With HS2 up in the air, it’s wise for those in the supply chain to review their contract position ahead of possible cancellation
News of the government’s review of HS2 has been somewhat overshadowed from public gaze by the ongoing Brexit turmoil. Nevertheless, it has sent shockwaves through the construction industry. With the project’s total cost having risen from £62bn to between £81bn and £88bn, transport secretary Grant Shapps recently announced that the first phase of the project will be delayed by up to five years, shifting the projected completion date to between 2028 and 2031. Refusing to rule out a complete cancellation, he said the review would put the government in a better position to make a “go or no go” decision by the end of this year.
While the government has said work on HS2 will continue in the meantime, suppliers should be considering the potential ramifications of a delay or, worse, cancellation of the project. So, what are the key contractual considerations?
Consider the costs you will incur in bringing your subcontracts to an end, and whether you are required to make payment under your subcontracts before you receive payment under your head contract
Termination and its consequences
Consider the termination rights under your contract. These will not necessarily be back-to-back if you are a subcontractor or secondary-level consultant on the project. In addition, look at the required notice periods for termination. Costs will be sustained in terms of demobilisation, reallocation of staff, and so on. Loss of profit may not be recoverable but it is a key aspect to check carefully, given the potential impact on your business. As all losses will need to be properly evidenced, you will need to ensure you maintain an accurate record of all costs and consequences that arise from termination. It may also be prudent to appoint (at an early stage) a quantum expert to provide you with a steer on costs.
Should delay or cancellation of the project lead to non-payment, consider your recovery options
While the government is carrying out its review, in the meantime you are likely to be contractually obliged to continue to deliver on the obligations in your contract, as will your client. During the uncertainty, if your client asks you to slow down, change your deliverables or even suspend services, ensure this is carried out in accordance with your contract, with notices provided in the prescribed form and time periods pursuant to your contract. Consider the remedies available to you if your client does not comply with its obligations, such as damages for breach of contract, and make sure all issues are documented in correspondence with your client.
Read more on HS2
NEC compensation events
NEC contracts require that you keep up-to-date with the management of your contract, for instance in terms of serving compensation events and making entries in the risk register, providing quotations for variations and submitting your programmes and budgets. Does the recent news itself warrant an early warning notice under the NEC? If so, ensure you have your notices ready before the contract is terminated to avoid “disallowed costs”. This will put you in a much better position in terms of negotiation and mitigating potential loss.
What are your suppliers’ rights against you, or your rights as a subcontractor? As contracts may not be back-to-back, you will need to factor in any contractual rights against you, as well as your contractual rights against the government. Do your subcontracts allow for suspension or termination if the head contract is suspended or terminated? You will need to consider the costs you will incur in bringing your subcontracts to an end and whether you are required to make payment under your subcontracts before you receive payment under your head contract.
Monitor late or non-payment
The uncertainty may mean payment is delayed or withheld, so it is prudent to ensure Construction Act notices are served in accordance with the act and the contract, including dealing with failures to issue payment notices, default payment notices or pay less notices. Should delay or cancellation of the project lead to non-payment, consider your recovery options, such as preparing a letter before action and/or commencing “smash and grab” adjudication.
Intellectual property rights
In the event of termination, you will need to consider your position in respect of your intellectual property rights and ongoing confidentiality obligations. Are you entitled to use the documents and materials produced in connection with the project? You will need to consider too how your contracts deal with jointly developed intellectual property and what is your suppliers’ entitlement to these rights. You will also need to manage confidential information, including return and destruction as required under the contract.
It is understood the government’s review should be completed and a report issued this autumn. Given the tight timetable, it would be wise for those affected to be thinking through now the likely commercial and legal implications of termination or a change in direction. Contingency planning is difficult when you don’t quite know what you are planning for – deal or no deal? However, evaluating the legal ramifications of cancellation of HS2 and protecting your position under your contract would seem sensible whatever the outcome of the review.
Sheena Sood leads the construction, engineering and infrastructure team at Beale & Co