Cold Link Africa October 2019 | Page 41

FEATURE INCORPORATING COLD CHAIN TERMINATION OF N/S SUBCONTRACT The N/S agreement provides at clause 38.3: ‘The subcontractor may give summary notice of termination to the contractor in the event of termination by the contractor or employer in terms of the principal agreement.’ It would seem that this clause refers to any termination of the principal building agreement by the employer or the contractor on the grounds of the other’s default. The subcontract specifically and separately provides: • At clause 37 for termination by the employer where the works have been destroyed; therefore, this is excluded and dealt with in terms of sub-clauses of this clause. • At clause 39 for termination for reasons associated with vis major 1 and similarly requires the implementation of the sub- clauses under this heading. The minute it comes to the subcontractor’s attention that either the employer or contractor has terminated the principal building agreement on grounds excluding those provided for at clauses 37 and 39, it can issue summary notice (without giving advance notice) of its own immediate termination of the subcontract. This should be done immediately as will be seen from the consequences of termination but also dependent on the status of payments on which it could impinge materially. It is irrelevant to the subcontractor whether the termination of the principal contract was proper or not or on what default it was terminated. To protect its interests, the subcontractor should obtain a written document from some source confirming the termination to justify its actions in terms of clause 38.3. 1. THERE ARE THREE POSSIBLE CONSTRAINTS THAT MAY IMPINGE ON THIS ISSUE: 1. Where the contractor rejects the termination – one of the legal options available to the contractor, if applicable, is to allege that the employer is repudiating the contract. Repudiation in such a case means that the employer is acting contrary to the terms of the contract. The relevant facts in such a case are objective and it is irrelevant whether the employer did not realise it was breaching the contract. How this impinges on the subcontractor is that the prejudiced party faced with a repudiation of the contract has a choice. It can either elect to accept the repudiation and sue for breach of contract, which provides a clear-cut termination in terms of clause 38.3, or it can elect to demand specific performance i.e. try to force the employer to abide by the contract. Where an election to demand specific performance from the employer leaves a subcontractor in terms of clause 38.3 becomes dependent on the facts in each case. It is probable that the subcontractor would be entitled to terminate on the basis of the manifestation of the employer’s intention to persist with the termination and argue the question of the legality of the termination in dispute resolution forums. The subcontractor should assess the balance of prejudice it faces and act accordingly. 2. Where the subcontractor is in ‘material breach’ of contract and is therefore precluded from terminating the subcontract in terms of clause Because the parties’ obligations are suspended by vis major/casus fortuitus, the right to terminate if the cause of the suspension continues for too long or arises repeatedly is dependent on each particular circumstance. To overcome this uncertainty, building contracts generally try to stipulate for an enforceable period after which either party has a right to terminate. COLD LINK AFRICA • OCTOBER 2019 38.6. It should be noted that such breach could probably be argued and proved after termination if not already alleged prior thereto. The question facing such a subcontractor would probably involve an analysis of its factual position at the time and the balance of prejudice it would suffer. It is submitted that the resultant prejudice the terminated contractor could prove in the event of the subcontractor choosing to terminate the subcontract could be arguable and that the subcontractor would probably find it preferable to terminate and rely on the benefits available to it in terms of clause 38.5 and leave it to the contractor to try to claim damages. The risk in the latter case would lie in the contractor’s ability to recover from the subcontractor’s security. 3. The potential for the contractor (or the liquidator) to allege an improper termination and recover the funds available from the on-demand JBCC construction guarantee. This is a very real risk and the contractual disputes are not available as a defence to the obligation of the guarantor to pay upon receipt of the properly delivered notices from the contractor. THE EFFECT OF TERMINATION Without becoming involved in legal detail, ‘termination’ means broadly that there is no contract and the terms of the contract fall away, leaving only the residual obligations and provisions as provided in the contract. The terms of the subcontract agreement have ongoing significance for purposes of damages claims as the source of the position that would have prevailed had the subcontract not been terminated. The termination clauses include provisions that guide the process and determine the rights and obligations POSSIBLE DRAFT NOTICE Legal advice should always be sought, but if an emergency arises, the following letter may provide some thoughts: To contractor, principal agent, responsible specialist agent and employer: Dear Sir, We have been advised that the employer has terminated the principal agreement with you in terms of clause 36.0 of the JBCC Principal Building Agreement for the works. Should this not be the case we request that you please respond urgently and advise us of the correct state of affairs. In terms of clause 38.3 of our JBCC N/S Subcontract Agreement with you, our N/S agreement can be summarily terminated upon such termination of the principal agreement and we hereby give notice to you of our intention to exercise this right with immediate effect. We refer you (and by copy hereof the employer and principal agent) to the provisions applicable to such termination at clause 38.5 which we will start to implement with immediate effect. [We place on record that at the time of termination we had suspended work on the N/S works as instructed by you in your mail of …] (If applicable). We await your confirmation of the alleged status and of receipt of this notice by return of mail. All our rights remain fully reserved. Regards, (sign) www.coldlinkafrica.co.za 41