Beware the Terminator

In his regular focus on potential contract issues, Len Bunton looks at the painful issue of termination by an employer

In the last edition of CABLEtalk I dealt with suspension of obligations under a building contract. If that was complicated, then my subject this time is termination, which is even more difficult, sometimes downright nasty, and to be avoided if at all possible.

To do this, I’m going to look at some of the issues concerning termination as set out in Section 8 of the Standard Building Contract with Quantities for use in Scotland, 2016 Edition, which I’ll refer to this as the SBC. You should be aware that the provisions I refer to are stepped down into the SBC sub-contract as well.

However, before I do that, I want to refer back to a previous article when I wrote about reading the small print in your contract or sub-contract, particularly to see if there are onerous termination provisions that you need to be aware of. One little beauty you’ll find states: “The sub-contract may be terminated at any time by the contractor.” So beware!

In my last article, you might remember that I also dealt with the yellow and red card system in the industry – and when it comes to termination, we’re definitely in red card territory.

SBC Section 8 deals with termination by employer and termination by contractor, so for starters I’ll look at what the processes and consequences are.

Termination by the employer

Frankly, this is the last thing contractors want to happen because the financial consequences are dire. However, it appears to be happening more and more because of market conditions.

Termination by the employer can happen due to the default of the contractor in five areas, and all before practical completion. I will identify these and comment on some of the practicalities.

If the contractor without reasonable cause wholly or substantially suspends the carrying out of the works, or the design of the contractors designed portion, then this is a default by the contractor and grounds for termination by the employer.

Bear in mind the point of suspending is different from the entitlement to suspend as set out in my last article. In my experience, the type of circumstances that can rise are where a contractor or subcontractor doesn’t turn up on site for a period and hasn’t notified the employer or the contractor.

The next default issue is where the contractor does not proceed regularly and diligently with the works or the design of the contractors designed portion. This is an old chestnut, but what does the expression mean?

I dealt with this issue in adjudication recently and basically the contractor argued that the subbie was not progressing the work every day and per the programme, resources were changing every few days, and there were areas of unfinished work that could have been completed. The answer to this is my other old drum I bang on about constantly – keeping good records. If you can’t progress your works then tell the employer – or the contractor if you’re a subbie – and give the reasons clearly.

Architects’ instructions

The next default issue is where the contractor refuses or neglects to comply with a notice or instruction from the architect to remove any work, material and goods not in accordance with the contract, and by such refusal the works are materially affected. Another difficult one, and here is why.

Let’s say that the architect asks for a brick wall to be taken down, and the contractor considers there is no justification to do so. What happens? The architect would need to give good reasons for why he thinks the wall should come down and be rebuilt. The contractor would need the same. Should the contractor get a second opinion, for reference later, from an engineer? I would certainly suggest record photographs or even a video of the work in question, for record purposes, and for future reference.

You can have a quick adjudication, but that could take 28 days, and how is the work in question affecting the progress of the works? It may well be that the contractor will have no option to demolish, rebuild and argue later, so not satisfactory at all.

The next default issue relates to non-compliance with Clause 3.7 or 7.1. Clause 3.7 relates to consent to sub-contracting. The contractor has to get the architect’s consent to sub-contract the whole or part of the works, but I can’t say that I’ve ever seen this to be an issue.

Clause 7.1 refers to assignation, and SBC states that neither the employer nor the contractor can assign the contract without the consent of the other. The next default relates to non-compliance with Clause 3.23, which relates to compliance with the CDM regulations.

So, having determined the default issue, what are the procedures to follow? This is something that the employer has to get spot-on. First, the architect has to give the contractor a notice specifying the default or defaults; these are referred to as ‘specified’ default or defaults. The contract will say at Clause 1.7 how notices are to be given, which you must comply with.

If the contractor continues a specified default for 14 days from receipt of the notice, the employer may terminate the contract on that date, or within 21 days from the expiry of that 14 day-period by a further notice. However, if the employer does not give a further notice but the contractor repeats a specified default, then upon, or within a reasonable time after such repetition, the employer may give notice to terminate the contract.

As I said above, it’s essential for these procedures to be followed to the letter as I’ve seen plenty of cases where it wasn’t carried out properly and it all just got into a complete muddle.

There are further provisions in relation to termination by the contractor. Clause 8.5 deals with insolvency of the contractor. This is obviously a horrendous situation as we in the industry have seen recently. In a future article, I might explore what happens when insolvency happens, but for now, if the contractor is insolvent then the employer may at any time by notice to the contractor terminate the contractor’s employment under the contract. Several issues happen thereafter, and I will deal with these when I look at the consequences of termination.

The contractor’s obligation to carry out and complete the works and the design of the contractor’s designed portion are suspended. The employer can take measures to ensure the site and the works are protected – insurance and security spring to mind – and materials are kept on the site.

Another and final ground for termination relates to the Corruption and Regulation 73(1) (b) of the PC Scotland Regulations, which is the Public Contracts (Scotland) Regulations 2015. The employer is entitled to give notice to the contractor to terminate the contractor’s employment under the contract, or any other contract, if the contractor or any person employed by him shall have committed an offence under the Bribery Act 2010, etc.

Default consequences

So the employer identifies the default or default(s), the notices are given and issued properly and the contractor has gone – so what are the consequences? There are plenty – and in my experience of insolvency it’s usually panic and mayhem. The project has to be built, but who will do it? Subbies are floundering because inevitably they haven’t been paid, and folk want to remove their materials because they’re owed money. Sometimes you just need to stand back for a few days to let matters settle down a bit.

The conditions say that of course the employer may employ and pay others to carry out and complete the works, and possibly the design for the contractor’s design portion (the latter of course can be a minefield). The employer takes possession of the site, and may use all temporary buildings, plant, tools and equipment, and site materials to complete the works.

The architect can direct the contractor to remove all temporary buildings and plant etc. A lot of this depends on how the employer decides how to complete the contract. There are a few options – bring in another contractor, who might engage the sub-contractors who were involved earlier with the first contractor, or bring in a construction manager and retain the original subbies. Some employers, like experienced property developers, have the in-house skills to manage the build-out of the job.

In terms of re-engaging the sub-contractors, that itself can bring many issues. They’ll be feeling mighty sore as inevitably they’ll be owed a lot of money by the contractor who’s gone. So there will be a re-negotiation of the subcontract sum, and I’ve seen instances where subcontractors try to recover some of their losses, which is inevitable in my opinion. The contractor has to pass all of the contractor’s design documents to the employer free of charge, and also to assign to the employer without charge, the benefit of any agreement for the supply of materials and/or for the execution of any work for the purposes of the contract.

In practical terms, what actually happens on the site is that a number of issues run in parallel. The site usually closes down and needs to be insured and secured, and any Construction Design & Management (CDM) Regulations or health and safety issues need to be dealt with. The design team would check the works to determine any defects or non-compliant workmanship that needs to be rectified at a later date, which of course carries a cost. Again, videos or photos are critical for future reference.

Financial position

The financial position on site needs to be established by the quantity surveyor, and often the technical representative of the administrator will be involved because in due course the administrator will want to try to collect some payment from the employer. The SBC sets out what the financial position is between the parties, with no further sums due to the contractor until much later on, when all the final accounting processes have been dealt with. In my experience, this can take months and, on occasions, years.

Following completion of the works and making good any defects, an accounting exercise is done within three months to determine the costs incurred by the employer in completing the works, including issues like additional professional fees, defects rectification etc. The amounts paid to the contractor also need to be established and what the cost of the works would have been had the contractor completed the works. So it really is a complex situation to deal with.

There is another provision in SBC at Clause 8.8 which provides for a position whereby if, within six months after termination, the employer decides not to have works carried out and completed, then he has to notify the contractor. Again, there is an accounting exercise required to determine the value of work at termination and any costs incurred by the employer. It then it has to be determined if any money is due to the contractor from the employer, and vice versa.

Commercial interests

In closing, I want to make a few points. It is clear, as I have stressed, that termination is a serious business and the paperwork and justification for it has to be right, because I’ve seen it successfully challenged so many times.

Inevitably, subcontractors will suffer in all of this. That’s why it’s very important for them to ensure they comply with the subcontract payment provisions and meet the dates. It’s also vital to submit fully detailed applications for payment, make sure they get paid on time and don’t let debt build up. In other words: Keep on top of their cash flow.

Post-Carillion, the industry, and particularly subcontractors, need a good shake-up about looking after their commercial interests more effectively and also in chasing retentions.

Termination is a horrible process and termination for insolvency is even worse. Times are not getting any easier in our industry, hence the need for much more focus on protecting your company’s commercial interests. It’s a drum I will keep banging

I’LL BE BACK...

In the next edition of CABLEtalk, Len will look at the causes and results of termination by the contractor.