Reduced availability of project finance, coupled with shifting economic, political and compliance considerations, is prompting parties to consider project suspension or cancellation. Spending time settling a contract reduces potential fall-out if a project takes a turn for the worse. This is equally relevant for both existing and new construction projects.
Benefits & Consequences: Suspension
Suspension has the benefit of stopping the clock on financial and risk exposure and unlike cancellation is redeemable. Incorporating clear suspension clauses can mitigate risk as the parties have a chance to “wait and see” before deciding to resume or terminate a project.
Many standard form contracts, such as the Government form of contract (GCCC), IEI, FIDIC and JCT agreements, expressly grant employers a general ‘no questions asked’ right to suspend all or part of the works for any reason. If no such clause is included, parties could look to case-law on deemed suspension by way of guidance: M Harrison & Co (Leeds) Ltd v Leeds City Council (1980) 14 BLR 118.
Generally, whilst contractors cannot suspend at will, they can usually suspend for non-payment (eg under the RIAI and GCCC forms of contract). In return, contractors have contractual entitlements such as extensions of time or compensation for direct loss and expense. Where there is no contractual right, there is limited persuasive authority to support the contractor’s right to suspend: CJ Elvin Building Services Ltd v Noble EWHC 837 (TCC).
There have been calls to introduce a statutory framework similar to that in the UK Construction Act 1996, to address non-payment of contractors through the mechanism of adjudication. Typically viewed as quick and cheaper than litigation or arbitration, no such equivalent currently exists in Ireland.
Benefits & Consequences: Cancellation
Cancellation brings finality and certainty to various parties on costs and risks and where relationships have collapsed. In certain circumstances, ailing projects can be re-scoped in light of changed circumstances and with both parties acting in good faith.
Most standard form contracts do not allow for projects to be cancelled at will but instead on certain grounds including insolvency and breach of obligations. Contractors may also be entitled to terminate after a pre-agreed period for suspension is exceeded.
It is therefore prudent for employers to include termination at will clauses to minimise risk. In drafting clear and weighted cancellation clauses lawyers should also address loss of profit or loss of expectation for contractors and parties should be aware of the consequences before agreeing them. However, even with such clauses, case law may support contractors’ rights to claim loss of profit for uncompleted works eg Abbey Developments Limited v PP Brickwork Limited EHWC 1987 (TCC).
Practical Steps on Suspension or Cancellation
When activating suspension or cancellation clauses, both parties should look at practical steps in addition to fulfilling the legal requirements of such clauses.
Employers should give realistic advance notice to enable contractors to wind-down activities on and off site and mitigate losses. Similarly, contractors should give adequate notice and both parties should strictly follow agreed suspension or cancellation contractual provisions as appropriate. Notice will then provide the springboard for claims submission and replacement of contractors/sub-contractors.
On suspension, the site, onsite materials and plant machinery need to be secured and employers may wish to consider securing offsite materials through vesting certificates. Fluctuation on suspension is important to consider particularly if previously excluded from the contract. Here contractors need to be mindful of future rises in construction costs.
On cancellation, employers need to pay for completed works, material purchases and possible compensation for loss of profits in line with the contractual provisions. Contractors need to clear the site and hand over documents and materials purchased prior to cancellation.
Security and property documents, performance bonds and insurances should be examined to see how these are affected by suspension or cancellation.
In lieu of suspension employers can issue instructions to decelerate the works, re-jig phasing or omit/ re-scope projects or parts of projects in an uncertain market (although this is dependant on the parties’ relationship). Notices of suspension or cancellation may also trigger third party rights, such as step-in or novation.
Suspension and cancellation clauses should clearly address the practical and financial consequences for both employers and contractors before the shutters come down. Employers and contractors alike need to follow these clauses or weigh up the alternatives to minimise risk and optimise the future survival and success of a project down the line.
This article is based on a presentation given at the recent Hill International Construction Masterclass Conference, Dublin