As site shutdowns loom amid coronavirus measures, what is the legal position for those whose project never restarts?
As at the end of last week (which is a long time ago in covid 19 terms) more than three-quarters of small and medium-sized firms had already seen projects cancelled or delayed due to the coronavirus pandemic (according to the Federation of Master Builders). It is no surprise that those employers who have projects about to begin or in their early stages are looking to cancel. Especially where the project is consumer demand-led.
While suspension or postponement may be the more desirable option, sadly it is likely that terminations will be more common in the commercial real estate sector and beyond. This article looks at the termination options and the financial implications under JCT and NEC.
Termination provisions typically provide for three categories of termination: those driven by contractor default, employer default, or “no fault”.
The likely ground for termination in these current circumstances is likely to be the “no fault” ground although there may be a race to establish other termination grounds.
Under NEC3/NEC4, the client may terminate if an event occurs that stops the contractor completing the whole of the works by the planned date for completion and is forecast to delay completion of the whole of the works by more than 13 weeks
Under JCT clause 8.11 the contract can be terminated on notice of seven days where the works or substantially all of the works are suspended for the “relevant continuous period” set out in the contract particulars by reason of, among other things:
- Force majeure, or
- The exercise by the UK government or any local authority of any statutory powers that is not occasioned by contractor default.
The “relevant continuous period” where not specified is two months, although this is usually amended upwards.
Others have written for Building about what is meant by “force majeure” where there is no definition, as is the case in an unamended JCT (see Simon Tolson’s piece, “The coronavirus versus construction”, and “Now this is a pandemic here is the legal view”). The force majeure cause may have been overtaken by the exercise of statutory powers by the time you read this.
Each party’s termination rights or remedies under JCT are stated to be without prejudice to any other rights or remedies they may have at common law, unless this provision has been deleted or replaced.
Financially, termination under clause 8.11 results in a revised payment regime with the contractor obliged to provide an account as soon as reasonably practicable but no later than two months from termination. The account includes the value of works carried out to date of termination “as if the contract had not been terminated”. This hypothesis means that, for example, deductions should not be applied for anticipated breaches that might arise only by virtue of the termination itself – for example, failing to rectify defects unless they had, prior to termination, been the subject of the non-compliant/defective work regime. There is also included in the account the cost of materials and goods that the contractor had paid for or is legally bound to pay and the reasonable cost of removal from site.
In addition, the contractor is entitled to sums ascertained in respect of direct loss and/or expense under clause 4.20 – that is, accrued rights that have nothing to do with the termination. Under clause 8.11 there is no right to claim any losses caused by the termination.
Section 9 of NEC3/NEC4 categorises the grounds for termination differently from JCT. They divide into two – employer and contractor rights. However, within the employer (client) rights to terminate is found what might be categorised as “fault” and “no fault” grounds, with different financial consequences. Looking at the current situation the potential ground for termination, akin to force majeure, is clause 91.7, which provides that the client may terminate if an event occurs that stops the contractor completing the whole of the works by the planned date for completion and is forecast to delay completion of the whole of the works by more than 13 weeks. The change from NEC3 to NEC4 is the inclusion of the reference to “the whole” of the work.
In addition, the event must be one that neither party could have prevented and that an experienced contractor could not reasonably have foreseen or allowed for.
If the client does terminate under this provision, the contractor is entitled to payments due as normal and defined cost, including the cost forecast for removing equipment
This “event” may be wider than force majeure under JCT, especially where the latter has been given a narrow definition in contract specific amendments.
If the client does terminate under this provision, the contractor is entitled to payments due as normal and defined cost, including the cost forecast for removing equipment. It also includes a calculation of the fee percentage depending upon the NEC option used. For example, for options A to D the fee percentage is applied to any excess of the total of the prices at the “contract date” over the “price for work done to date”.
The challenge under any of these contracts is where the situation falls within a contractual no man’s land – where the circumstances do not quite fit into the above categories or contract provisions. In those circumstances, the client may well argue that the risk of lack of progress lies with the contractor. It is worth mentioning that JCT clause 8.2.1 provides that notice of termination of a contractor’s employment shall not be given unreasonably or vexatiously. This is also covered under NEC3 and NEC4 of the mutual trust and co-operation obligations. In the months ahead we may see these and the termination provisions tested as never before.
Lindy Patterson QC is a barrister, arbitrator and adjudicator at 39 Essex Chamber