Terminating for breach of progress obligations – key questions

Posted: 14/08/2024

This article considers the questions that commonly arise when considering a termination under a construction contract for breach of a contractor’s, or subcontractor’s, progress obligations.

What types of progress obligations are there?

Often there will be an obligation to complete by a date (or dates), with a mechanism to adjust this. In the absence of a specified date, there is likely to be an implied obligation to complete within a reasonable time.

Many contracts will include additional progress obligations. For example:

to proceed ‘regularly and diligently’, ie JCT DB 2016 clause 2.3. JCT SBC/Q 2016 clause 2.4;
‘in accordance with a programme’, ie JCT DBSub/C 2016 clause 2.3; or
‘in accordance with the progress of the main contract works’, ie JCT DBSub/C 2016 clause 2.3.

Would an obligation to proceed ‘regularly and diligently’ be implied?

Conceivably, but in reported cases the courts have declined to imply such a term, preferring instead to hold that the (sub)contractor should be at liberty to organise its work as it chooses.

Note also that some standard form construction contracts contain a right to terminate for not proceeding ‘regularly and diligently’, even without a freestanding obligation to proceed as such.

What does an obligation to proceed ‘regularly and diligently’ (or similar) require?

Early cases offered limited guidance:

London Borough of Hounslow v Twickenham Garden Developments [1971] Ch 233 – ‘These are elusive words, on which the dictionaries help little. The words convey a sense of activity, of orderly progress, and of industry and perseverance…’

GLC v Cleveland Bridge and Engineering [1984] 34 BLR 50 – the contractor must ‘get on with it’. What is required ‘depends on the objective’.

West Faulkner Associates v London Borough of Newham [1995] 71 BLR 1 – ‘…to proceed continuously, industriously and efficiently with appropriate physical resources so as to progress the works steadily towards completion substantially in accordance with the contractual requirements as to time, sequence and quality of work…’

‘…like the elephant, [it is] far easier to recognise than to describe’.

More recent cases – Sabic UK Petrochemicals Ltd v Punj Lloyd Limited [2013] EWHC 2916 and Vivergo Fuels Ltd v Redhall Engineering Solutions Limited [2013] EWHC 4030 – have offered more practical guidance:

delay against the intended programme is not in itself conclusive, but may suggest and evidence a lack of due diligence;
failure to produce a programme on which to plan the work or by which to monitor and manage the work is not of itself conclusive, but may suggest and evidence a lack of due diligence;
failure to achieve the programmed productivity because of inadequate resourcing will usually evidence a failure to proceed regularly and diligently;
poor labour management and inadequate supervision does not necessarily establish that a contractor is not proceeding regularly and diligently, but again it may be good evidence of this;
the contractor is not released from its obligation to exercise diligence simply because the completion date has been missed; and
an employer may jeopardise its position where it tries to manage and mitigate a delay caused by the contractor, and requests that the contractor re-deploy resources to higher priority areas.

Is it possible to terminate for failure to complete on time?

Most terminations for breach of progress obligations relate to obligations to proceed ‘regularly and diligently’ (or similar wording), or to unlawful suspension or abandonment.

Failure to achieve an obligation to meet a particular completion date may not be a separate ground for termination in a construction contract. It is not under JCT forms of contract, for example. It is more common in other types of agreement, ie development agreements or agreements for lease with development obligations.

Are there procedural formalities to be observed?

Yes, and the courts tend to apply such contractual requirements strictly, with the result that a procedural irregularity could invalidate an otherwise justified termination. Worse still, the exclusion of a contractor or subcontractor from site while relying on an invalid termination could put the terminating party in repudiatory breach, with very significant adverse consequences.

Typical requirements relate to:

timing, particularly where there is a requirement to serve a default notice prior to a termination notice, or otherwise to allow a period for correction. Contractual provisions regarding timing for the service of a notice will need to be considered;
the form and content of the notice;
who may serve the notice. It may not be the same for a default and a termination notice; and
how any notices have to be served. Again, it may not be the same manner for a default and a termination notice.

When should the test be applied?

Under most default notice regimes with a period for correction, the test should be applied:

when the default notice is served; and
when the period for correction expires.

What should I consider when applying the test?

This will very much depend on the facts, but the following areas of enquiry are invariably relevant:

Programme

Is there a programme? Is it up to date? In practice, there may well be a gap between the last updated programme and the relevant points in time. Developments in this gap will need to be considered, particularly at the subcontract level where there may be lots of ongoing activities for which the subcontractor in question is not responsible.

How does actual progress compare to the programme? Can any differences be explained away?

Resourcing

What level of resource was required? Consider:

tender and contract documents;
method statements;
contemporaneous records of requests and projections/statements of intent;
cash flow forecasts versus applications for payment; and
an analysis of the resource required.

Was there sufficient allocation of resource? Consider:

site records, attendance records, inspection reports;
emails; and
accounts from site personnel.

Other reasons for delay

Are delays explained by matters for which the (sub)contractor in question is not responsible? This may be apparent from:

progress reports or meeting minutes;
emails;
notices of delay or extension of time requests; or
responses to calls to ‘hurry up’.

What effect did these factors have?

The assessment should be concluded with a critical and objective consideration of the grounds for termination. In practice, the terminating party will need to justify its decision and it would be wise to ensure that it can be clearly explained and supported by strong evidence. It should consider critically whether any improvement in a period for correction is sufficient to satisfy the contract.

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