In the good times, contractual termination provisions did not really impinge on the consciousness of the parties. In recessionary times, they are writ large.
For a long time, there has been a view amongst users and students of JCT Contracts that the termination provisions give an advantage to the terminating party. This is because the party who properly terminates gets to take the account between the parties and that account determines which party is to pay the other and in what amount. So far as the taking of the account goes, the terminator is in the driving seat.
The Design and Build Contract termination provisions may give a particular advantage to the Employer. The Design & Build Contract at 8.12.1 provides that the consequences of termination under 8.9 – 8.11 are that “the other provisions of this Contract which require any further payment or any release of Retention to the Contractor shall cease to apply”.
However, the purpose of this article is not to argue against the perceived potential injustices of the termination provisions. It is to consider the practical effects of termination under the DB2005 regime.
The relationship between the adjustment of completion date mechanism and the provisions for extension of time or the deduction of liquidated damages, on the one hand and the termination provisions on the other, is bound to be complex.
Similarly, the relationship between the taking of the account on termination and contractual rights of set off needs detailed consideration.
The theme of this article is that the JCT has either not given sufficient thought to the inter-relationship of these provisions or, if it has, that it has not spelt out the consequences so as to make them clear to the users of the contract.
In fairness to the draftsmen of the JCT, it may be their intention that the mechanism of taking the account on termination is to be completely comprehensive and exhaustive of all monies due and payable from either party to the other. Therefore, the JCT may have reasoned, the taking of the account is to be exclusive of any further right of set off. However, the point is the DB 2005 Contract does not expressly state this. Elsewhere, it deals with rights of withholding in considerable detail in relation to interim payments and the final payment upon the Final Account and Final Statement. There are no similar withholding provisions under Clause 8.12 dealing with payment on the taking of the account on termination. One possible effect of this is that there is a loophole in the contract under which a party who is liable to make payment under the account taken on termination can simply set off against that account provided that Notice of Withholding is served in accordance with the Scheme for Construction Contracts. The Scheme would apply in the absence of a contractual regime.
The termination of the Contractor’s employment under the contract, whether by the Employer or the Contractor, does not terminate the contractual machinery. Disputes over the account taken on termination can therefore be referred to adjudication, or arbitration or litigation depending on the chosen regime for dispute resolution.
The inter-relationship between the adjustment of the completion date and termination mechanisms gives pause for thought. Suppose the situation is that the Contractor has terminated on the grounds of the Employer’s default in making payment of interim payments. Suppose by that stage, the contractual completion date has been reached. It seems to be apparent that the mechanism for adjustment of the completion date and for stating non-completion and for levying liquidated damages remains alive and active, although Condition 8.12.1 will preclude any further payment of liquidated damages, prior to the account being taken.
The Contractor, who considers that he has been delayed, will wish to claim additional preliminaries and may wish to claim loss and expense within the account as a consequence of delay.
Where Practical Completion has been achieved prior to termination, then the Employer shall pursuant to Condition 2.25.5.1, within 12 weeks after Practical Completion determine whether to grant a Completion Date later than that previously fixed. This may mean that the Contractor has to wait for 12 weeks following Practical Completion before taking the account, in order to know whether he is given an extension of time up to Practical Completion or not.
On the other hand, if the taking of the account by the Contractor is an exhaustive and comprehensive process, then the taking of the account by the Contractor, with the inclusion of additional preliminaries, could be determinative of the Contractor’s entitlement to those additional preliminaries.
Alternatively, must the Contractor, who seeks but is not given an extension of time, adjudicate to determine his entitlement to an extension of time first and then take the Final Account on the basis of the Adjudicator’s decision?
If liquidated damages have already been levied and deducted at the time of termination, does the Contractor have to concede those liquidated damages within his account, even though he disputes that he was responsible for delay, or, again, does he adjudicate to challenge the levy of liquidated damages and then take the account?
If the Contractor takes the account on the basis that he is entitled to a full extension of time and loss and expense and effectively awards himself additional preliminaries and loss and expense in the Final Account, is that account binding upon the Employer and payable under 8.12.5? Does the Employer have to adjudicate to review and revise the Final Account, or can he merely point to the fact that the Final Account is inconsistent with the mechanism for fixing the Completion Date under Condition 2.25 and is therefore invalid?
The JCT appears to have created a conundrum. It may be that the conundrum is easily solved but the JCT does not appear to have resolved it and case law on the point is hard to find.
The relationship between taking of an account on termination, set off and withholding notices and the mechanism for fixing the Completion Date needs some clarification.
