Forfeiture Clauses in Construction Contract

In building and engineering contracts it is usual to insert a provision empowering the employer to forfeit certain rights or property of the contractor on the occurrence of certain events. “Forfeiture clause” is a loose term usually used to describe a clause in a written building contract giving the employer the right upon the happening of an event to determine the contract or the contractor’s employment under it, or to eject the contractor from the site, or otherwise to take the work substantially out of his hands.

In standard form building contracts it is usually referred to as ‘determination of employment’ or termination. In this sense JCT SBC 05 clauses 8. 4 and 8. 9 which relates to termination by employer and contractor respectively are forfeiture clauses. It is common in construction contracts to find determination clauses allowing either side to bring their contractual obligations to an end should an event specified occur due to the actions or inactions of the other.

It would seem that common law determination and determination under a clause of contract are alternatives. There are differences between the processes. First, whereas common law determination depends upon repudiatory conduct or a fundamental breach, the grounds of determination specified by the contract need not exhibit these features, although frequently such will be present. Second, the remedies for common law determination are provided by law, whereas with a contractual determination the clause itself must expressly deal with the issue of remedies.

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Third, at common law in the face of repudiatory conduct or fundamental breach the innocent party need only indicate to the other that he accepts the breach and considers the contract discharged. Under a contractual determination clause the procedure specified must be carefully followed, failure to so may prevent a successful determination. The right of forfeiture may be stipulated to accrue either 1) on the bankruptcy of the contractor only, or ) on his bankruptcy and also on the occurrence of other events, or on the occurrence of other events only Clause 8. 5. 1 of the JCT SBC 05 states that if the contractor is insolvent, the employment may at any time by notice to the contractor terminate the contractor’s employment. Similarly Clause 8. 10. 1 of the JCT SBC 05 states that the employer is insolvent, the contractor may by notice to the employer terminate the Contractor’s employment under the contract.

A provision empowering the employer to forfeit the contract on the bankruptcy of the contractor is introduced into building and engineering contracts for the purpose of preventing a contractor’s trustee in bankruptcy from electing to complete the contract, and such a provision is valid, if it is coupled with a stipulation that the contractor’s contract shall be a personal one; and further, so far as the forfeiture affects the mere licence of the contractor to enter upon the site, it would seem that the revocation of that licence can be conditioned on bankruptcy, as a mere licence does not seem to be included in the definition of property.

A trustee, however, would be entitled to enter the site to remove property of the bankrupt in respect of which the employer had no right under the contract The validity of a right to forfeit on the bankruptcy of the contractor is dependent on the nature of what is stipulated to be forfeited.

In addition to bankruptcy, forfeiture is usually conditioned upon the happening of one or more of the following events:

1. not commencing the work
2. not regularly proceeding with the work for a fixed number of days,
3. not proceeding to the satisfaction of the employer or the architect,
4. not proceeding with such despatch as, in the opinion of the architect, will enable the works to be duly completed by the time stipulated,
5. not observing some stipulations of the contract
6. leaving the works in an unfinished state, or
7. failing after proper notice to rectify defective work,
8. not maintaining the works JCT 05 SBC

Clause 8. states:

1. Notice of termination of the Contractor’s employment shall not be given unreasonably or vexatiously.
2. Such termination shall take effect on receipt of the relevant notice
3. Each notice referred to in this section shall be given in writing and given by actual, special or recorded delivery. Where given by special or recorded delivery it shall, subject to proof to the contrary, be deemed to have been received on the Second Business Day after the date of posting.

Also Clause 8. 3 of the JCT 05 states:

The provisions of clauses 8. 4 to 8. 7 are without prejudice to any other rights and remedies of the Employer.

The provisions of clauses 8. 9 and 8. 10 and (in the case of termination under either of those clauses) the provisions of clauses 8. 12, are without prejudice to any other rights and remedies of the contractor.

Irrespective of the grounds of termination, the contractor’s employment may at any time be reinstated if and on such terms as the parties may agree The requirements of the contract must be properly complied with, for the courts construe forfeiture clauses strictly, and a wrongful forfeiture by the employer or his agent normally amounts to a repudiation on the part of the employer.

There must be some definite unqualified act showing that the power has been exercised, although writing or other formality is not necessary unless expressly required. The contract may also require a certain notice to be given, and that such notice must set out the default complained of. In appropriate circumstances the notice may be of a general character and need not necessarily refer to the number of the clause which is being invoked, provided that there is no doubt that it is exercising or purporting to exercise the contractual power of determination.

But it is obviously preferable to state explicitly the clause relied on and to follow its actual wording as closely as possible. It also seems that if a material statement in such a notice is made recklessly, without an honest belief in its truth, the notice is a nullity. Forfeiture in reliance on such a notice would be ineffective and would normally amount to repudiation by the employer. When an event occurs which gives rise to the right to forfeit, the power of forfeiture must be exercised within a reasonable time or the employer will be deemed to have waived his ight unless the event is a continuing breach of contract. Where the contract provides for termination of the contract by a warning notice followed by a termination and two notices have been served, a party can only rely on that provision if an ordinary commercial businessman can see that that there is a sensible connection between the two notices both in content and in time as seen in the case of Architectural Installation Services v James Gibbon Windows.

Also, where the contract provides for completion by a certain date and also provides for forfeiture for delay, and the completion date has passed, it is a question of construction whether the forfeiture clause for delay can still be enforced. Thus where the object of the clause was to enable the architect to “have the means of requiring the works to be proceeded with in such a manner and at such a rate of progress as to ensure their completion at the time stipulated” it was held that the clause did not apply after the completion date.

But in another contract where the clause provided “for the execution of the work with due diligence and as much expedition as the surveyor will require”, it was held that the clause was as much applicable to the fulfilment of the contract within a reasonable time as to its completion by the contract date. The parties may agree that any consequences may follow the exercise of a right of forfeiture, provided there is no illegality, nor fraud on the bankruptcy law, and the clause is not so onerous that it will not be enforced on the grounds that it is a penalty.

The employer is usually given the right to take possession of the site and complete the works. In addition, there is frequently a clause vesting the property in unfixed materials, and perhaps plant, in the employer, or there may be merely a right to seize the materials or hold them by way of lien until they are built into the works, or there may be clauses giving the employer rights to use the contractor’s plants and materials. Where the contractor is guilty of any of the defaults specified in clause 8. 1 JCT 05 SBC, the contract administrator is to issue a written notice specifying the default. If the default is then continued for 14 days, the employer may within 10 days of the continuance terminate the contractor’s employment by using a notice to this effect. Furthermore, if termination does not take place on this occasion, any subsequent repetition of a specified default gives the employer the right to terminate immediately; there is no need (and indeed no power) to issue a second default notice. It is also expressly provided under clause 8. 2. 1 that a notice of termination is not to be given ‘unreasonably or vexatiously’ When an employer, in exercise of his rights under a forfeiture clause, enters and completes the work and uses the contractor’s materials or plant, or holds retention money due to the contractor, he must, subject to the provisions of the contact, account to the contractor. He will have to show that that the materials and plant and money were expended reasonably.

The Court, it would seem ,as seen in Fulton v Dornwell, will make full allowance for extra cost caused by the disruption and delay occasioned by the contractor’s default. Also, where the employer determines the contract under a forfeiture clause because of some breach of contract by the contractor, the employer’s right to damages depends upon the wording of the contract. He may not be entitled to the enhanced cost of completing by another contractor if the breach for which he determined the contract did not amount to repudiation and the contract does not so provide. 20] Termination of contract was examined in the recent case between Ellis Tylin ltd v Co-operative Retail services. Co-operative Retail services Ltd (CRS) is a national retailer which operates from approximately 730 premises across the country. In early 1996 it contracted with Ellis Tylin the task of maintaining and repairing mechanical and electrical plant within its various premises. The contract was for a period of three years with provision for revision of rates of payment at the end of the first and second years.

Disputes arose as to the scope and responsibility for works carried out under the agreement and the operation of the contract came to an end three months after the end of the first year. Clause 1. 8 of the agreement concerned the review of fees for the maintenance services and the rights of either party to terminate the contract in the event that agreement could not be reached. Disputes arose as to whether the proper mechanisms for termination had been applied and the court was asked to consider these questions as preliminary issues.

It was acknowledged that the right of Ellis Tylin to end the agreement pursuant to clause 18 only arose if Ellis Tylin first took the action described within that clause. This involved making a written proposal for the revision of the amount of the fees after the expiry of ten months from the date of commencement of works. CRS argued that Ellis Tylin had failed to follow this procedure. Counsel for CRS submitted that clause 1. 8 of the contract should be construed either as a determination clause or as a break clause comparable to the type of provision found in leases. Strict compliance was required.

The act of contractual determination was one which deprived the other party of the benefit of the contract it had concluded. His honour Judge Bowsher QC reviewed textbooks on the subject of contractual termination. In Chitty on contracts (27th edition), it was stated “the terms of the of the termination notice may provide that notice can only be given after a specified event”. In the Interpretaion of contracts by Kim Lewison QC, it is stated “An option to terminate is construed in the same manner as any other option, and accordingly any condition must be strictly complied with.

Any condition precedent must be strictly fulfilled. The clause must be exercised strictly in accordance with its terms”. Also Hudson’s Building and Engineering (11th edition) states, “Exact and meticulous compliance by the determining party with any formal or procedural requirements laid down in the termination clause, for example, as to notices or time limits, will usually be required if a contractual termination is to be successful”

Judge Bowsher added however, that words in a contract should be given a natural and ordinary meaning and he quoted Lord Diplock when he said in Antaios Cia Naveira SA v Salen Rederierna AB: “if detailed semantic and syntactical words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”.

Judge Bowsher concluded that whilst Ellis Tylin had given notice earlier than the time period set down in the contract, there could be no doubt of the intention that negotiations should take place for a revision of the fee. Taking into account all the evidence he concluded that Ellis Tylin had given valid notice of termination of agreement. However, subsequent evidence showed that the parties had in fact agreed revision to the fees to be submitted to the second year of the contract.

Accordingly the notice of the termination had been overridden, and could not be regarded as a valid notice. By ceasing to work following expiry of its invalid termination notice, Ellis Tylin had repudiated the contract. The wrongful operation of a termination clause (i. e when you are not entitled to) amounts to repudiation. A contractual power of determination will be wrongly exercised if the events upon which it is conditioned are not established (unless the contract provides for that question to be concluded by a binding opinion or certificate).

In the great majority of modern contracts the question will be subject to review by an arbitrator or the courts, however; and it has also been seen that the courts have, under some clauses, been prepared to imply a term that the exercise of the power itself should be reasonable as seen in Renard Construction v Minister of Public Works[. ontractual determinations will also be wrongful if exercised prematurely in breach of a contractual time limit, however marginally.

It is an unavoidable feature of construction contracts that an employer’s purported determination will in nearly all cases constitute a repudiatory breach, if whatever the general merits, it later transpires that the determination was invalid. In such a case, if the contractor has accepted the repudiation by leaving the site, the owner will be liable for the possible heavy damages attendant upon repudiation and cannot, if he discovers his mistake, restore the contract status quo ante without the agreement of the contractor.

The purported exercise of a power to forfeit may be invalidated either by reason of the fact that the events upon which it is conditioned have not occurred; or, that a correct notice has not been given, or that that a sufficiently clear election to exercise the right has not been made, or that there has been a been delay or other conduct recognising the continued existence of the contract after knowledge of the breach, if the breach is not a continuing one.

Generally, the measure of damages in the case of a wrongful forfeiture falls to be determined by the ordinary common law rules. Per Lord Cranworth in Ranger v G. W. R. y,: “The right of the appellant (the contractor) would be to recover such amount of damages as would put him in as nearly as possible the same position as if no such wrong has been committed-that is, not as if there had been no contract, but as if he had been allowed to complete the contract without interruption”

In Smith v Howden Union (1890), the plaintiff had nearly completed a sewerage contract and the engineer fraudulently refused to certify. The defendants took possession of the works and certain plant. It was held that the plaintiff was entitled to damages for prevention of completion, such damages being what he would have been entitled to if he had completed and the engineer had certified; and judgement was given for the unpaid balance of the contract price, extras properly ordered, extras properly certified, and the value of the plant seized.

The principle remedy for any breach of contract is an award for damages. As a general principle, where an employer is guilty of a breach of a construction contract, the contractor is entitled to damages under two headings. The first is damages for any actual loss that has been suffered, and the second is damages for any profit of which the contractor had been deprived. Where the employer’s breach is sufficient to justify the contractor in terminating the contract, the contractor is entitled to damages reflecting everything which would have een received under the contract, or proportion of it that remains outstanding at the date of termination, less what it would have cost the contractor to complete the work. It has been clearly established that the damages should include the profit element on work remaining to be done as seen in the landmark case of Wraight Ltd v P H & T (Holdings) Ltd. Where, however, the contract is one which the contractor had under-priced and on which the contractor would thus have made no profit, only nominal damages will be awarded for the employer’s breach.

This is because as seen in C&P Haulage v Middleton, an award of damages should not put the claimant in a better position than if the contract had been performed. But if this procedure was relentless pursued it would lead to a party in default having to pay ‘for all loss de facto resulting from a particular breach however improbable, however unpredictable’. The courts therefore set a limit to the loss for which damages are recoverable, and loss beyond such limit is said to be remote. The famous rule as stated in the case Hadley v Baxendale is: Where two parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either

1. arising naturally, i. e according to the usual course of things from such breach of contract itself, or
2. such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it” This is demonstrated in the case of Balfour Beatty Construction (Scotland) Ltd v Scottish Power Plc.

The claimants there, who were constructing a concrete aqueduct over a main road, installed a concrete batching plant and arranged for the defendants to supply electricity to it. The claimants needed to pour all the concrete in a single continuous operation and so, when the electricity supply failed, the claimants had to demolish all the work which had been done. Unsurprisingly, it was held that while the defendants were clearly in breach of contract because of the power failure, they were not liable for the extra losses nvolved in the demolition and reconstruction, since the claimants had not informed them that a continuous pour was essential. It has long been established that contractor’s claims for loss and expense under express contractual provisions are assessed in exactly the same way as damages for breach of contract. Any disruption to the regular process of work under a contract may lead the contractor to incur administrative costs, such as the diversion of managerial time and effort, at head office.

If so, these costs may justifiably be claimed, but it will not be simply assumed that such losses have been suffered. They must be specified and properly supported by the evidence, for example by records of the time spent by individuals in dealing with the particular problem. Where the contract period is prolonged by something for which the employer is contractually responsible, the contractor may may also seek to claim in respect of general office overheads.

When making application for the head office overheads part of loss and/or expense under Standard Form Building Contracts, contractors often base their claim on a formula. The Courts have never given approval to the use of formula in this way although they have accepted the use of formulae in certain cases which generally were decided on their own facts. Indeed, the courts have tended to disapprove formulae unless as a last resort or the parties have agreed their use as seen in Alfred Mc Alpine Homes North Ltd v Property & Land Contractors Ltd. Actual costs are normally required.

Claims for head office overheads are essentially claims for lost opportunity to contribute to those overheads, because the overheads do not actually change or, if they do, the amount of any extra overheads directly resulting from the delay can be claimed separately. Formulae assume a healthy construction industry and a contractor with finite resources with the result that if he is delayed on a project, he will be deprived of the chance to take other work. Where the industry is sluggish or where the contractor is so large that turning away work does not arise, the latter will face difficult problems in showing the lost opportunity.

There are several formulae in common use notably Emden formula, Eichleay formula and Hudson formula. Also a contractor who has accepted the wrongful repudiation is not restricted to suing for damages for breach on contract. He may, as an alternative, where he has elected to treat the contract as rescinded, sue upon a quantum meruit. The expression quantum meruit means "the amount he deserves" or "what the job is worth". A quantum reuit clause claim is one in which the contractor seeks payment of the reasonable value of work done for the employer.

Where the employer is in breach of contract, the crucial question is whether the contractor in such circumstances can simply ignore the contract and instead claim a reasonable sum for all the work done, even if this means that the contractor recovers more than what would have recovered under the contract. In the situation where there is a contract, then the issue in a Contractual Quantum Meruit claim is either the measure of the “reasonable sum” or the interpretation of similarly wide express terms. The issue is whether the measure is on the basis of cost or market price. There appears to be no hard and fast rule.

In the case of an express contract to do work at an unquantified price, the measure is the reasonable remuneration of the contractor Serck Controls Ltd. v Drake & Scull Engineering Ltd. In the case where there was a contract, the assessment of a quantum meruit was usually based on actual cost which would include on and off site overheads provided that it was reasonable and was reasonably and not unnecessarily incurred, plus an appropriate addition for profit Judge Bowsher QC in Laserbore Ltd v Morrison Biggs Wall Ltd had to decide the meaning of the term "Fair and reasonable payments for all works executed".

He considered that the costs plus basis was wrong in principle even though in some instances it may produce the right result. The appropriate approach was to adopt general market rates.

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