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termination. SABIC v PLL and SCL33 was a case concerning termination of a building contract where progress had been slow from the outset. The parties entered into a supplemental agreement fixing a new completion date but progress remained poor and the employer gave the contractor a seven day warning notice that it was failing to proceed with the works with due diligence. One month later the contract was terminated and the employer completed the work itself, employing the same sub-contractors. The court concluded that ‘due diligence’ required a contractor to apply its efforts industriously, assiduously, efficiently and expeditiously to ensure the completion date required. If this was difficult to achieve, the contractor must still endeavour to reach it. By contrast, neither before, nor after the warning letter, had the contractor focussed his efforts on achieving the completion date, and this conduct justified the employer in terminating the contract. The Court noted that due diligence is not determined subjectively by reference to the individual contractor’s achievements (or lack of them): it is a contractual requirement with which the contractor must comply; and it is to be assessed in the light of the other contractual obligations that the contractor has undertaken.
22.2.5Providing notice of breach of contract justifying termination
A party wishing to terminate a contract should do so with care. This is because, if it gets it wrong – either because it does not have, or no longer has, the right to terminate or it does not exercise its rights properly – it could be in repudiatory breach itself, which then gives the other party a right to terminate instead. Which party is actually in breach and who terminates a contract will be very important as it will determine the compensation on termination provisions that will apply.
Some contract forms require two notices to be provided. First, a notice is serviced advising the other party that it is in default and notifying the need for remediation or possible termination. Second, after the required time period has expired, and assuming the right to terminate still exists, a termination notice is served. The two notices must be connected both in content and in time. The contractor must be notified of the alleged default and a link made to the relevant termination clause so that the contractor realizes it is a termination notice. A notice must be sufficiently clear and unambiguous so as to leave the recipient in no reasonable doubt as to how and when the notice is intended to operate. If it is, a court will ignore immaterial errors.34
22.3TERMINATION UNDER JCT CONTRACTS
As explained above, building contracts commonly provide for the contract to be brought to an end in various circumstances, some but not all of which concern a breach of contract by one of the parties. We now consider the ‘termination’ provisions of JCT SBC 11 and its related sub-contract JCT SBCSub 05. JCT forms
33[2013] EWHC 2916 TCC 10 October 2013.
34Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd [2013] EWHC 4030 (TCC).
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refer to ‘termination of the contractor’s employment’, presumably to differentiate termination under the agreement from common law termination.
22.3.1Termination by the employer under JCT SBC 11 clauses 8.4 to 8.8
Grounds for termination
Clause 8.4.1 entitles the employer to terminate the contractor’s employment for certain defaults, namely:
1.Suspension of work without reasonable cause.
2.Failure to proceed regularly and diligently.
3.Failure to comply with a contract administrator’s instruction to remove defective work, so that the works are materially affected.
4.Unauthorized sub-contracting or assignment.
5.Failure to comply with contractual obligations regarding CDM Regulations.
Clause 8.6 entitles the employer to terminate the contractor’s employment if the latter (directly or via employees) is guilty of corrupt practices relating to the obtaining or execution of contracts.
A contractor who becomes insolvent (as defined in clause 8.1) is obliged to inform the employer about it (clause 8.5.2). The insolvency entitles the employer to terminate the contractor’s employment by notice to the contractor (clause 8.5.1). However, JCT SBC 11 has abandoned the feature of JCT 98 according to which the contractor’s employment was automatically terminated in certain types of insolvency. Whether or not the employer terminates the contractor’s employment, there are important consequences which follow from the contractor’s insolvency (clauses 8.5.3.1–3): particular payment provisions apply, the obligations of the contractor to carry out and complete the works are suspended, and the employer is entitled to secure the site.
Procedures
Where the contractor is guilty of any of the defaults specified in clause 8.4.1, the contract administrator is to issue a written notice specifying the default. If the default is then continued for 14 days, the employer may within 10 days of the continuance terminate the contractor’s employment by issuing a notice to this effect. Furthermore, if termination does not take place on this occasion, any subsequent repetition of a specified default gives the employer the right to terminate immediately; there is no need (and indeed no power) to issue a second default notice.35 It may be noted that this ‘two-notice’ procedure is not required in cases of termination on insolvency or corruption.
It is expressly provided that a notice of termination is not to be given ‘unreasonably or vexatiously’ (clause 8.2.1). This would presumably prevent the employer from using a technical breach of contract that is causing no loss (such as
35 Robin Ellis Ltd v Vinexsa International Ltd [2003] BLR 373.
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unauthorized sub-contracting of some unimportant part of the work) to escape from a contract that had proved to be disadvantageous.
Any notice under clause 8 is supposed to be actually delivered to the contractor, or to be sent by registered post or recorded delivery (in which case delivery is presumed on the second business day after the date of posting). It has been held by courts in the Commonwealth36 that conditions governing the method of sending notices must be strictly complied with, if the notices are to be valid. However, it seems that the English courts take a more liberal approach and will uphold a notice that actually arrives, irrespective of the method used.37 Furthermore, a notice that fails to satisfy the contractual requirements may still be a valid notice of termination at common law (provided, of course, that the contractor is guilty of a sufficient breach to justify the employer in taking this step).
A good example of the last point is provided by a case in which main contractors sent a letter to labour-only sub-contractors, requiring them to comply with a term of the contract that dealt with the length of the working day. Eleven months later and without further warning, the main contractors sent a telex purporting to terminate the sub-contract for breach of this term. It was held that this telex did not comply with the contractual provisions for termination after due warning, since a reasonable person would have seen no connection between the two notices. However, it was a valid termination of the contract at common law.38
Consequences of termination of employment
Clause 8.7 sets out the rights and duties of the parties following a termination of the contractor’s employment by the employer. The position, briefly, is as follows:
1.The employer may employ others to complete the works, and may for this purpose make use of the contractor’s temporary buildings, plant, tools, equipment and materials.
2.All of the contractor’s equipment, etc. must be removed from the site, but only when the contract administrator has given the instruction so to do.
3.The contractor is required to provide the employer with two copies of all contractor’s design documents (if there is a contractor’s designed portion).
4.The employer may insist on taking an assignment from the contractor of all sub-contracts and all contracts for the supply of materials.
5.The contractor is not entitled to any further payment (including, it appears, payments that should already have been made by the employer39) until the works are completed by another contractor or until six months after the
employer decides not to complete them (clauses 8.7.4 and 8.8 respectively). The contractor is then entitled to the difference, if any, between what would have been earned by completing the contract and what the breach has cost the employer (the expenses incurred in completion plus any direct loss
36Eriksson v Whalley [1971] 1 NSWLR 397 (Australia); Central Provident Fund Board v Ho Bock Kee
(1981) 17 BLR 21 (Singapore).
37Goodwin v Fawcett (1965) 175 EG 27; JM Hill & Sons Ltd v Camden LBC (1980) 18 BLR 31.
38Architectural Installation Services Ltd v James Gibbons Windows Ltd (1989) 46 BLR 91.
39Melville Dundas Ltd v George Wimpey UK Ltd [2007] 1 WLR 1136.
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and/or damage). If, as is likely, the employer’s losses exceed what would have been due to the contractor, the latter is liable for the difference.
22.3.2Termination by the contractor under JCT SBC 11 clauses 8.9 and 8.10
Grounds for termination
Clause 8.9 entitles the contractor to terminate his or her employment on various grounds which may be loosely described as ‘defaults’ of either the employer or persons acting on behalf of the employer (other than the contractor). These are:
1.Failure by the employer to pay amounts properly due within the time limits.
2.Interference by the employer with the issue of any certificate.
3.Unauthorized assignment by the employer.
4.Failure by the employer to comply with contractual obligations regarding CDM Regulations.
5.Suspension of the whole or substantially the whole of the works for a continuous period stated in the Contract Particulars (where a default provision of two months is provided) by reason of one of the following specified events:
Contract administrator’s instructions dealing with discrepancies in contract documents, variations or postponement of work, unless these are caused by negligence or default of any statutory undertaker or of the contractor.
Any impediment, prevention or default by the employer, contract administrator, quantity surveyor or any other person employed by the employer, unless caused by negligence or default of the contractor.
Clause 8.10 relates to the employer’s insolvency. The clause is an equivalent to the provisions relating to contractor insolvency under clause 8.5. The employer has to inform the contractor about any of the different forms of insolvency set out in clause 8.1, and the contractor is entitled to terminate his or her employment.
Procedures
On all the above grounds, contractors may terminate their employment by a written notice delivered to either the employer or the contract administrator, or sent to them by registered post or recorded delivery. As with termination by the employer, the contractor must first (except in the case of the employer’s insolvency) give a ‘warning shot’.
The general requirement that notices shall not be given ‘unreasonably or vexatiously’ (clause 8.2.1) applies to termination notices of either party. In this connection, it is worth noting that all the ‘suspension of work’ grounds are also ‘relevant events’ in respect of which the contractor would be entitled to an extension of time (clause 2.29) and ‘relevant matters’ in respect of which the contractor is entitled to compensation for direct loss and/or expense (clause 4.24). The availability of these alternative methods of safeguarding the contractor’s
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interests might well make it seem unreasonable to terminate in any but the most serious of cases.
Consequences of termination
Clause 8.12 requires the contractor to remove all equipment and materials, including that of sub-contractors, from the site. This must be done with all reasonable dispatch, but with all necessary safety precautions. Moreover, the contractor must provide the employer with two copies of all contractor’s design documents (if there is a contractor’s designed portion).
As to payment, the contractor is entitled to:
1.The value of all work completed at the date of termination.
2.The value of all work begun but not completed at that date.
3.Any direct loss and/or expense arising out of other matters for which the contractor has a claim.
4.The contractor’s costs of removal from the site.
5.The cost of materials ordered by the contractor for the works which then become the employer’s property.
6.Any direct loss and/or damage caused to the contractor by the termination.
The contractor has to prepare an account with all the sums listed above. The amount properly due (after taking account of all amounts previously paid) has to be paid within 28 days after the submission of the account to the employer, without deduction of any retention money.
22.3.3Termination on neutral grounds under JCT SBC 11
There are circumstances beyond the control of both parties that can give rise to termination of the contractor’s employment. Surprisingly, perhaps, JCT SBC 11 has not collected all of these into a single clause.
Clause 8.11
Clause 8.11 of JCT SBC 11 deals with the situation where the contract work is suspended by certain causes that could be regarded as ‘neutral’, in the sense that they are the fault of neither the employer nor the contractor. In certain circumstances, this clause entitles either party to terminate the contractor’s employment by written notice which, like all termination notices, is not to be given unreasonably or vexatiously. The relevant circumstances are described in clause 8.11.1, and the clause applies where the whole or substantially the whole of the contract works has to be suspended for a continuous period stated in the Contract Particulars or, if none is stated, two months. The relevant circumstances are:
1.Force majeure.
2.Contract administrator’s instructions dealing with discrepancies in contract documents, variations or postponement of work, each of them as result of the negligence or default by a statutory undertaker (a term which is defined in clause 1.1 of JCT SBC 11, for example a local authority).
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3.Loss or damage to the works caused by a ‘Specified Peril’.
4.Civil commotion, the use or threat of terrorism or the thereby triggered activities of authorities.
5.The exercise of any statutory power by the UK government which directly affects the execution of the works.
According to clause 8.11.2, the third ground (specified peril) cannot be relied upon if the event has arisen out of the contractor’s own negligence or default. This includes negligence or default of those for whom the contractor is responsible (including sub-contractors and sub-sub-contractors). As to the procedure two notices are required: after the expiry of the relevant period of suspension, either party can give notice in writing that she or he may terminate the contractor’s employment under the contract. Then, after seven days, a notice of termination can be issued (clause 8.11.1).
The consequences of termination under clause 8.11 are very similar to those under clauses 8.9 and 8.10 (termination by contractor). However, the contractor is not entitled to reimbursement for any direct loss and/or expense arising out of the termination, except where it is caused by damage from a ‘Specified Peril’ which is itself the result of negligence on the part of the employer (clause 8.12.4.2).
Insurance Option C – Paragraph C.4.4 of Schedule 3
Where the contract consists of work on an existing structure and insurance option C is stated in the Contract Particulars (against clause 6.7) to apply, an additional ground of termination exists which overlaps rather awkwardly with clause 8.11. This ground is set out in paragraph C.4.4 of Schedule 3: if loss or damage to any part of the work is caused by a specified peril (whether or not due to negligence on the part of the contractor), then either the employer or the contractor may within 28 days serve written notice to terminate the contractor’s employment. The effectiveness of such a notice depends upon the very vague criterion of whether termination would be ‘just and equitable’, and the other party is given seven days to take this question to arbitration or court (whichever is stated in the contract to be the preferred dispute resolution procedure).
If the contractor’s employment is indeed terminated under this clause, the financial consequences from clause 8.12 apply. If it is not (either because neither party serves notice, or because a notice is successfully challenged), the contractor is entitled to be paid for necessary works of restoration and repair as if for a variation.
22.3.4Termination under sub-contracts
In general terms, the termination provisions of the JCT Standard Building SubContract (SBCSub 11) follow, ‘one step down’, those of JCT SBC 11, as regards both the grounds for termination and the consequences. However, there are some significant differences between main contract and sub-contract termination, the most important of which are as follows.