UK Construction Media Interview (part 3): Contract Termination

In our interview series with Melbury Construction Consultants, the Managing Director, Peter Heatley, has spoken in depth about issues that the company often face with late and non-payment issues, and the adjudication process.

In the final part of this three-part interview, Peter talks exclusively to UK Construction Media about the common problems with Contract Termination and how using Melbury’s services can help companies avoid having to pay damages.

You also specialise in Contract Termination – what does this involve?

This is where you have a contract between two parties. If it is a written contract there is usually a termination provision that allows one or both parties to terminate under certain circumstances.

If one party attempts to terminate and they do it badly by not complying with the terms and conditions, it’s referred to as a repudiation. This allows the other party to accept the repudiation and pursue all the damages that come from it – usually loss of profit and overhead costs.

In circumstances where there are no termination provisions, it’s not uncommon for parties to fall out with each other and either one walks off the site or the other tells them to leave. What is often not realised is that these are repudiations to the contract. We recognise this and, if we are involved, can ensure damages can flow from it.

An example is one of our clients last year who had their contract terminated but the other side didn’t follow the correct process. We looked at the facts, wrote to the other side and told them they’d repudiated the contract and that our client was taking action to recover damages. Two adjudications later, our client was paid £250,000 when originally they were told they would get no money and would actually be responsible for damages.

So they’re quite significant issues and the consequences of getting these wrong are quite onerous.

By using your services, can you ensure that companies don’t encounter some of the pitfalls of contract termination?

Yes, we can certainly try, and I can give two examples:

Typically a lot of our clients will phone up and tell us their issue or email and they will attach a draft letter which they want to send out and they want confirmation from us that it is a wise course of action.

A couple of years ago, a client sent an email and said: “I want to send this out to a subcontractor. Can you confirm it is OK?”

What the email said was something along the lines of: “Dear Mr Bloggs, you’re not proceeding in accordance with the contract and are causing us delay so we hereby give you notice in accordance with the contract that we’re going to suspend your performance as of next Friday unless you perform better before then.”

When I had a look at it and read through it, I told them they had no entitlement to do that under the contract so if they had sent this out the other side could, potentially, take it as a repudiation of the contract and sue for damages. Sending it out would expose my client to a massive risk, so they didn’t send it.

We also had a situation last year where our client – a contractor, had a subcontractor working for them that wasn’t performing. Again, they sent me a letter, asked me to look at it before being sent out. The letter said something along the lines of: “With regards to the contract we’ve got with you for blocks A, B, C, D, E and F, you’re not performing and are in delay. Therefore we’re going to take blocks D, E, and F from you and give them to someone else so that you can concentrate on blocks A, B and C. This will take effect as of next Friday.”

They sent this across to me. I looked at the contract and said that they can’t do it because there’s no provision for taking work out of their contract and if you do it, you’ll be repudiating the contract and they’ll be able to abandon the whole contract and sue for damages.

My client did two things. First, they didn’t do what they were going to do, secondly I worked with them to find a negotiated solution to the problem. They also asked us to re-word their contracts so that, in the future, they can remove work from a subcontractor without it leading to repudiation. It’s all about reducing their risk and giving them better control over site works and their own financial management.

Peter Heatley of Melbury Construction Consultants

Peter Heatley, BSc, MRICS, MCIArb

What advice would you give to companies who could benefit from these services?

What I like to emphasise to clients is to involve us as early as possible in the process so that if necessary we’ve got a watching brief and are a back-stop right from day one, we can look at their risks and so be used as a preventative measure, somebody they can sound ideas off and provide constructive advice throughout the project rather than simply be used as a problem-solving tool when the problem is a lot bigger. In the long run this can be a more cost-effective approach.

The examples I gave about repudiation could have cost clients tens of thousands of pounds but they were wise enough to bounce it off us first and we could give them information about the need for a different way of solving the issues.

In a similar situation we had a client phone us up who said they had a subcontractor who’d claimed they’d repudiated his contract – when they explained the situation, we showed that they had, indeed, repudiated his contract, acting without our advice and exposing the company to damages.

The earlier we’re involved, the earlier we can help develop a strategy that is designed to ensure a company meets its objectives which is to be profitable at the end of a job, retain a client relationship, and to reduce risk.

Having more education in the marketplace would be beneficial regarding these sort of issues and how they can be avoided or at least understood by companies so they don’t get themselves in this situation.

Is there anything else that you’d like to mention?

One of the key things I try to get across when meeting new people is that we’re approachable and have empathy with their issues. Quite often they’ll come to the office for a meeting and there can be a genuine feeling that the issues they have are unique.

We have to give them comfort that there are lots of people out there experiencing similar problems and it’s not to do with mismanagement. Sometimes these things happen and that’s what we’re here to help with.

What’s important from my point of view is we as a business don’t lose focus. The money we are talking about is real money to our clients, particularly those who are smaller.

We’ve got several clients where it’s a husband and wife running a business and if they’re not getting paid even moderate amounts of money, it’s a big issue. So we don’t lose the focus of that and we’re not complacent.

If we’re dealing with a dispute of £1.5M and somebody comes to us with a dispute with £25,000, we treat it with the same amount of respect.

View the original article on the UK Construction Media website