If the parties to a building contract get to the point where one (or even both) of them wants to terminate the contract then, usually, something has gone very wrong.
Each individual construction or engineering contract has its own requirements for termination, so this Ask the team assumes that:
- The parties have agreed and signed a JCT Standard Building Contract, 2005 edition, Revision 2 2009 (SBC05).
- The employer wishes to terminate the contractor’s employment under the building contract because the contractor has all but left the site, without good reason, and the works have nearly ground to a halt.
- The employer has decided to use the contractual right to terminate in the SBC05, rather than any common law right it may have to treat the contract as repudiated.
Three key requirements
Any formal termination of a contractor’s employment under the SBC05 must be carried out using the correct contractual notices: a first notice, which informs the contractor that it is in default, and a second notice, which terminates the contractor’s employment if the default has not been remedied.
The SBC05 includes three key requirements that apply to all notices under section 8 (clause 8.2, SBC05):
- Vexatious or unreasonable notices are prohibited.
- Termination takes effect on receipt of the termination notice (the second notice).
- Both the first and second notices must meet the specific requirements of clause 1.7.4 of the SBC05, as well as the general requirements of the rest of clause 1.7.
Read all of clause 1.7 before you send a notice: for example, if you use registered post, note the deeming provisions in clause 1.7.4. A two day delay caused by a deeming provision may be critical in the context of termination, where certainty of timing is vital. It is usually best practice to serve such notices by hand (often using a reputable courier company).
Identifying the specific default
Whatever form of contract the parties use, one common mistake that often leads to a dispute is a terminating party’s failure to identify the express contractual reason for termination.
In our example, the employer may allege that the contractor is failing “to proceed regularly and diligently with the Works…” (clause 220.127.116.11, SBC05) or has “substantially [suspended] the carrying out of the Works” (clause 18.104.22.168, SBC05). The employer may choose to refer to both grounds for termination. Depending on the facts, there may be other related defaults too. For example, failure to comply with an Architect’s instruction (clause 22.214.171.124, SBC05).
Whether the notice refers to one or more grounds of termination, it is best practice to refer briefly to the facts that relate to each specific default. The employer may attach copies of previous correspondence, related to the default. For example:
We visited the site on [DATE]. As referred to in our [EMAIL/LETTER] of the same date, you were not carrying out construction activity on the site.
We visited the site again on [DATE]. As referred to in our [EMAIL/LETTER] of the same date, you were not carrying out construction activity and there was no evidence that further construction activity had taken place since [DATE OF FIRST VISIT].
The first notice
By referring to both the contract term and the facts relied on, the employer is seeking to comply as fully as possible with clause 8.4.1 of the SBC05, which requires a notice to specify the contractor’s default. However, note the further restrictions in the drafting of clause 8.4.1 of SBC05, which state that:
- The notice specifying the default or defaults must be given by the Architect/Contract Administrator named in the contract. The SBC05 does not refer to the employer giving the notice, nor to the employer’s solicitors.
- The notice can only be given before practical completion. If things go wrong after practical completion, but before making good of defects, the employer may not rely on clause 8.4.1 of the SBC05. (That is not to say that the employer is prohibited from terminating the contract or the contractor’s employment under common law, but the express contractual right in clause 8.4.1 will not apply.)
The second notice
If the position on the site does not change, clause 8.4.2 of the SBC05 allows the employer to send a second notice, terminating the contractor’s employment. Note that:
- The employer sends the notice this time. (The clause does not refer to the architect or contract administrator.)
- Clause 8.4.2 includes further, strict, time limits. The contractor default must continue for 14 days. If it does, the employer may serve a notice on the expiry of that 14 day period, or within 21 days of the expiry of that 14 day period.
Again, the second notice must comply with clause 1.7 and (in particular) clause 1.7.4 of the SBC05.
If possible and appropriate, the employer may choose to add one extra day to the 14 day period, to assist it in rejecting any argument from the contractor that it has given notice too soon. If circumstances do not allow such caution, then the employer must still give the contractor the full 14 day period. The employer then has a 21 day window in which to give the second notice.
To illustrate, if the architect gives the first notice on Tuesday, 1 June 2010, then the 14 day period starts to run on 2 June and finishes on 15 June. The employer may give the second notice on (but not before) Wednesday, 16 June. The final date for any second notice would be a notice received by the contractor on Tuesday, 6 July, allowing the employer 21 days to serve its notice. (Out of an abundance of caution, an employer might treat Thursday, 17 June as the first day to give notice and Monday, 5 July as the last day to give notice.)
Key points to remember
New cases on termination of construction contracts happen all the time (see, for example, HDK Ltd (trading as Unique Home) v Sunshine Ventures Ltd). However, to minimise the chances of your notice being defective:
- Read the contract (checking whether the parties have agreed any bespoke amendments). Read not only the termination clause, but also (for example) the notices clause and the interpretation clauses.
- Calculate time periods with utmost care, and get a colleague to check your maths. (For example, clause 1.5 of the SBC05 means that bank holidays do not count as “days” when calculating notice periods.)
- When you come to terminate, be as clear as possible in your termination notice. In most instances, a termination notice will lead to a dispute or difference (whether that is settled quickly by the parties or ends up in adjudication or court action). Read back any letters, emails or notices you write as if you were an adjudicator or judge reading them for the first time.
If you do get it wrong, the contractor will almost always argue that a wrongful termination notice is itself a repudiation of the building contract.