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Henry Sherman introduced a series of articles on the implications of the downturn by explaining the limited options open to an employer who wants to 鈥渞etreat鈥� from its building project in order to minimise expenditure (17 October, page 58). But difficult times also aggravate problems with a contractor鈥檚 performance of its obligations under the contract and we have seen an upsurge in enquiries about an employer鈥檚 ability to terminate on the basis of a contractor鈥檚 non-performance.

The first step is carefully to consider the termination provisions of the relevant contract. Even JCT forms differ. The standard building contract says the works must have been 鈥渨holly or substantially suspended鈥�, the contractor must have failed to proceed 鈥渞egularly and diligently鈥�, it must have failed to remove defective work and 鈥渂y such refusal or neglect the works are materially effected鈥�, or it must have breached certain specific provisions of the contract.

The words quoted indicated the perils of termination under the standard contract: an employer鈥檚 view of what is regular and diligent progress when it is waiting to move into a new building may be somewhat different from a contractor鈥檚 view when it is struggling with the insolvency of two key suppliers. If the adjudicator decides that they prefer the contractor鈥檚 view, then any termination by the employer would wrongfully entitle the contractor to substantial damages. More about that below.

Under the major project construction contract, the employer may terminate for any 鈥渕aterial breach鈥�. This includes a wider menu of defaults and avoids the uncertain wording of the standard building contract, making the employer鈥檚 position less precarious.

Other forms, as Henry has highlighted, contain provisions for termination on the grounds of contractor default but also allow the employer to terminate 鈥渁t will鈥�. Cleverly, the GC/Works contracts state that if the employer purports to terminate for breach but gets it wrong, the employer shall be deemed to have decided to terminate at will. In other words, the contract protects it against wrongful termination.

The second step is then to look at the exact mechanism for termination. It is vital that any procedural requirements contained in the termination provision are strictly observed, otherwise, the termination may be wrongful. So time periods must be strictly counted and requirements for service of notice under the contract (for example, by recorded delivery or to specific addresses) must be observed. Always double check.

The third step is to consider and plan for the consequences of termination. Many of these may be so intractably difficult that it might be better to reconsider the prudence of terminating at all. For example, if the contractor is carrying out design, is it complete? If not, what are the consequences of 鈥渟plit鈥� responsibility? Any incoming contractor will need to pick up the works in the state in which the outgoing firm leaves them. In addition to the risk of split responsibility, how will the incoming contractor estimate the price given that it will not easily be able to assess what is complete, especially in building 鈥渟ystems鈥�?

Has the contractor delivered the collateral warranties required of it and its subcontractors? It certainly will not be delivering them after termination

Are there any critical pieces of plant and equipment that cannot easily be obtained by a replacement contractor? Are there any items on long lead times which will be hard to secure afresh? How much delay will be caused by bringing in a new contractor?

Are consents required from funders or other third parties that may not be forthcoming? Has the contractor delivered the collateral warranties required of it and its subcontractors? It certainly will not be delivering them after termination 鈥�

And finally, damages. The law does not allow the employer to profit out of termination and the courts have evolved strict rules to ensure that this does not happen. The recent Multiplex litigation noted that Multiplex鈥檚 new steelwork subcontractor charged less to fabricate the steel than Cleveland Bridge, and Multiplex had to give credit to Cleveland Bridge in the final calculations for the saving that achieved.

Obviously, this is particularly likely in a falling market. Another trap relates to delay: the employer鈥檚 remedies for delay under the contract are fixed by the rate of liquidated damages and if that rate does not represent the employer鈥檚 true loss, it cannot use its entitlement.

So sometimes, even though termination may be an option, it is better to grin and bear it 鈥�