Contracts often give employers suspension rights in respect of force majeure or emergency events. The contractor will not usually be entitled to suspend in these circumstances, but will be entitled to relief from its obligation to complete in the form of an extension of time – payment of costs is less common.
In certain jurisdictions, contracts will also give a party a right to suspend in the event of non-payment of a sum due. This has largely been in response to statutory requirements. For example, in the UK, parties can suspend performance of contractual obligations where a required payment has not been made under section 112 of the 1996 Construction Act. Parties are also entitled to payment for the reasonable costs incurred in exercising their right to suspend performance, and to additional time involved in suspending and re-mobilising. This statutory right expires on payment of the required sum.
These provisions address the indirect effects of Covid-19. If the employer’s business is struggling because of the impact of the virus, it may be unable to pay the contractor. These provisions enable the contractor to suspend work – and to limit its own costs – in circumstances where the existence of Covid-19 may not directly provide a remedy under the contract or statute.
How does termination work?
The longer-term impact of Covid-19 may lead to one or both of the parties to a construction contract concluding that the contract should be terminated, perhaps because there is no need for the project anymore.
If the parties agree, then the contract can be brought to an end on agreed commercial terms. If there is no agreement, then the position is more complex.
Common law termination
At common law, a party can terminate the contract in the event of a breach of a condition or an ‘essential term’ of the contract. The contract may specify which terms are ‘essential’.
A party may also repudiate the contract when by its words or actions it indicates that it is no longer ready or willing to perform the contract. If this is the case, the other party has the option to either insist on performance or to accept the repudiation and claim damages. Repudiatory conduct is a serious matter which should not be lightly inferred. It is tested objectively and can arise out of a single act or a course of conduct. Conduct may not be repudiatory if it is based on a good faith interpretation of contractual rights. The breaching party can also ‘cure’ conduct before repudiation is accepted.
These common law rights are based on a party being at fault. While problems caused by Covid-19 may be considered fault free, unless the contract provides an excuse to the contractor then the contractor will remain responsible for late progress, late supply of materials and equipment, missed completion dates and other practical effects of the pandemic. These ‘faults’ may give the employer grounds for termination.
Given the uncertainties around common law termination, most contracts provide for specific events and procedures. These invariably include serious breaches that would justify common law termination but can go further, to include events which are not the fault of a party.
Many contracts also allow the employer to terminate for convenience. This will usually be subject to proper recompense for the contractor, and subject to an obligation to exercise the termination right in good faith.
Contractual termination terms entitle a party to terminate where the other party fails to perform its obligations without excusable cause. For example, an employer may terminate where a contractor wholly suspends the work before completion without a reasonable cause. A contractor may have an express right to terminate where the employer fails to make payments within the time specified. The contractual provisions typically include a timetable for ‘warning notices’ and periods to cure failings.
The same considerations about fault and its effects apply to contractual regimes. However, it may be that the contract contains ‘fault-free’ events which would justify termination due to prolonged Covid-19 measures. Termination for convenience could also be used by the client – for example, if the project was no longer required.
A contract will be frustrated, and therefore set aside, where an unforeseen event – in this case, the pandemic – either renders contractual obligations impossible, or radically changes the principal purpose for entering into the contract.
Frustration has a narrow application, and will not operate to provide relief for the usual consequences of ill-advised contracts. It will not operate where there is a force majeure clause which addresses the event impacting the project. Frustration will not ordinarily provide relief where the event causes delay, unless the delay is for an unreasonable time.
Conceptually, frustration may operate to terminate contracts where the impact of the virus is such that performance of the obligations becomes impossible.
Risks of termination
Unless the parties agree, one of them will have to ‘call’ termination. Inevitably, that party will cease to carry out its own obligations under the contract and refuse to acknowledge its future obligations. This carries risk. A party claiming frustration can find itself in the same position.
Termination is a binary scenario – one party is right, and the other party is wrong. A party is either entitled to terminate or it is not. This means that:
- if the party is not entitled to terminate, the purported termination is itself a repudiation on which the other party can rely, notwithstanding any breach by the other party on which the terminating party may have tried to rely;
- if the party is entitled to terminate, the termination is valid notwithstanding any prior breach by the terminating party.
Where a party acts on a mistaken conclusion that the conduct of the other party is repudiatory, the consequences are profound. For example, in a situation where the contractor purports to terminate because it unreasonably perceives the employer’s conduct to be repudiatory, it is the contractor who may be held to have repudiated the contract giving rise to the employer’s right to terminate. The employer may seek damages for the extra costs of completion associated with a new contractor at a higher price, loss of profit and additional borrowing costs.
Relationship between contract and common law
Where there are termination provisions in the construction contract, the parties need to consider whether the contractual right excludes a common right to terminate as a matter of construction.