Delay is a common problem in construction projects and can have costly implications. If a project has reached a stage where a party wants to terminate, it must consider the available grounds for termination. Before electing to terminate on grounds of contractor delay, there are a number of factors that should be considered.
Entitlement to terminate
Termination can take place under a contractual provision or at common law. The contract may give rise to a contractual right to terminate even if the relevant breach is not sufficiently serious to justify termination at common law. Conversely the contract may expressly exclude the common law right to terminate.
In many of the standard form contracts, delay is captured in the grounds for termination. To take as an example, JCT Standard Building Contract (2011 edition) provides that the contract may be terminated if the contractor, before practical completion of the works:
1 "fails to proceed regularly and diligently with the Works…" (clause 220.127.116.11); or
2 “without reasonable cause wholly or substantially suspends the carrying out of the Works..” (clause 18.104.22.168).
Clauses similar to the above will be generally be construed by the courts as permitting termination only for important or substantial breaches (Hudson's Building and Engineering Contracts, Twelfth Edition). There is authority for the proposition that a breach must be analogous to a repudiatory breach but this argument has recently been rejected by the Technology and Construction Court (Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar  EW 1028 (TCC)).
In the absence of express termination provisions giving rise to an entitlement, the delayed party must demonstrate a repudiatory breach of contract in order to terminate1. The test commonly applied for common law repudiatory breach by failure to perform is whether the innocent party has been deprived of "substantially the whole benefit which it was the intention of the parties as expressed in the contract that it should obtain" (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd  EWCA Civ 7).
Demonstrating "deprivation of the benefit" or a sufficiently serious breach
The assessment (of whether or not the delayed party was substantially deprived of the benefit of the agreement) is made at the time of the notice of termination.
The Court of Appeal provided guidance on how this assessment should be approached in Telford Homes (Creekside) Ltd v Ampurius Nu Holdings Ltd  EWCA Civ 577:
"the starting point must be to consider what benefit the injured party was intended to obtain from the performance of the contract… the next thing to consider is the effect of the breach on the injured party. What financial loss has it caused? How much of the benefit under the contract has the injured party already received? Can the injured party be adequately compensated with an award of damages? Is the breach likely to be repeated? Will the guilty party resume compliance with its obligations? Has the breach fundamentally changed the value of the future performance of the guilty party's outstanding obligations?"
In Telford, the matter concerned an investor's purported termination of its agreement with developer on the basis of the developer's delay and/or suspension of the works (which was a result of the developer's financial difficulties during the "credit crunch"). The court found that there was no repudiatory breach despite the developer suspending the works for over a year.
The date of assessment proved to be significant in this case because, unbeknown to the investor, the contractor had restarted work on the project, after 14 months of suspension, just a few weeks before the investor served its termination notice. When considering the impact of the re-commencement of works, the court observed that delay is capable of being "cured" by faster performance (paragraph 60):
"A breach of contract, although serious, may be capable of remedy. If it is remedied before the injured party purports to exercise a right of termination, then the fact that the breach has been remedied is an important factor to be taken into account. Likewise if there is delay in performance of an ongoing obligation it may well be possible for the delay to be made up by faster performance."
Had the investor served the notice before works had recommenced on site, the outcome of the case may well have been different.
So what does the delayed party need to show if the works are ongoing but significantly behind? In Telford, significance was attached to the financial loss (lack of) suffered by the investor as a result of the developer's delay. It is crucial that a terminating party can demonstrate the losses that the delay has caused it to suffer (or that it reasonably anticipates it will cause) if it intends to terminate on grounds of delay. Depending on the nature of the project, the terminating party should be able to do this (time related costs of the Project, liquidated damages payable, the costs of financing etc). However these losses need to, objectively in all the circumstances, be significant enough to deprive the claiming party of substantially the whole benefit of the contract. This may be a difficult hurdle to overcome; it has been acknowledged by the courts that "where the party said to be in breach by delay is nevertheless making an effort to perform the contract, it is intrinsically difficult for the other party to establish fundamental breach in this sense" (Shawton Engineering Ltd v DGP International Limited  EWCA Civ 1359, paragraph 32).
In Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar  EW 1028 (TCC) the issue concerned termination for delayed works under a subcontract for the design and construction of a tunnel under the runway of Gibraltar Airport (OHL and Gibraltar). The TCC found that the two year delay to the two year project was "serious enough" to justify termination (this case concerned a contract permitting termination for failure to proceed with due expedition and without delay). The OHL and Gibraltar decision is fact specific and provides limited practical guidance as to how to determine whether delay is sufficiently serious to justify termination. Permission to appeal has however been granted by the Court of Appeal and will be heard by the court this month (May 2015). Hopefully the Court of Appeal decision will provide this guidance.
Waiver of breach / affirmation of the contract
There is an obvious tension that arises between allowing delay to continue to ensure that a sufficiently serious or repudiatory breach can be substantiated, and, the risk of waiving the contractor's breach / affirming the contract. This may be more difficult if there are a number of separate periods of delay; which periods of delay fall within the assessment? It is possible that the right to consider earlier delays in the project is lost as a result of subsequent actions. This should be dealt with in correspondence that records the fact of delay and reserves the position. The courts have recognised a "middle ground between acceptance of a repudiation and affirmation of contract, and that is the period when the innocent party is making up his mind what to do" (Stocznia Gdanska SA v Latvian Shipping Company & Others  EWCA Civ 889, at paragraph 87).
The decision to terminate
Before making the election, consider why the delayed party wants to terminate.
In addition to the difficulties of identifying and substantiating an entitlement to terminate as set out above, it may be that the concern driving the election to terminate is not actually addressed by termination. For example, if the delayed party's main priority is timely completion of the works, it will need to consider how quickly a new contractor can be instructed and re-commence the works. Are there procurement rules that must be complied with? Are there factors on the project that arguably contributed to the delay that may also delay the incoming contractor? In many cases, the best approach may be to persevere with the incumbent contractor. If litigation proceedings follow the termination, termination is certainly not a quick means of resolving issues between the parties and getting the project finished. Taking OHL and Gibraltar as an example, press reports suggest that construction of the tunnel is anticipated to finish in September 2016, over 5 years after the contract was terminated.
If, however, the delayed party decides that termination is the best option in the circumstances, it must follow the contract provisions closely (for example by serving the appropriate notices); be prepared to demonstrate a positive case as to the contractor's delay, demonstrating losses suffered as a consequence; and defend any accusations that it has waived its rights to terminate based on the contractor's delay. As mentioned above, OHL and Gibraltar is being appealed in the Court of Appeal. The decision may offer some reassurance to parties that feel they should be entitled to terminate on the basis of contractor delay.