This bulletin considers a process that is rarely needed to be called upon on any project, but like any aspect of the contract it needs to be understood when it becomes necessary to enact. Termination is the ending of a contract before all parties have fully completed their obligations. At this point it would free everyone from their contractual responsibilities. This could be necessary due to unforeseen circumstances such as budgets being cut, mutual agreement, or breach of contract by one party. This bulletin will consider termination under an Engineering and Construction Contract (ECC) where a Contractor’s obligation to Provide the Works will be terminated. The same rules and processes can be applied to a Subcontractor being terminated under an Engineering and Construction Subcontract (ECS). These elements are covered within section 9 of the contract.
What is the first step to trigger termination? For ECC, the contract is between the Client and the Contractor. If either Party wishes to terminate the Contractor’s obligations to Provide the Works, they notify each other and the Project Manager to that effect. The Project Manager issues a termination certificate promptly if the reason complies with the contract.
A Party may terminate for a reason identified within the termination table listed below. The termination table identifies who is the terminating party, the reasons for termination, the procedures to be followed and the amount due to be paid.
The procedures for termination are put in place as soon as the termination certificate has been issued by the Project Manager. If the Client is terminating, for most listed termination reasons, it will mean that the Client does not need to make the certified payment that period (unless the conditions of contract state otherwise). Once a termination certificate has been issued the Contractor does no further work.
Reasons for termination: Section 91 of the contract lists 22 reasons why one Party or the other may choose to terminate the contract, each reason being numbered and prefixed with an “R”. Examples of those listed are bankruptcy, substantially failing to comply with obligations, force majeure type event, or a corrupt act.
Some reasons (R11-R15) would have required the Project Manager to have first notified a default to the Contractor, and the Contractor has not rectified that default within four weeks of being notified. A Contractor may also terminate if the Client has not paid an amount due within thirteen weeks of the date that the payment should have been paid (R16). An instruction to stop any substantial work or all work, followed by no further instruction to re-start within thirteen weeks is another reason for termination (R18-20).
Secondary Option X11: If this secondary option has been listed in Contract Data, the Client may terminate for a reason not stated in the termination table. This then becomes one of the rarer situations where the Contractor WILL be entitled to fee percentage on the works that have been removed as the termination reason is not one the Contractor has contributed to or had any control over.
Procedures upon termination: Section 92 identifiesa choice of four procedures to follow (P1-P4). Procedure P1 will always be applicable for any termination reason, and then there is a choice of either one or two additional procedures (P2-P4) that will be applicable depending on the termination reasons:
- P1: Client may complete the works and may use Plant and Materials to which it has title
- P2: Client instructs Contractor to leave site, remove any Equipment, Plant and Materials from site and assign any benefit of any subcontract to the Client
- P3: Client may use Contractor Equipment to complete works before the Contractor then promptly removes it
- P4: Contractor leaves Working Areas and removes Equipment
Payment upon termination: Section 93 identifies a further four elements(A1-A4) to identify what the amount due upon termination to the Contractor would be:
- A1: amount due assessed as for normal payments, Defined Cost for Plant and Materials within the Working Areas, other Defined Cost reasonably incurred, any amounts retained by Client, and a deduction of any un-paid balance of an advanced payment
- A2: forecast Defined Cost of removing Equipment
- A3: deduction of the forecast additional cost to the Client in completing the works
- A4: fee percentage applied to remaining works
The only situations where the Contractor is paid fee percentage on the works that have been removed (A4) would be if the Client has gone bankrupt or insolvent (R1-10), Client has not paid an amount within 13 weeks of the date due (R16), default by the Client (R19) or Client terminating for any other reason (X11).
Conclusions: If termination is necessary then both Parties need to understand and follow the termination process in section 9 of the contract in terms of valid reasons for termination, procedures to follow upon termination and then payments to be made upon termination.