Back to Basics #47 – NEC4:- Termination

Back to Basics #47 NEC4:- Termination

The two main routes to termination are:

1) Termination for breach - A breach at common law that a Court would consider serious enough to repudiate the contract. Considerations by the Courts include; whether there has been a Material Breach, whether there is an Anticipatory Breach, how much of the intended benefit of the Contract has been received and whether the breach was likely to be repeated.   

2) Termination under the agreement - Termination through the terms of the contract.  

In NEC4 the reasons for Termination are set out in the Contract (Clause 90.2).  The contractual procedure for Termination that needs to be followed depends on the reason for Termination and on the Party that is terminating. The Amount Due after terminating also depends on the reason.

There are 22 express reasons for Termination in NEC4.

Each reason has a reference (from R1 to R22). These are reasons why one of the Parties “may” terminate the Contractor’s obligation to provide the works. This means the choice to terminate is optional. The reasons include:

1) Matters relating to insolvency and bankruptcy (R1 to R10). 

2) The Contractor not putting one of the following defaults right within four weeks of being notified by the Project Manager:

• Substantially failed to comply with its obligations (R11).
• Not providing a bond or guarantee which the contract requires (R12).
• Appointing a Subcontractor for substantial work before the Project Manager has accepted the Subcontractor (R13).

3) The Contractor has not stopped one of the following defaults within four weeks of being notified by the Project Manager:

• Substantially hindered the Client or Other (R14).
• Substantially broken a health or safety regulation (R15).

4) The Contractor may terminate if the Client has not paid an Amount Due under the contract within thirteen weeks of the date that the Contractor should have been paid (R16).

5) Either Party may terminate if the Parties have been released under the law from further performance of the whole contract (R17).

6) The Project Manager may issue an instruction for the Contractor to stop or not to start any substantial work or all the work. However, should an instruction not be provided, within thirteen weeks, allowing work to re-start or start or remove work from the scope, the Client may terminate if the instruction was due to a default by the Contractor (R18) or the Contractor may terminate if it was due to a default by the Client (R19).  If the instruction was due to any other reason, then either Party may terminate (R20).

7) The Client may terminate if any event occurs, which stops the Contractor completing the whole of the works or stops the Contractor or delays Completion of the whole of the works by more than thirteen weeks. The event must be one that neither Party could prevent and that an experienced Contractor would have judged to have such a small chance of occurring that it would have been unreasonable to have allowed for it (R21).

8) The Client may also terminate for Corrupt Acts by the Contractor and in some circumstances for a Corrupt Act by a Subcontractor or supplier (R22).

The Client may also terminate using the optional clause X11 if it has been selected.  This gives allows the Client to terminate for reasons that are not included in R1 to 22.

Some of the reasons for Termination use such words as ‘substantial’ and ‘reasonable’. It may therefore be quite subjective as to whether there are valid grounds for Termination. If the Termination is challenged, it is important that the terminating Party is able to clearly demonstrate, to a third party, the reasoning and justification to the Termination. 

If a Termination Notice is issued, which later transpires to be invalid, it may constitute a repudiatory breach itself, upon which the other Party can rely. This can backfire on the Party that attempted to terminate and lead to a claim for damages against it. 

Parties considering terminating a contract should ensure they seek proper and comprehensive advice.

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