Just cause and impediment

You are being seriously messed about by your subcontractor. They don’t turn up when they are supposed to, they don’t have half the people they need, they hardly do any work and what they do do is a mess. And that’s not all - they leave rubbish all over the site, ignore safety regulations and get in the way of everyone else. What’s new?

You tell them in no uncertain terms that unless they sort themselves out, they will be off. They don’t sort themselves out and so you tell them to leave today and not to come back.

You bring in a new subcontractor who is a little more expensive but seems to know what the job is about. You breathe a sigh of relief and start working out how much you are going to claim from the first lot. But you haven’t heard the last of them yet. Next week you receive a letter from claims consultants accusing you of repudiation of contract and saying that unless you send a large cheque by return they will be starting an adjudication.

Repudiation is a big word, with big consequences. A party repudiates the contract if it makes it clear that it does not intend to perform it, or shows that it is incapable of doing so. The effect of one party repudiating is to give the other party the option of insisting that it gets on with the job and pays damages at the end for delay, defects and any other problems it has caused. Alternatively, the innocent party can call the whole thing off and bring in someone else, making a claim for the extra cost and other losses.

So when you receive the rather aggressive letter from the claims consultant accusing you of repudiation you feel the world has gone topsy-turvy. Surely it was the subcontractor who repudiated by performing so badly? How can someone think that you were the one who repudiated? All you were doing was acting responsibly to ensure that the job proceeded without more delay and quality problems.

All may not be lost. It is possible that the subcontractor’s performance was in fact so bad that it was reasonable to conclude that it really was incapable of doing the job

Most adjudicators have had to deal with this situation many times. A typical subcontract will provide a very clear process for terminating the employment of a subcontractor who is not performing. The JCT Standard Form of Subcontract, for example, sets it all out in clause 7.4. In brief, if the subcontractor stops work, fails to proceed regularly and diligently, ignores an instruction to remove defective work or does one of a few other things it is not supposed to, then the contractor can give a notice specifying the default. If the subcontractor doesn’t sort it out within 10 days, the contractor can terminate.

If, however, the contractor doesn’t send the notice, delivers it to the wrong address or doesn’t wait for 10 days then it can’t take advantage of the termination clause. By sacking the subcontractor it has made it clear that it doesn’t intend to comply with the contract terms. So there is a serious risk that the contractor (in this example, “you”) is the one who has repudiated after all.

The subcontractor will be claiming the full value of its work less an allowance for putting right the defects. It will also be claiming the gross profit that it would have made on the rest of the job and, as there were still several weeks to go before the finish date, it wasn’t actually late yet. It will be hoping for a large windfall.

All may not be lost. It is possible that the subcontractor’s performance was in fact so bad that it was reasonable to conclude that it really was incapable of doing the
job. If so, the subcontractor did repudiate and the action of kicking him off was simply exercising the option to end the relationship. But it is now up to you to prove that it was that awful. The subcontractor will argue that it had a bad week last week but, now that the team has all got over the flu bug, they are perfectly capable of getting on with it and of course would have made up the delay if only they hadn’t been thrown off the site. The adjudicator may believe them.

Clearly it is preferable to follow the terms of the contract. The breach that sets up the 10-day notice and contractual termination may not be hugely significant, but if you have followed the procedure the termination will be safe. Relying on the general law of repudiation will probably lead to a serious argument, an expensive adjudication and a very uncertain result.

John Redmond is a consultant at Osborne Clarke