaches it alleges have taken place during the period.
Risks and rewards
If termination is used as a considered step in accordance with the contractual regime, it can be a remedy which benefits both parties and the project. However, it is not without risks and the unwary will expose themselves to a claim if they do not consider the risks at each stage of the termination process.
Mark Breslin is a senior associate and Rebecca Rous is an associate in ICE Disputes, London at CMS UK LLP
