House builders should scrutinise contracts before imposing cuts

Reports of house builders imposing price reductions on their contractors for current and future contracts continue to make the headlines.

In some cases, there has been a threat to terminate contracts if the contractors do not accept the reduction. Understandably, the supply chain is concerned. So what are the legal implications?

Can you terminate a contract?

A house builder cannot impose a price reduction on an agreed contract, unless the contract expressly allows for it. If the price reduction is not agreed, what is the house builder's position? Termination of the contract is not legal unless there is a clear contractual right to terminate at will or for convenience.

If the house builder makes a deduction, he is at risk of an adjudication claim and/or the contractor suspending work under the Construction Act.

House builders may try to get round a contractor's refusal to agree a price by cancelling the rest of the job. Will that work?

Again it depends on what the contract provides and you must look at exactly what work was included in it and whether its terms allow for what the house builder proposes.

The most recent relevant case is Abbey Developments v. PP Brickwork (4 July 2003). The court considered the position of a main contractor which wanted to omit part or all of the works of a subcontractor in order to give them to another, cheaper one.

The judge held that variation provisions in a contract must be construed carefully so as not to deprive a subcontractor of its contractual right to complete the works.

He stated that "reasonably clear words are needed in order to remove work from the contractor simply to have it done by someone else" because "the purpose of a variation clause is to enable the employer to alter the scope of the works to meet its requirements".

The question is whether a particular variation clause is clear and wide enough to permit the omission of the rest of the work and/or the contract otherwise allows early termination of the contractor's work.

The test applied is what purpose the contractual provisions envisaged – but this must be clear in order to override the contractor's right to have the opportunity of completing all the contract work.

No right to take away work

There may be a breach of contract if it turns out that the variation instructed is not for a purpose for which the clause was designed.

The judge discussed the standard variation clause found in many standard form contracts and said that it did not give the employer/contractor the right to take away work in order to give it to someone else. He said that it is "a right only to omit work that the claimant considers is no longer required by the project".

Accordingly, thought needs to be given to the precise terms of existing contracts. If there is no clause allowing termination for convenience, the chances are that a house builder is stuck with his original deal.

Published in Construction News, 7 February 2008