You’re Terminated – Get Out of my Site!!

The award of a new construction contract normally generates feelings of happiness, hopefulness, confidence, and positivity, all the components of optimism.  With that feeling of optimism Employers, Engineers, and Contractors, embark on a new project intent on its success, and hope that things will go well.

Unfortunately, that is not always the case.  Some projects do go wrong to the extent that disagreements and disputes in construction contracts are relatively commonplace resulting in the regular implementation of the dispute resolution procedures inherent in most contract forms – Optimism evaporates, and pessimism descends.

Such pessimism may be exacerbated in more extreme circumstances where an Employer or Contractor elects to terminate the Contract – activities are halted, pessimism evaporates, frustration and anger prevail.

Sadly, in the current economic circumstances, termination of construction contracts seems to be on the increase with, Employers on the one hand, experiencing difficulties with financing, carbon neutrality and sustainability.  On the other hand, Contractors continue to face difficulties.  These include issues associated with the ongoing pandemic, changes necessitated through Employer implemented, climate related, design changes, a much-disturbed international supply chain, delayed payments and the associated unforeseen additional costs.  Additionally, in a worldwide effort to reduce carbon dioxide emissions, it seems inevitable that in the next few years, coal, oil, and gas related projects will be either made redundant, shelved, or terminated and that the industry will move towards construction of renewable energy sources and the decommissioning, dismantling, demolition, and disposal of fossil fuel related projects.

Similarly, as working from home is accepted as the new norm and the use of more sophisticated technology and artificial intelligence continues to grow, the need for new offices and city centre developments could decrease and some projects of that nature may be terminated on the basis that they are no longer economically viable.

Although an Employer or Contractor may consider that a clear contractual entitlement to terminate exists, they should recognise that termination is a risky process and very much an action of last resort.  A party contemplating termination should, in the first instance, consider the following; –

  • The situation that allows termination is that a breach of the contract has occurred and, having been notified in writing, a party has failed to remedy the breach.
  • That notification is a twostep process, contracts generally requiring that a warning notice be provided instructing that the breach be rectified within a stipulated time frame, failing which a second notice is required to confirm termination. Therefore, the first step is to ascertain that the first notice has been issued correctly, i.e., within the stipulated time, issued by and to the correct party and clearly identifying the complaint in terms of the contract – the admissible causes are generally set out within the provisions relating to termination – and confirming, prior to the issue of the second notice, that the grounds relied upon remain valid.
  • By way of exception, if the grounds for termination arise because of the other party becoming bankrupt, engaging in corruption, or assigning the contract without the consent of the other party or subcontracting the whole of the works, termination can be immediate upon issue of the first notice. Terminations due to bankruptcy / insolvency can be complex when compared with terminations due to default and thus merit separate consideration.
  • Is the breach of such a damaging nature to justify termination? Not every breach merits implementing the termination procedures and there are always departures from the strict interpretation of a contract that are simply not worth pursuing.
  • What kind of evidence is there to support the stated reasons for termination?  Taking legal and / or Expert advice at this point is advisable / essential to establish that your evidence is sufficiently strong to support your position – correspondence, photographs, reports, records, and, records.
  • What will be the impact of termination in terms of cost to either party?  For example, liquidated damages might not fall due if the contract was terminated before the due date for completion and any amounts due under the contract would be payable whilst the contract would specify the categories of loss or damage that would be recoverable by the terminating and terminated entities.  A risk analysis including legal advice should be undertaken, especially if another contractor is to be employed to complete the project.
  • Is it likely that the terminated party would dispute the validity of the termination notice and / or the valuation at termination and invoke the dispute resolution procedures and / or legal action?  Any such action would obviously attract potentially significant additional cost, especially if an award were to be made in favour of a wrongfully terminated party.
  • Will the termination have a negative impact on the terminating party’s reputation?  If so, tenders for completion of the existing project and any future projects could attract an additional risk premium either from Contractor to Employer or Subcontractor to Contractor.
  • Can intensified discussions / negotiations with the other party lead to termination being avoided? Potentially, this is the most attractive option, at least in terms of cost.

In relation to current and other potential terminations, the provisions allowing either party to terminate contractual arrangements are similar from one form of contract to the next but are not always standalone with certain jurisdictions, predominantly in the Middle East, not allowing the termination procedure to go ahead without such action first being endorsed via legal proceedings.

Whether that is the case or not, and having considered the issues set out above, the party implementing termination must take legal and / or Expert advice before embarking on such a drastic course of action.   The issue of the second notice, will most likely have a dramatic impact both practically and financially.  The provisions of the contract must be followed to the letter such that allegations of wrongful termination are avoided.

Having decided that termination is the route to be followed, an Employer under the provisions of different forms of contract, would generally be entitled to rely upon Contractor breaches in respect of; –

  • Failing to remedy the breach identified in the first notice.
  • Failing to comply with a binding or final and binding determination issued by the Engineer.
  • Failing to comply with a binding or final and binding decision of any DAAB (Dispute Avoidance / Adjudication Board).
  • Abandoning the project.
  • Indicating that it has no intention in continuing to discharge its contracted obligations.
  • Failing to commence and progress the project without delay.
  • Failing to perform instructed remedial works or to rectify defective and/or rejected work.
  • Failing to provide a Performance Security or to extend it in accordance with the requirements of the Contract.

To reiterate, prior to issuing the termination notice, it is essential that an Employer, relative to the breach relied upon, reviews the correspondence and other records to ensure that the notice and grounds for termination are fully compliant with the contractual requirements and that its evidence is compelling.

In issuing the termination notice an Employer needs to be particular in instructing the Contractor to vacate the Site and to identify any requirement for the assignment of subcontracts and actions required by the Contractor in the protection of life and property.

The assignment process should be conducted under a tripartite agreement between the Employer, Contractor and Subcontractor such that liabilities towards each other are clearly defined, particularly regarding any payments due to the Subcontractor.  Similarly, assignments in respect of any required supply contracts should also be agreed upon although many contracts do not make provision for such.

Most international forms of contract provide that after termination of the Contractor, an Employer retains a non-terminable licence to copy, use and communicate the likes of the design data, calculations, digital files, computer programmes and other software, drawings, manuals, models, specifications, and other technical documentation required for completion of the project.  Also, upon termination, the Employer, under some forms of contract (FIDIC Red Book for example) becomes entitled to use the Contractor’s Equipment, Materials, Plant and Temporary Works required for the project which, by reference to the popular definition of each of these terms, conveys that the Contractor leaves the project with its workforce but little else.

A time frame in which the valuation after termination for the Contractor’s default is to be agreed or determined is contained in most contracts and the amount due to the Contractor established inclusive of; –

  • The Permanent Works.
  • Goods.
  • Contractor’s Documents.
  • Additions and/or deductions including variations and claims.

That valuation should also include amounts which the Employer is entitled to recover from the Contractor, including amounts claimable against the Performance Security, the additional amounts, losses, and damages incurred in completing the project, and, if appropriate, liquidated damages.

Once the foregoing amounts have been established and the procedures relative to determinations and the issue of a final payment certificate have been followed, the Employer becomes obliged to pay any residual amount within a stipulated period but may withhold payment until amounts due to the Employer in respect of any additional costs, losses or damages associated with completing the project and liquidated damages are settled.

On the basis that it may not be able to establish the amounts due to or from the Contractor in advance of completion of the project the Employer may well be similarly unable to conclude the financial account within the time stipulated, the Contractor will not be paid and may wait for some considerable time before settlement of the account, another area for potential dispute.

After termination, the Employer may arrange for completion of the project and make use of the above documentation, materials and equipment.

As a very attractive alternative to the foregoing, most contracts include provisions that allow an Employer to terminate the contract, at any time, for its own convenience, although most forms qualify that entitlement to disallow the completion of the project by the Employer or an alternative contractor.  In other words, if the Employer thinks that the project is no longer fit for its intended purpose or no longer has the funds to facilitate completion, it can terminate its arrangements with the Contractor.

Having been provided with notice of termination on that basis, a contractor would become obliged to cease all work other than that specifically instructed for the protection of life and property and to otherwise demobilize.  As regards payment, the Contractor would be required to provide its valuation of the amount becoming due and including; –

  • Amounts associated with the work performed.
  • Cost of plant and materials ordered for the work either delivered or to be delivered.
  • Any other cost reasonably incurred.
  • Costs arising in the removal of temporary works and equipment and its repatriation.
  • Costs associated with the repatriation of the Contractor’s staff and labour.
  • Loss of profit.
  • Other losses and damages.

The Contractor would also be required to repay or credit any balance of any advance payment whilst the Employer would become obliged to return the Advance Payment and Performance Securities.

After submission of the Contractor’s valuation, certification and payment provisions are included in most contract forms, these, typically allowing generous periods to the Employer prior to payment becoming due.

The inclusion of terms allowing termination for the convenience of the Employer but not the Contractor within many contract forms may on the face of it, seem like a poor allocation of risk.  However, the Employer is the party who is paying for the enterprise and who has taken the financial risk in proceeding with the work albeit at a time when completion of the project would look towards compensating the Employer for that risk and projecting future profitability.

In the present day circumstances these projections may have changed to the extent that there may be no financial advantage in completing the project or because the initial price has been exceeded for whatever reason to the extent that the Employer simply does not have sufficient funds to complete it.  These circumstances would permit an Employer to terminate the contract for its convenience, agree an equitable settlement with the Contractor and avoid having to establish a breach and terminate the contract due to some, potentially contrived, default of the Contractor and the substantial costs associated with that and resulting proceedings.

Although a Contractor is not entitled to terminate the contract for its own convenience, most contracts do allow for termination by the Contractor where an Employer is in breach of its obligations and require that the Contractor notifies the Employer of its intention to terminate the arrangement in circumstances where; –

  • the Employer has failed to provide evidence of acceptable financial arrangements within a stipulated time frame.
  • a payment certificate is not issued within the stipulated time frame after receipt of an application.
  • the Employer fails to make payment within a stipulated time frame. after the due date for payment.
  • the Employer fails to comply with a binding agreement or a final and binding determination.
  • the Employer fails to comply with a decision of the DAAB.
  • the Employer substantially fails to discharge its contracted obligations.
  • the Employer fails to provide notification of the commencement date within the stipulated time frame.
  • the Employer fails to sign a contract agreement within the stipulated time frame.

In circumstances where the Employer fails to remedy the complaint(s) set out in the above notice, the Contractor is required to issue a second notice immediately terminating the contract.

Having terminated the contract, the Contractor is required to cease work other than that required in the protection of life and property and safety.  It is also required to deliver to the Engineer all documents, plant and materials which have been paid for and to remove the remainder.

Under most contracts after termination by the Contractor, it becomes entitled to payment of; –

  • Amounts associated with the work performed.
  • Cost of plant and materials ordered for the work either delivered or to be delivered.
  • Any other cost reasonably incurred by the Contractor.
  • Costs arising in the removal of temporary works and equipment and its repatriation.
  • Costs associated with the repatriation of the Contractor’s staff and labour.
  • Loss of profit.
  • Other losses and damages including Cost Plus Profit associated with any work instructed after termination.

The payment process is an abbreviated one in that there is generally no need for the Contractor to issue a statement with the Engineer issuing a payment certificate and the Employer thereafter affecting payment in accordance with the time frames stated relative to the final payment certificate.

Whilst the provisions relating to termination by a Contractor may be clear, the considerations first set out above should be deliberated in depth prior to implementing these provisions.  To further reiterate, prior to issuing the termination notice, it is essential that a Contractor, relative to the breach relied upon reviews the correspondence and other records to ensure that the notice and grounds for termination are fully compliant with the contractual requirements and that its evidence is compelling.

Contracts may also include provisions that allows the Contractor to invoke termination procedures in certain other circumstances such as; –

  • where a suspension continues for more than a stipulated period and applies to the whole of the works.
  • where an Exceptional Event or Force Majeure prevails for more than a stipulated period.
  • where performance is prevented from continuing due to the occurrence of events making progress impossible or unlawful.

In these circumstances, the procedures and payment terms generally follow those governing termination by the Contractor.

The above is a generalization of the termination procedures governing different forms of contract, but these procedures vary depending on which form of contract is employed and how any particular conditions may modify the general termination provisions.  Additionally, the foregoing may be only partially applicable to subcontracts.


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