Clifford Chance

Why your construction contract default termination remedies are (often) wrong

We have been thinking this for a while - too many construction contracts contain an inherently perverse position in relation to Contractor-default terminations.

A termination liability position in construction contracts will typically read as follows:

If the contractor has defaulted and is to be replaced by another contractor, it will be liable for the additional costs of completing the works and certain other direct losses arising from the termination. Potentially it will also be liable for some delay liabilities as well, although the extent to which this is true depends on the wording used and interaction with any exclusion of so-called economic losses. This is the 'fair' position accepted by the market, often further limited by agreed caps on liability.

However, if the contractor's default is so bad it manages to lead to complete project failure, such that it will now never be completed (for example, because of loss of a key consent, license or termination of another project document), the contract will often contain the same exclusive list of liabilities.

In other words, in this scenario, additional costs of construction/replacements would be covered – but there will not be any.

Likewise delay losses, which will be zero (or incapable of calculation and therefore irrecoverable).

The Employer's losses will no doubt be far more significant in the event of a total project failure, but its recoveries will often be found grasping for a foothold at the bottom of the greasy slope of a messy lawyers' argument about the meaning and intent of restrictions to 'direct loss' and/or exclusions of loss of profit, financing and 'consequential' losses.

Yes, we know that terminations are rare - other than in cases of insolvency, which will probably limit recoveries anyway – and that total project failures are even rarer. But is that really any excuse for a defaulting contractor's liability reducing when the materiality and consequences of its default increase?

Alternatively, a wide exception is made to the exclusion of economic losses, and it is the contractor who is exposed by the termination liabilities failing to recognise recoveries under other project documents.

The solutions to this are not particularly hard to imagine or complex to draft - it is a just a shame that nearly every single standard form contract continues to persist in the notion of construction contracts existing in wonderful isolation of all other project dynamics and agreements.

And this seems odder when placed opposite the increasing trend for promoters of standard forms to argue that their contracts are delicately balanced creations of perfect risk allocation that should never be amended, when the forms themselves continue to ignore a number of the most basic requirements of those funding and paying for projects to happen in the first place.