Termination - Are you protected?
08/07/24
Newsletter #14:
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Termination is strong response to all situation, but why would you use it, and should you? Let’s break it down for NEC4 ECC:
What is Termination?
When can you use it?
What is the process?
Must-do’s to protect yourself (Client or Contractor)
Don’t have time to read all the way, here is the Summary:
Summary:
Termination is a tool intended to be used when events occur which are not foreseen, or one of the Party’s doesn’t act as they should. The Termination Table sets out the procedures to be followed and the amounts which should be paid.
Termination is not a process by which either Party will win, it will be challenging and difficult to manage ‘on-the-ground’ when trying to deliver a construction project. The Party’s should hope to come out of the process no worse off than beforehand, however the realities are likely to be more negative than this.
Termination exists to end contracts which have already been executed. The best way to avoid termination is not to enter into a contract in the first place, unless all checks and reassurances have been undertaken.
Have you experienced termination?
Email us - contact@contractinstruct.com
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What is Termination?
Put simply, termination is the act of stopping something. In this case, an NEC contract from continuing, and the obligations of the parties being terminated.
Termination within NEC is simple but also somewhat complex depending on the reasons and conditions of the contract.
NEC is tucked into the last of the Core Clauses, Section 9, Clauses 90 to 93. It contains a ‘Termination Table’, a matrix to explain the procedures and amounts due depending on who notified termination, and the reason stated.
Don’t forget the ace up the Client’s sleeve though…more on that next…
When can you use it?
Termination clauses are mute regarding timing. It can be administered at the very beginning of a contract or near the end. This is because things change and issues arise. There may be skeletons in the closet which only appear once the contract has been signed, or a problem occurs on site which means the whole project is no longer viable.
The important point is; it can happen any time, by either Party (Client or Contractor) if the right conditions are met.
So when can you use it (what conditions need to be true)!?
Clause 91 details the reasons for termination, they are summarised as (Reason numbers included in brackets at the end):
Contractor reasons to terminate:
Bankruptcy and near-bankruptcy of the Client (R1-R10)
Client has not paid an amount due (R16)
An inability to complete the contract (force majeure, frustration clause) (R17)
Instruction to stop work beyond 13 weeks (R19-R20)
Client reasons to terminate:
Bankruptcy and near-bankruptcy of the Contractor (R1-R10)
Contractor has not put a default right and has not stopped a default (R11-R15)
An inability to complete the contract (force majeure, frustration clause) (R17)
Instruction to stop work beyond 13 weeks (R18, R20)
An event which stops the Contractor completing (R21)
Contractor does a corrupt act (R22)
But wait, that’s not all…
Remember the ace up the Client’s sleeve?
NEC4 includes the ability for the Client to terminate for any reason. In NEC3 this was included in the Termination Table (Clause 90) but default…but NEC4 has split this into a separate Secondary Clause.
X11 Termination By The Client
This allows the Client to terminate for any reason not identified in the Termination Table!
This means the Client must proactively select this X clause when preparing the contract, making a conscious decision to include it.
Let’s discuss the impact of this when administering the process.
What is the process?
Once a reason has been selected by the Party (R10-R22, or X11), this is what happens:
The Party wishing to terminate notifies the Project Manager and the other Party giving details of the reason. (Clause 90.1)
The Project Manager issues a termination certificate promptly (no timescale defined), if the reason complies with the contract. (Clause 90.1)
The procedures for termination are implemented immediately after the termination certificate. (Clause 90.3)
After a termination certificate has been issued, the Contractor does no further work necessary to Provide the Works. (Clause 90.4)
Procedures on termination
Point 3 above identifies the procedures on termination needing to be implemented. Well what are these? Depending on the reason selected, a combination of the following will be used:
The combinations are: R1-R15, R18, or R22 - Procedure P1, P2, and P3. All other reasons (Excluding X11) - Procedure P1 and P4 X11 - P1 and P2
P1 - The Client may complete the works and may use any Plant and Materials to which it has title
P2 - The Client may instruct the Contractor to leave the Site, remove any Equipment, Plant and Materials from the Site and assign the benefit of any subcontract or other contract related to performance of the contract to the Client.
P3 - The Client may use any Equipment to which the Contractor has title to complete the works. The Contractor promptly removes the Equipment from Site when the Project Manager informs the Contractor that the Client no longer requires it to complete the works.
P4 - The Contractor leaves the Working Areas and removes the Equipment
Additionally, the Contractor is due an amount on termination. This is the amount the Contractor should be paid at the time of termination and includes a combination of the following amounts:
R1-R15, R18, or R22 - Amount Due A1 and A3 R17, R20, or R21 - Amount Due A1 and A2 R1-R10, R16, or R19, & X11 - Amount Due A1, A2 and A4
A1 - Amount due on termination includes:
an amount due assesses as for normal payments.
the Defined Cost for Plant and Materials within the Working Areas or to which the Client has title and of which the Contractor has to accept delivery.
other Defined Cost reasonably incurred in expectation of completing the whole of the works.
any amounts retained by the Client and
a deduction of any un-repaid balance of an advanced payment
A2 - The forecast Defined Cost of removing Equipment
A3 - A deduction of the forecast of the additional cost to the Client of completing the whole of the works.
A4 - The fee percentage applied to
for Options A, B, C and D, any excess of the total of the Prices at the Contract Date over the Price for Work Done to Date or
for Options E and F, any excess of the first forecast of the Defined Cost for the works over the Price for Work Done to Date less the Fee.
Must-do’s to protect yourself (Client or Contractor) To protect yourself when entering into a contract, use the following as a guide:
Contractor:
Read the contract and the conditions which have been included.
Check if X11 has been included
Ensure the Scope is thoroughly reviewed and can be delivered
Undertake credit checks on the Client, can they make payment?
Understand the project risks. Is the Client likely to pull out of the project if conditions change, i.e. how likely are they to use X11?
Check if changes have been made to the termination clauses which could reduce the amount due to the Contractor
Client:
Include X11 in all contracts, it provides protection from unexpected events, be open with the Contractor about this
Run credit checks on the Contractor and ensure they are financially stable
Undertake reference checks on the Contractor for a history of events which could be classed as Corrupt Acts or defaults in previous contracts.
Use the mechanisms within the contract, don’t confuse matters with additional changes
Summary: Termination is a tool intended to be used when events occur which are not foreseen, or one of the Party’s doesn’t act as they should. The Termination Table sets out the procedures to be followed and the amounts which should be paid.
Termination is not a process by which either Party will win, it will be challenging and difficult to manage ‘on-the-ground’ when trying to deliver a construction project. The Party’s should hope to come out of the process no worse off than beforehand, however the realities are likely to be more negative than this.
Termination exists to end contracts which have already been executed. The best way to avoid termination is not to enter into a contract in the first place, unless all checks and reassurances have been undertaken.
Have you experienced termination?
Email us - contact@contractinstruct.com
Tag us on LinkedIn - Instruct
Reading Recommendations
To understand more about how to prepare and manage an NEC contract, the following guidance documents are available.
NEC4 Preparing an Engineering and Construction Contract