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Grounds for termination

Termination of the sub-contractor’s employment by the main contractor is provided for by clauses 7.4 to 7.6 of JCT SBCSub 11. The grounds are virtually identical to those on which the employer may terminate the main contract, the only difference being that it is the main contractor rather than the contract administrator who issues the first notice.

Clause 7.8 of JCT SBCSub 11 entitles the sub-contractor to terminate their employment if the main contractor is guilty of one of the following defaults:

1.Suspension, without reasonable cause, either wholly or substantially, of the carrying out of the main contract works.

2.Failure to proceed, without reasonable cause, with the main contract works so that reasonable progress of the sub-contract is seriously affected.

3.Failure to make payment in accordance with the sub-contract.

4.Failure to comply with the CDM regulations.

Two more grounds on which the sub-contractor may terminate are contained in clauses 7.9 and 7.10 of JCT SBCSub 11. The former provides for automatic termination of the sub-contractor’s employment if the main contractor’s employment is itself terminated. The latter sets out a right to terminate where the main contractor is insolvent.

Procedures and consequences

While the procedural provisions of JCT SBC 11 are followed to a great extent, there are minor differences (for example as to the period which must elapse between the two notices required to terminate). As to the financial and other consequences of termination, once again the JCT SBC 11 pattern is largely adhered to. Sub-contractors are well protected since they can claim any direct loss and/or expense caused by the termination (JCT SBCSub 11: 7.11.3.5). Clause 7.11.5 of the sub-contract sets out that (parallel to clause 8.12.5 of JCT SBC 11) the amount properly due has to be paid to the sub-contractor within 28 days after the submission of the appropriate account, without deduction of any retention money.

22.4TERMINATION UNDER NEC CONTRACTS

Termination under the NEC3 form is dealt with at clauses 90 to 93. The terminology used is that of terminating the contractor’s obligation to provide the works. If either the employer or contractor wishes exercise this termination it notifies the project manager and the other party giving details of the reasons for terminating. The project manager then issues a termination certificate if the reason given for termination complies with the contract provisions.

This provides 21 reasons for termination, 4 procedures and defines 4 separate amounts due on termination. An innovative provision of this form is a Termination Table which brings together these elements and explains which procedures and amounts due apply to which reasons for termination. This table shows different

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procedures and amounts apply depending upon whether the termination is exercised by the contractor or by the employer and upon the reason given. Interestingly, the table also provides specifically for circumstances where the employer terminates for a reason other than one of the 21 defined reasons, thereby in effect allowing for termination for convenience.

22.5TERMINATION UNDER FIDIC CONTRACTS

The FIDIC Red Book provides for termination under three separate parts, each with its own procedures and consequences for termination.

Termination by the employer is addressed under clause 15. Under clause 15.2 the employer may terminate if the contractor fails to provide a performance secutity, fails to comply with a notice to correct work, if the contractor abandons the works without reasonable excuse or fails to proceed after suspension. In any of these cases, the employer may terminate upon giving 14 days notice to the contractor. By contrast, the employer may terminate immediately if the contractor sub-contracts the whole of the works without consent, becomes bankrupt or insolvent, or gives or offers unlawful inducements or bribes. Additionally under clause 15.5 the employer may terminate for convenience at any time. This is said to be effective 28 days after a notice is given, but the employer may not terminate under this clause in order to carry out the works itself or to arrange for the work to be done by another contractor. Payment consequent upon such termination is calculated under clause 19.6.

In Obrascon Huarte Lain SA v. Attorney-General for Gibraltar40 the UK Technology and Construction Court considered a claim by the contractor of wrongful termination under clause 15 of the FIDIC Yellow Book 1999 edition, the wording of which is similar to the Red Book. The claims arose from a substantial contract for infrastructure works in Gibraltar. Finding for the employer, the court considered this clause and held that it must relate to more than insignificant contractual failures by the contractor and those which are actual rather than prospective. The period for a notice to comply must be reasonable in all the circumstances. The contractor argued that the breach of contract relied upon must be serious and one which is equivalent to a repudiatory breach of contract. The court rejected this argument and decided that determination clauses of this type are generally to be construed as permitting termination for significant or substantial breaches as oppose to trivial, insignificant or insubstantial ones. The court found that the employer was entitled to terminate the contractor’s employment when it did, in particular in light of its continual lack of expedition during the course of the contract, which had led to a two-year delay on a two-year contract, as against which there was a minimal entitlement to an extension of time.

Termination by the contractor is provided under clause 16 which lists 7 reasons for termination. Of those, if the termination is due to a prolonged suspension or bankruptcy of the employer, the termination takes effect immediately. For the other causes, termination takes effect after 14 days.

40 [2014] EWHC 1028 (TCC).

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Unlike other forms, FIDIC has a separate clause dealing expressly with force majeure. This is defined to mean an exceptional event or circumstance which is beyond a party’s control, which such party could not reasonably have provided against before entering into the contract, which, having arisen, such party could not reasonably have avoided or overcome and which is not substantially attributable to the other party. This might include war, acts of foreign enemies, riots, natural catastophrophies and the like. This clause, in effect, is an express provision for which at common law might have been termed frustration, as noted below. Clause 19.6 notes that if substantially all of the works in progress is prevented for a continuous period of 84 days or for multiple periods totalling 140 days then either party may give notice and the contract is terminated 7 days later.

22.6TERMINATION OF CONTRACT BY FRUSTRATION

This Chapter would be incomplete without at least some mention of a legal doctrine which may bring about the termination of a contract on ‘neutral’ grounds. This doctrine, known as ‘frustration of contract’, applies where, due to some external event, performance of a contract becomes impossible, illegal or radically different from what was originally envisaged. If this happens through the fault of neither party, and the contract itself makes no sufficient provision for what has occurred, it is possible that the law may treat the contract as terminated. In such a case both parties are freed from any further obligations under the contract. As for any losses already incurred, these will be allocated between the parties in accordance with principles contained in the Law Reform (Frustrated Contracts) Act 1943.

It is important to appreciate that this doctrine is very limited in its application. If the general law terminates a contract in this way, it interferes with the balance of risks between the parties. In the building and civil engineering fields in particular, the courts recognize that the kind of risks involved in such cases often fall naturally on one party or the other, and that to give the risk-bearing party an escape route would unfairly distort this balance. What is more, most standard form contracts make express provision for many of the eventualities that might lead a party to claim that a contract has been frustrated, and the doctrine cannot be used to override clear contract terms.

Two decisions of the House of Lords may be used to illustrate the doctrine of frustration and give an idea of its limits. In the first of these, Davis Contractors Ltd v Fareham UDC,41 the parties in 1946 entered into a fixed price contract for the construction of 78 houses in 8 months. The work in fact took 22 months to complete and cost the contractors far more than the contract price. This was due partly to bad weather and partly to labour shortages caused by the slow demobilization of World War II troops, both of which were unforeseeable. The contractors sought to argue that the contract was frustrated, and thus to claim a reasonable sum for the value of the work. However, it was held that what had happened was

41 [1956] AC 696.

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squarely within the risk assumed by the contractors, so that no relief could be granted to them.

The earlier case of Metropolitan Water Board v Dick, Kerr & Co Ltd 42 arose out of a fixed-price contract for the construction of a reservoir. The contract, which was entered into on the eve of World War I, provided that the work was to be completed within six years, but gave the engineer very wide powers to order extensions of time. After some 18 months, the government ordered the contractors to stop the work and to sell all their plant. This development, it was held, was sufficient to bring the contract to an end. It went far beyond the extension of time provisions in the contract, and made the project fundamentally different from what had been envisaged.

In Gold Group Properties Ltd v BDW Trading Ltd43 a housebuilding group argued that it had not proceeded with the development, and the development agreement was frustrated, because of a sudden fall in property values during the financial crisis in 2008. The result of this fall was that the properties were most unlikely to achieve the minimum prices set out in the agreement. They argued that, since that fall in the property market was not the fault of either side, it would be unjust to hold them to their literal obligations under the Development Agreement. The court decided that the facts fell far short of satisfying the legal doctrine of frustration, not least because both parties foresaw the possibility of a fall in property prices.

It must be recalled that recourse to the doctrine of frustration will be rare because ordinarily contracts will make express provision for consequences of unforeseen or force majeure events. In Alliance Concrete Singapore Pte Ltd v Sato Kogyo Pte Ltd 44 the initial quotation for supply of concrete included a force majeure clause but this was not included in the final contract. The contract was for supply of concrete to a project in Singapore. In its decision, the Singapore Court of Appeal held that the parties had expressly contemplated that the sand to be used in the cement would be sourced from Indonesia and therefore the contract had been fundamentally frustrated. At the time of contracting, Indonesia was the primary, if not the sole, source of concreting sand used in Singapore. Sourcing other sand, even at increased prices, did not become possible for months. Following Davis Contractors, the Court noted that the doctrine of frustration is premised on the rationale of fairness since both parties are discharged from their contractual obligations at the time of a supervening event if their obligations have been rendered radically or fundamentally different from what had been agreed upon. Literal impossibility is not required for a contractual obligation to be rendered radically or fundamentally different.

42[1918] AC 119.

43[2010] EWHC 323 (TCC), [2010] BLR 235.

44[2014] SGCA 35.