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Contract Practice > Termination > Flashcards

Termination Flashcards

1
Q

What is termination?

A
  • Termination of a construction contract can occur where the a party to the contract has breached the terms of the contract.
  • If one party ceases to perform in the contract, termination enables the other party to end their obligations.
  • Most standard forms of construction contracts contain provisions detailing how in such circumstances it may be terminated
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2
Q

What is Corporate Recovery?

A
  • ‘Corporate recovery’ is a term used to describe the process and actions taken to bring an ailing (poor health) company back to full health
  • This can involve the provision of financial, restructuring, accounts and legal advice by qualified specialists and the possible appointment of an insolvency practitioner.
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3
Q

What is a breach of contract?

A

A breach of contract (or subcontract) is a failure by a party to the contract to comply with an obligation imposed on it under the terms of the contract.

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4
Q

What is the Insolvency Act 1986?

A

The Insolvency Act 1986 governs issues relating to personal bankruptcy and Voluntary Arrangements (individual or company) and all administrative orders relating to company insolvency.

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5
Q

What does it mean to be insolvent? What does insolvency mean?

A

A company or party is deemed to be insolvent when it does not have sufficient assets to cover its debts or is unable to pay its debts when they are due.
A common indication that a company may be insolvent is that it consistently makes late payments.

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6
Q

What is a sign a Contractor is in financial difficulty?

A
  1. Overclaiming on valuations
  2. Reduced number of workers on site
  3. Word of mouth
  4. Slow progress
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7
Q

How might a cashflow show insolvency problems?

A

If monthly payment applications are way above the pre-estimated cashflow might indicate a problem

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8
Q

What can be done to prevent contractor insolvency at the tender stage?

A
  • Thoroughly check financial accounts for financial stability
  • Check for front loading of tender submission
  • Bank references
  • Credit checking agencies
  • Previous references
  • Formal or informal checks
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9
Q

During your interim valuation, a subcontractor tells you that the Contractor is in financial difficulties. What do you do?

A
  • Check the statement is true, speak to the Contractor
  • Arranging a meeting between the contractor to discuss the situation
  • Value the works (carefully) as normal
  • Check materials on site are for the job in question
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10
Q

Who can the contract be terminated by?

A

The Employer, the Contractor, Law Enforcement

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11
Q

What section of the JCT contract deals with Termination?

A

Section 8

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12
Q

Can the contractor’s employment be reinstated?

A

Yes, irrespective of the grounds of termination, the Contractor employment can be reinstated at any time if and on such terms the parties agree

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13
Q

What are the main reasons for the termination of a contract?

A

Default by the Contractor or Employer
Bribery / Corruption
Insolvency

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14
Q

Under JCT what way can the contract be terminated?

A 
•	Termination by the Employer 
o	Default by Contractor 
o	Insolvency of the Contractor 
o	Corruption and Regulation 73(1)(b) of the PC Regulations 
•	Termination by Contractor 
o	Default by Employer 
o	Insolvency of Employer 
•	By either party and Regulations 73(1)(a) and 73(1)c)  of the PC Regulations
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15
Q

What is the Public Contracts Regulations 2015?

A

Regulation that governs public procurement

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16
Q

What constitutes default by the Contractor?

A
  1. Suspending works for not a legitimate reason
  2. Not proceeding diligently
  3. Not complying with notices and instructions
  4. Subcontracting without employers’ consent
  5. Fails to comply with CDM Regs
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17
Q

What constitutes default by the Employer?

A
  1. Non payment
  2. Deferment of possession of the site
  3. Delayed instructions
  4. Delay due to clients subcontractors
  5. Failure to comply with CDM
  6. Assignment of rights without Contractors consent
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18
Q

How contract be terminated by default of the Contractor? What is the process?

A

• If before PC, the contractor commits any of the following defaults:
o without reasonable cause, suspends carrying out the works
o fails to proceed regularly with the performance of his obligations
o Refuses to comply with an instruction to remove any materials not in accordance with the works from site.
o If the contractor assigns his rights under the contract to a third party without consent from the employer.
o Subcontracts part or all of the works without the employers consent.
o Fails to comply with CDM regulations.
• The Architect/CA can serve him a notice specifying the default(s). If the contractor continues to commit the specified defaults for 14 days the Architect/CA may terminate the employment of the contractor within 21 days of the expiry of the 14 days grace period.

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19
Q

How can the contract be terminated by insolvency of the Contractor?

A

• If the contractor becomes insolvent, the employer may at any time by notice to the contractor, terminate his employment. If the contractor becomes aware of any meetings or events which will lead to his insolvency he should make the employer aware. From the date the contractor becomes insolvent his obligations under the contract are suspended. From the date of insolvency the employer can take reasonable steps to secure the site and any materials. The contractor shall not hinder the employer in doing so (e.g. example change the locks).

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20
Q

How can a company become insolvent?

A
  1. Company voluntary arrangements (CVAs)
  2. Administration
  3. Winding up of the party/company or Compulsory liquidation
  4. Administrative receivership (or receivership)
  5. Voluntary liquidation.
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21
Q

What is administration?

A

• Administration involves the adoption of a procedure that allows a company unable to pay its debts to continue to trade for a further period, during which its assets are protected
• An Administrator is appointed by directors, by order of the court or by the holder of a qualifying floating charge
• The administrator purpose is to:
o Rescue the company as a going concern.
o Achieve a better result for the company’s creditors as a whole than if the company were wound up.
o Realise property to distribute to creditors
• They will seek to refinance company, sell company or arrange repayments with creditor

22
Q

What is a wind up order / Compulsory liquidation?

A
  • Where the company is unable to pay its debts.
  • A registered company may be wound up either by court order or voluntarily.
  • A winding up order by a court order forces an insolvent company into compulsory liquidation. A process in which the court appoints an liquidator to liquidate all of the company’s assets in order to repay creditors.
23
Q

What is Company Voluntary Arrangements?

A
  • CVAs occur when a company is in difficulty financially but is not necessarily insolvent, but heading that way!
  • Commenced by the Directors of a company, the process involves the CVA being approved at a scheduled creditors meeting.
  • The directors nominate a who is able to make a viable proposal to the creditors with a view to them being able to secure an acceptable percentage of the monies due to them
24
Q

What is the advantage of administration over involuntary liquidation?

A

The advantage of administration over involuntary liquidation is that the assets may realise a better position, and the administrator can wield full management powers to secure the best position for all creditors.
Reduces the need for the winding up of the party

25
Q

What is the criteria for the resultant debt for the company to be wound up?

A
  • Undisputed
  • More than the monetary sum of £750.00
  • The creditor must have informed the debtor of its intention to pursue and collect the debt
26
Q

What is administration receivership?

A

Administrative receivership is where a party breaches the terms of its borrowing from a creditor
The creditor appoints an administrative receiver, who must be a licensed insolvency practitioner, to recover the money owed

27
Q

What is liquidation?

A

Winding up of a company because it can’t pay debts, trading ceases, assets collected, can be voluntary or compulsory

28
Q

What do you do when the Contractor goes into administration?

A
  • First find out if it is true, have they gone into administration
  • Advise the client of contractor insolvency, contractual position and recommended action
  • Go to site, secure site and materials and change the locks
  • Get in touch with administrative receiver
  • Instruct the QS to prepare a detailed valuation of the completed work and an inventory of materials and equipment
  • Termination of the contractor’s employment under the contract at any time by notice. Written notice is required, delivered by hand, special or recorded delivery. Termination effective with immediate effect upon the contractor receiving the notice. Contractor’s obligations to carry out and complete the works are suspended
  • Withhold any payments to the contractor. Employer is not obliged to make any further payments or release monies if Termination is in effect. If anthe interim certificate has recently been issued, it is advised to issue a withholding notice
  • Contact key sub-contractors, suppliers and commence discussions about continuation contracts. (Collateral Warranties)
  • Begin the process of engaging a new contractor to proceed with the works
  • Check the contract for Bonds or Parent Company Guarantees (PCG).
  • Get in touch with administrative receiver or liquidator and client about their views with regard to project completion
  • Ensure that the project is insured and that the insurance obligations have been fulfilled/ complied with
  • Keep a record of the time spent and cost incurred in dealing with and advising on the insolvency. Normal for additional fees to be chargeable in this respect.
29
Q

Where does the client fall in relation to receiving monies after liquidation?

A

Very low as they are an unsecured creditor

Bank = secured creditor) (preferential creditors = employees) (Unsecured = suppliers, customers, contractors

30
Q

Can the employer terminate if the contractor goes insolvent?

A

Yes, written notice effective immediately

31
Q

How can the contract be terminated by Corruption?

A

The employer is entitled to terminate the contract if anyone in the contractor’s organisation has committed an offense under the Bribery Act 2010

32
Q

What are the consequences of the Employer terminating works?

A

If the contractor’s employment is terminated, the employer may employ a third party to carry out and complete the works and may take possession of the site, site materials, temporary buildings, plant, tools and equipment to do so. The contractor shall undertake the following:

  1. When notified in writing, remove all temporary buildings, plant, tools, equipment etc. belonging to the contractor
  2. Provide the employer will all design documents previously undertaken
  3. Within 14 days of termination, assign any rights with regards to the supply of goods and materials for the use of the contract. This is without charge to the employer.
33
Q

What if the Employer decides not to complete the works? What happens if the employer decides not to complete the works after the termination of the contract with the contractor?

A

• If within 6 months of the contractor’s termination, the employer does not make arrangements to complete the works, then the employer must notify the contractor of this fact.
• If after 2 additional months no progress has been made to the works the employer shall issue a statement to the contractor setting out the following:
o the value the works completed up until the contractor’s termination.
o any amounts due to the contractor under the conditions of the contract.
o The total amount of losses incurred and damages due to the employer at that point, whether from the contractor’s termination or otherwise.
• If the total value of the losses incurred and damages due to the employer are greater than the value of the works completed by the contractor at the point of termination then the contractor will own a debt to the employer.
• If the value of the works completed as of termination is greater than the losses incurred and damages due to the employer then the employer owes a debt for the difference to the contractor.

34
Q

If you do decide to continue the works how do you complete the works?

A

Continue with original contractor (if near completion or PCG), novation / assignment, appoint new contractor

35
Q

How can the contract be terminated by default of the Employer?

A

• If the employer commits the following defaults, the contractor can serve a notice to the employer specifying these fault(s).
o failure to pay the amount due by the final date of payment for an interim payment
o failure to comply with CDM Regulations
o assigns his rights under the contract without consent from the contractor
• The contractor may serve a notice to the employer if after the date of possession but before practical completion, the employer suspends the works or commits an act of prevision or omission that is not because of negligence by the contractor or his agents.
• If the act of suspension continues for 14 days after notice has been given by the contractor then within 21 days the contractor may terminate his employment under the contract. If the employer repeats the act of suspension such that the progress of the works is likely to be affected then the contractor may terminate his employment under the contract.

36
Q

How can the contract be terminated by insolvency of the Employer?

A

If the employer becomes insolvent, the contractor may give notice terminating his employment.
The employer should notify the contractor of any proceedings that would lead to insolvency. As of the date of the employer’s insolvency the contractor’s obligations under the contract stop.

37
Q

How can the contract be terminated by either party?

A

If one of the following events causes the suspension of the works for a period of time specified in the contract particulars then either party may give a notice to the other that states if the suspension does not cease within 7 days, then they will terminate the contract.

  1. force majeure
  2. instructions for changes, postponement of the work or a notice for discrepancies as a result of negligence by any statutory undertaker
  3. loss or damage to the works caused by Specified Peril
  4. civil commotion or threat of terrorism
  5. an exercise by the UK government or any statutory power which directly affects the execution of the works
  6. delays to permissions or approvals of development control requirements.
  7. The contractor cannot give a notice for suspension due to a specified peril if the suspension has been caused by the contractor’s negligence.
38
Q

What are the consequences of the Contractor or either party terminating works?

A

• The contractor shall remove any temporary buildings, materials etc. from the site and provide the employer with any as built drawings.
• Within 2 months of the date of termination the contractor shall provide the employer with an account which sets out the following:
1. the total value of the work properly executed and any design work properly executed
2. any sum as a result of matters that affected the progress of the works before or after the date of termination
3. the reasonable cost of removing temporary buildings, materials etc. from site
4. the costs of all materials already ordered that have been paid for or that the contractor will have to pay for
5. sums associated with any direct loss caused by the contractor’s termination.
• The account should identify if a specified peril was the ultimate cause of the termination or if it was a result of the employer’s negligence
• After taking into account the sums already paid the amount set out in the account will be due within 28 days and the amounts payable should not include retention.

39
Q

What is a specified peril?

A

Specified perils tend to be significant events that would cause very significant damage.
Fire, lighting, explosions, storm, flood, escapes of water from tank, earthquake, aircraft or other ariel devices dropping, riot and civil commotion

40
Q

What must a contractor prepare following termination by the employer? (JCT)

A

The Contractor must prepare a Final account of works done up until insolvency (entitled to be paid), without cost to employer remove all temp buildings, materials and plant from site and provide 2 copies of the contractor’s design to the employer

41
Q

How is termination dealt with under NEC?

A

If either Party wishes to terminate the Contractor’s obligation to provide the Works he notifies the Project Manager and the other Party giving details of his reason for terminating. The Project Manager issues a termination certificate to both Parties promptly if the reason complies with this contract.

Within 13 weeks of termination, the Project Manager certifies a final payment to or from the Contractor which is the Project Manager’s assessment of the amount due on termination less the total of previous payments. Payment is made within three weeks of the Project Manager’s certificate

42
Q

What does it mean when a termination certificate is issued under NEC?

A

After a termination certificate has been issued, the Contractor does no further work necessary to Provide the Works.

43
Q

What are the remedies for breach of contract?

A

EOT, LADs, Loss and/or Expenses, Pay Less, Set-off, Abatement, Termination

44
Q

When can a contractor suspend works?

A
  • Contractor has the right to suspend performance when payment has not been made
  • Need to give 7 days’ notice
  • Once suspended contractual obligations such as the provision of insurance can be haltered
  • Party must NOT suspend statutory duties (enforceable by law)
45
Q

What is repudiation?

A
  • An act of repudiation occurs when a party commits a breach of contract that is sufficiently serious such that it entitles the receiving party to consider the contract as terminated with immediate effect, and to sue for damages (for loss and/or expense) for breach of contract.
  • Whether this is a material or non-material breach will depend upon the severity and effect of the breach and whether it is a contractual obligation.
  • A repudiation of a contract can be:
  • abandonment of the site or removal of plant by the contractor
  • refusal by the party to carry out work
  • employment of other contractors to carry out the same work
  • access denial: failure by an employer to give access to the site
46
Q

What is rescission?

A

Rescission is the process of returning both parties to a contract to the position they would have been in had they not entered into a contract.
If a contract is rescinded, it is treated as if it did not exist.
However, circumstances often make it impossible to rescind a contract, for example where works have already been commenced, in which case damages may be awarded.

47
Q

What is frustration?

A
  • Frustration occurs when the contract is terminated by mutual consent of both parties due to being incapable of being performed due to unforeseen circumstances.
  • Frustration happens when neither party has defaulted on the original contract but other unforeseen circumstances have intervened to prevent the contract from being performed as originally intended.
  • The result is that further performance of the contract is not possible, is illegal, or is so inherently different from what the parties contemplated when they entered into the contract that it is considered to be void.
48
Q

What are the 7 reasons to terminate the contractor’s contract?

A
  1. Insolvency
  2. Suspend work without reasonable cause
  3. Contractor fails to proceed regularly and diligently
  4. Fails to comply with written instructions to remove materials / goods
  5. Contractor subcontracting without consent
  6. Fail to comply with CDM regs
  7. Corruption
49
Q

What is abatement?

A
  • Abatement is a defence against a claim for payment where it is argued that the amount claimed is incorrect because of defects in the work.
  • If the defect is proved, then the valuation of the amount due may be reduced by the reduction in value of the works resulting from the defect.
  • Abatement only applies to payment for labour and materials, NOT professional services or to losses resulting from delay or disruption.
  • Abatement exists as a common law right.
  • i.e. If the Contractor builds a brick wall and includes it within their payment notice but they Employer believes its defective (the amount claimed is incorrect) they Employer is entitled to reduce the value of the payment notice if the defect is prove.
  • Following amendments to, 2011 HGCRA96, abatement requires a pay less notice to be issued.
50
Q

What is set off?

A
  • This requires that a breach of contract can be demonstrated.
  • It can permit the withholding or extinguishing of an agreed payment.
  • Set off can be used to recover the costs of rectifying defects and any delay.
  • Following amendments to, 2011 HGCRA96, set off requires a pay less notice to be issued.
  • i.e Demonstrate a breach of contract, the Employer can withhold or not make an agreed payment
51
Q

What is a counter offer?

A
  • A counterclaim is a claim set up in opposition to another claim, that is, a claim by a party against another party who has made a claim against them. This is not a defence to a claim, it is separate from it and proceeds even if the original claim is ended.
  • CLAIMS WAR.
  • i.e If the Contractor builds a brick wall and includes it within their payment notice but they Employer believes its defective, the Contractor could counter claim and say that the defect was caused by the Employer due to lack of ground conditions information / design.
  • Following amendments to, 2011 HGCRA96, counterclaims requires a pay less notice to be issued.
52
Q

What is the difference between set off and a counter offer?

A
  • A counteroffer may be entirely different in nature to the claim.
  • Set off, unlike a counterclaim, cannot give rise to a positive balance of claim whilst a counterclaim may exceed the amount of the initial claim.
  • Set off can only break even!

Contract Practice (10 decks)

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