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Termination by Employer under FIDIC Red Book (Conditions of Contract for Construction) 2017

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FIDIC Red Book (Conditions of Contract for Construction) 2017 stipulates the provision regarding ‘Termination by Employer’ under Clause 15 of General Conditions. Before discussing further, the provisions under the clause, let us first understand what the termination is?

Termination of Contract

As we all know that, a contract is an agreement enforceable by law. Termination of the contract is ending contract legally before both the parties into the contract has fulfilled their obligations. There may be several reasons of terminating a contract. It may be terminated by the employer on account of breach of contract by the contractor. The contractor may also terminate the contract it the employer has breached the contract. The contract may also be terminated as per the convenience of the Employer.

In this article, we will know about the provision regarding ‘Termination by Employer’ under FIDIC Red Book (Conditions of Contract for Construction) 2017 which is stipulated in Clause no. 15.

Clause No. 15: Termination by Employer

The Employer may terminate the contract for two reasons.

  1. For Contractor’s Default
  2. For Employer’s Convenience

This clause has seven sub- clauses the detail of which is given in below mentioned table.

Sub- Clause No.Sub- Clause Name
15.1Notice to Correct
15.2Termination for Contractor’s Default
15.3Valuation after Termination for Contractor’s Default
15.4Payment after Termination for Contractor’s Default
15.5Termination for Employer’s Convenience
15.6Valuation after Termination for Employer’s Convenience
15.7Payment after Termination for Employer’s Convenience

Let us discuss each sub- clause in detail.

Sub- Clause 15.1, Notice to Correct

This clause provides an opportunity to the contractor to remedy any failure of his obligation within a stipulated time. Under this clause, the Engineer may give a notice to the Contractor to make good a failure within a specified time, in case the Contractor fails to carry out any obligation under the contract. This notice is called the ‘Notice to Correct’ and it comprises of the following

  1. Details of Contractor’s failure;
  2. Sub- clause or provision under which the Contractor has the obligation;
  3. Time within which the Contractor has to remedy the failure.

After receiving the ‘Notice to Correct’, the Contractor shall quickly respond to the Engineer with details of measures he will take to remedy the failure.

The time specified in the Notice to Correct shall not imply any extension of the Time for Completion.

Sub- Clause 15.2, Termination for Contractor’s Default

This sub- clause is further divided into four parts. 15.2.1, ‘Notice’, 15.2.2, ‘Termination’, 15.2.3, ‘After Termination’ and 15.2.4, ‘Completion of the Works’.

15.2.1 Notice

Under this sub- clause, the Employer may give a Notice to Contractor of the Employer’s intention to terminate the Contract (or in the case of sub-paragraph (f), (g) or (h) below a Notice of termination) for the reasons mentioned below.

(a) If the Contractor fails to comply with either a Notice to Correct, a binding agreement or a decision of the DAAB.

(b) Abandons the work or demonstrates an intention not to comply with any obligation

(c) Fails to comply with Clause 8 [Commencement, Delays and Suspension] or with Sub- clause 8.2 [Time for Completion].

(d) Fails to comply with a Notice of rejection given by the Engineer under Sub-Clause 7.5 [Defects and Rejection] or an Engineer’s instruction under Sub-Clause 7.6 [Remedial Work], within 28 days after receiving it;

(e) Fails to comply with Sub-Clause 4.2 [Performance Security];

(f) Subcontracts the work in breach of Sub- Clause 5.1 [Subcontractors], or assign the contract without the required assignment under Sub- Clause 1.7 [Assignment];

(g) Becomes bankrupt or insolvent;

If a contractor is a JV, then it will be a cause of termination if any of the above matters apply to a member of JV unless the other members confirm that in accordance with Sub-Clause 1.14(a) [Joint and Several Liability], such member’s obligation shall be fulfilled under the contract.

(h) If the Contractor is found to be engaged in corrupt, fraudulent, collusive or coercive practice at any time in relation to the contract.

The failures under the point (b) to (h) comes under material breach of the Contractor’s obligations under the contract.

15.2.2 Termination

If the Contractor does not remedy the matter described in sub- clause 15.2.1, within 14 days of receiving the notice, the Employer may by giving a second Notice to the Contractor immediately terminate the Contract.

The date of termination shall be the date the Contractor receives the second notice however in case of sub- paragraphs (f), (g) or (h) above, the date of termination shall be the date the Contractor receives this notice.

15.2.3 After Termination

After termination of the contract as per sub- clause 15.2.2, the Contractor shall comply with any reasonable instruction included in a Notice given by the Employer under this sub- clause, deliver to the Engineer, any goods required by the Employer, all Contractor’s documents & all other design documents (if any) and leave the site.

If the Contractor does not leave the site, the Employer shall have the right to expel the Contractor from the Site.

15.2.4 Completion of the Works

After termination, the Employer may complete the work.

After completion of the work, the Employer shall give notice to Contractor that the Contractor’s equipment and temporary works will be released. Any amount due to the Employer from the Contractor’s side may be recovered by selling those items and the balance payment shall be returned to the Contractor.

15.3 Valuation after Termination for Contractor’s Default

After termination, the Engineer shall proceed under Sub- Clause 3.7.3 [Agreement or Determination] to agree or determine the value of the Permanent Works, Goods and Contractor’s Documents, and any other sums due to the Contractor for work executed in accordance with the contract.

15.4 Payment after Termination for Contractor’s Default

The Employer may withhold the payment of the Contractor until the following costs, losses and damages are established:

The Employer shall be entitled subject to Sub-Clause 20.2 [Claims For Payment and/or EOT] to payment by the Contractor of:

  1. The additional costs of execution of the work and all other costs incurred by the Employer
  2. Any losses and damages suffered by the Employer
  3. Delay damages

15.5 Termination for Employer’s Convenience

Under this clause, the Employer may terminate the contract for his convenience by giving a notice to the Contractor.

After giving a notice to the Contractor under this clause, the Employer have no right to use the Contractor’s documents, equipment, temporary works, etc. The Employer shall immediately return the performance security to the Contractor.

Termination under this Sub-Clause shall take effect 28 days after the later of the dates on which the Contractor receives this Notice or the Employer returns the Performance Security.

15.6 Valuation after Termination for Employer’s Convenience

After termination under sub- clause 15.5, the Contractor shall, submit details regarding

  1. The value of work done (please refer Sub- Clause 18.5 and 14.13 also)
  2. The amount of any loss or profit and damages suffered by the Contractor due to this termination.

The Engineer shall then proceed under Sub-Clause 3.7 [Agreement or Determination] to agree or determine the matters described in points a) and b) above.

The Engineer shall issue a Payment Certificate for the amount so agreed or determined, without the need for the Contractor to submit a Statement.

15.7 Payment after Termination for Employer’s Convenience

The Employer shall pay the Contractor the amount certified in the Payment Certificate under Sub-Clause 15.6 [Valuation after Termination for Employer’s Convenience] within 112 days after the Engineer receives the Contractor’s submission under that Sub-Clause.

Summary

Termination of the contract is ending contract legally before both the parties into the contract has fulfilled their obligations. FIDIC Red Book (Conditions of Contract for Construction) 2017 stipulates the provision regarding ‘Termination by Employer’ under Clause 15 of General Conditions. The Employer may terminate the contract for two reasons. (1) For Contractor’s Default, and (2) For Employer’s Convenience. The ‘Clause 15, Termination by Employer’ has seven Sub- Clauses, Notice to Correct, Termination for Contractor’s Default, Valuation after Termination for Contractor’s Default, Payment after Termination for Contractor’s Default, Termination for Employer’s Convenience, Valuation after Termination for Employer’s Convenience and Payment after Termination for Employer’s Convenience.

Only the brief provisions regarding sub- clauses are given in this article for basic understanding of the clause. For full provisions under the sub- clauses, FIDIC Red Book (Conditions of Contract for Construction) 2017 may be referred.

The termination of contract should be the last resort, if no other option is left, because it may lead to litigations and disputes and the objective of t

he contract is also not fulfilled. The Employer should carefully handle any situation leading to termination of the contract and due diligence should be taken by the employer, before terminating the contract.

References:

  1. FIDIC Conditions of Contract for Construction, Second Edition, 2017 (FIDIC Red Book)
  2. https://fidic.org/

Disclaimer

  1. The description of sub- clauses given in this article is only a part of the whole clause which is relevant to the ‘Termination by Employer’. For whole provision under the sub clauses refer to FIDIC Conditions of Contract for Construction, Second Edition, 2017.
  2. The content of this article is only for education purpose and it cannot be used as a legal advice. For any legal issue a suitable professional may be consulted.
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Rajesh Pant
Rajesh Panthttps://managemententhusiast.com
My name is Rajesh Pant. I am M. Tech. (Civil Engineering) and M. B. A. (Infrastructure Management). I have gained knowledge of contract management, procurement & project management while I handled various infrastructure projects as Executive Engineer/ Procurement & Contract Management Expert in Govt. Sector. I also have exposure of handling projects financed by multi-lateral organizations like the World Bank Projects. During my MBA studies I developed interest in management concepts.
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