Under most standard forms of construction contract, there are prescribed consequences for violation or breach of its conditions. Some of the examples include liquidated damages to be imposed for culpable delay to completion dates, withholding of progress payment if the contractor fails to submit a baseline programme within certain timeframe etc. These ‘deterrent measures’ are important to keep the agreement intact and maintain the contractual relationship notwithstanding that one party had breached its obligations. How serious should the violation be before it amounts to a fundamental breach to the contract where it supersedes the regular application of those deterrent measures? Under what circumstances is the aggrieved party entitled to exercise its right of termination under the contract?

This is part 3 of a series of articles comparing PSSCOC Design & Build  (seventh edition published in 2020) with REDAS Design & Build (third edition published in 2010). The changes made in fourth edition of REDAS in 2022 do not meaningfully affect the scope of this article apart from the role of certifier which will be addressed separately. The general differences between the third and fourth edition of REDAS form pertain to Covid-19 pandemic related prolongation costs and co-sharing mechanism of certain construction expenses, advance payment for material fabricated offsite, the introduction of delay certificate prior to recovery of liquidated damages etc.

The issue of termination for default is particularly interesting under design and build (D&B) contract because the contractor is under a broader scope of responsibility than a traditional contractor with only construction responsibility. There are various serious and complex implications that ensue immediately after termination. These include how to meaningfully utilise partially completed design and what is the premium to engage a replacement contractor that is agreeable to accept and be responsible for the adequacy of  ‘legacy design’. It is fair to say termination is not a decision taken lightly since it hardly offer any immediate relief to the aggrieved party. This is why the above mentioned deterrent measures are perhaps more practical if there is meaningful prospect to rehabilitate a problematic contractual relationship. 

This article examines the basics of termination for default provisions including how such contractual rights exist in parallel with common law termination rights. In order to preserve such rights, the aggrieved party should be mindful of various contractual notices as well as procedural requirements associated with termination for default. There are certain distinctions between PSSCOC and REDAS as regards these termination provisions. Although both contract forms expressly set out grounds for termination which justify the Employer exercising its right under the contract, its application can be fairly complex and nuanced. This is because the threshold for termination is rather high, where the default has to be so serious that it objectively supersedes the regular application of deterrent measures. A reasonable and objective judgment call is required in this regard. An appreciation of the parallel common law termination rights is instructive as a matter of context and comparison. A party’s failure to comply with the necessary notification and procedural requirements under contract for termination may itself constitute a repudiatory breach of contract, which is a classic case of a double edged sword. The next few sections of this article will provide some tips and guidance on how to navigate such treacherous contractual terrain.

Basics of Termination For Default

The termination for default of PSSCOC can be found under Clause 31.1 whereas a similar provision under REDAS can be found under its Clause 30.2. These are the Employer’s contractual rights which operate in parallel with its common law rights. On the other hand, the contractor’s contractual rights for termination can be found in Clause 31.2 of REDAS but there is no equivalent provision under the PSSCOC. Therefore, the contractor under the PSSCOC may need to rely on its common law rights for purposes of termination for default.

Parties usually agree on terms for rights to terminate under contract in addition to their common law rights as some have grappled with difficulties of exercising such right under common law. In general common law right to terminate is deemed to have arisen when there is a repudiatory breach committed by an offending party. Such breach is usually so serious that it conveys the fact that the offending party has no intention of performing the contract and the aggrieved party is deprived of the benefit of the contract. Such breach has to be so egregious that it is said to go to the root of the contract. The common law requires the aggrieved party to ‘accept this breach’. If there is any delay in accepting such breach, this may constitute an election to affirm the contract thereby excluding the right to terminate. Therefore the aggrieved party’s hesitation to exercise its common law right promptly may effectively extinguish such right. Unfortunately what objectively constitute repudiatory breach is fact sensitive and there is an absence of a specific definition on the expected level of seriousness. A party that terminates the contract under common law without the right to do so may itself be held to have wrongfully terminated the contract. In the context of construction contract, if the contractor delays the project completion, does it objectively amount to repudiatory breach? How long should the delay be before the Employer can safely exercise its common law rights? By the same token, how bad must the quality of workmanship be before such breach by the contractor goes to the root of the contract? Evidently there are no clear definitions for situations described above and much depends on circumstances. Therefore it is understandable that the Employer may be reluctant to exercise its common law rights without thorough deliberation. Even such reluctance may be deemed an election to affirm the contract rather than accepting the breach. 

Despite the presence of such termination rights under contract for both PSSCOC and REDAS, these forms affirmed that contractual termination rights do not operate to the exclusion of the Employer’s common law rights. By way of example, Clause 31.1(2) of the PSSCOC states amongst others that the termination is without prejudice to any other rights and remedies available to the Employer. There is a similar provision under Clause 30.2.2 of REDAS where such contractual right is without prejudice to any other rights and remedies available to the Employer including the right to treat the contract as being repudiated under general law. 

In view of the characteristics of such common law rights, contractual rights to terminate may well provide certain procedural clarity. Firstly such provisions typically set out discrete grounds for the Employer to exercise its termination rights. This in some way avoids the ambiguity as to what amounts to repudiatory breach as in the case of common law. Prior to exercising such right, the Employer is usually required under contract to issue certain prescribed format of notification so as to formally put the contractor on notice of the occurrence of certain event that is deemed to qualify as a cause for termination. This notice provides the contractor certain time to cure the breach within an allowed duration. If the issue persists, the Employer may then proceed to exercise its right under the contract. There are also express provisions to regulate post termination follow up measures to ensure an orderly transition leading to the engagement of a replacement contractor. One key feature in this regard is the usage of the phrase ‘termination of the contractor’s employment under the contract’ rather than ‘termination of the contract’. This is to ensure that other critical clauses that are required to continue to be in force survive the termination, such as arbitration clauses, liquidated damages provision post termination, confidentiality agreement etc. These termination related provisions under both PSSCOC and REDAS will be examined further in the next few sections of this article.

Contractual Notice And Procedural Requirements For Termination For Default

Under the REDAS form where the contractor is in default, contractual notice is issued either by the Employer or the Employer’s Representative. The circumstances that require notice from the Employer can be found under Clause 30.2.2 whereas Clause 30.2.1 provides for circumstances where similar notice may be required from the Employer’s Representative. It should be noted that the Employer’s Representative’s notice is optional in that such notice ‘may’ be given to the contractor in case where works are wholly suspended without justification or fail to proceed with due diligence and expedition. The Employer’s Representative’s notice does not itself terminate the contractor’s employment under the contract but merely serve as a ‘warning notice’ which then provides the contractor with an opportunity to cure the default within 28 days of receipt. Although such 28 days grace emanates from non mandatory notice, this procedural allowance may in some ways address any of the Employer’s risk associated with wrongful or premature termination. By contrast, the notice issued by the Employer under Clause 30.2.2 of REDAS amounts to Notice of Termination which terminates the contractor’s employment under the contract. The circumstances which warrant the Employer’s notice in this regard is broader than those under the Employer’s Representative. This include where the contractor fails to comply with the ‘warning notice’ issued under Clause 30.2.1 from the Employer’s Representative within the said 28 days. Although Clause 30.2.2 also uses the word ‘may’ as regards the Employer’s issuance of its notice, this is in the context where termination under contract is without prejudice to its common law right of termination. The termination is effective immediately upon the contractor’s receipt of the Notice of Termination. It is therefore both administratively and legally important for the Employer to be able to know precisely when the contractor is in receipt of its notice and mode of communication that may provide such paper or digital trail. Under Clause 1.5 of REDAS on subject of ‘Communications’, where provision is made under the contract for the giving or issue of any notice, such notice shall be in Writing, and ‘Writing’ under Clause 1.1.35 means any hand written, typewritten or printed communication including telex and facsimile transmission. Further, Clause 2.2.4 states that all notices and other communications given by the Employer and/or the Employer’s Representative under the contract shall be given to the Contractor’s Representative. 

As regards the contractor’s right to terminate for default under contract, these provisions can be found under Clause 31.2 of REDAS. It should be noted that in so far as progress payment related disputes are concerned, these are subject to Security of Payment Act where the remedies are set out separately. Comparatively, the procedural requirements are rather brief as it relates to contractor’s right to terminate under contract. It is applicable in the event of the Employer’s bankruptcy where the contractor may issue its written Notice of Termination of which the termination will take effect immediately. The above mentioned mode of communication applies accordingly. 

As regards PSSCOC, the Employer’s right to terminate under contract is structured differently from REDAS. The contract administrator in this regard is the Superintending Officer where such certifier is required under both contract and common law to discharge its function independently and impartially. Where the grounds of termination for default relates to the contractor’s performance, the Superintending Officer is responsible for making such determination. Under Clause 31.1(1) of the PSSCOC, if the Superintending Officer is of the opinion that the contractor had amongst others abandon the contract, fail to execute the works in accordance with an accepted baseline programme etc, then the Superintending Officer may issue a Termination Certificate, identifying the nature of the default. Such certificate is issued to the Employer to formally communicate the Superintending Officer’s assessment, with a copy provided to the contractor at the same time. The Superintending Officer’s independent assessment (as expected under general law and contract) may in some ways address any of the concerns of whether the termination is done appropriately and fairly which in turn may relate to any risk associated with wrongful termination. Similar to the REDAS, the Superintending Officer’s assessment via Termination Certificate does not itself terminate the contractor’s employment. It is however an essential procedural requirement for the Employer to issue its very own notice of termination to the contractor which shall take effect upon the contractor’s receipt. Under Clause 31.1(2)(e) of the PSSCOC, the Employer’s issuance of its notice of termination is on the premise that the Employer ‘shall’ have been issued with a Termination Certificate from the Superintending Officer. The certificate from the Superintending Officer similarly offers certain grace periods within which the contractor shall cure its default or prevent its recurrence. These grace periods are structured in three scenarios namely (i) the contractor shall cure its default within 7 days of the Termination Certificate, (ii) the default identified in Termination Certificate shall not be repeated within 30 days, (iii) any other defaults that would entitle the Superintending Officer to a Termination Certificate shall not be committed within 30 days of the original Termination Certificate. 

Where the contractor’s default is not associated with its ‘qualitative performance’ thus avoiding the need for independent professional assessment, the Employer may issue its notice of termination without the Superintending Officer’s Termination Certificate. By way of example, Clause 31.1(2) provides for these grounds such as contractor’s insolvency, committing corrupt or bribery practices, failure to provide security deposit/ performance bond or prescribed insurance policies.

Grounds For Termination For Default

The justification for the Employer to exercise its contractual rights for termination for default can be found in the provisions relating to grounds for termination. The grounds provided for under both PSSCOC and REDAS are largely similar except that the former included two additional grounds i.e. contractor’s violation of bribery laws and failure to insure the works. In reality there is very limited practical difference in these grounds, due to the fact that the contractor’s failure to comply with written instruction either from the Employer’s Representative under REDAS or from the Superintending Officer under PSSCOC would qualify as a ground for termination for default. These contract administrators may from time to time issue a written instruction that is specific to the circumstances in hand. The focal points however are whether such instruction relate to a severe issue justifying termination and whether the time period for compliance is reasonable for the contractor to cure its default. 

One of the grounds for termination for default available to the Employer that is unique to REDAS pertains to its Clause 30.2.1.1 in the event where the contractor wholly suspended the carrying out of the design or construction of the works without justification. The express reference to suspension of the design activities by the contractor is not available under the PSSCOC. This is because the design development activities would have been significantly completed when parties enter into the agreement. Further information on this topic is available in a separate article published in this website entitled ‘Part 1 of PSSCOC D&B vs REDAS D&B – Pre-Contract Design Requirement’. Given that the contractor under REDAS is expected to carry out significant design development works after agreement is formed, there is an inevitable overlap between design development and construction works. Instead of commencing construction works after design is fully completed under the traditional approach, time efficiency is achieved by commencing certain parts of the construction works as soon as the corresponding design is completed. This however give rise to a conundrum where such fluidity in programming and sequencing may cause difficulty in objectively determining whether the D&B contractor failed to proceed with due diligence and expedition with its design works. 

Currently, the threshold is extremely high in respect of termination for default as regards design works. Clause 30.2.1.1 refers to a scenario where the contractor ‘wholly suspended’ the carrying out of the design of the works, amongst others.  The ground for termination for default for failure to proceed with due diligence and expedition is reserved for the construction works as found under Clause 30.2.1.2. It is noted that under Clause 30.2.1, the Employer’s Representative may issue its written notice to the contractor requiring that it ‘recommence’ with the design works, underscoring the fact that only when the contractor is found to have wholly suspended its design activities, such default may give rise to contractual termination. As design development activities precedes construction activities, it serves as an important bellwether or early indicator if progress of the works is at risk of being in delay, particularly under D&B arrangement. Therefore, whilst the Employer and its agents may rightly be watchful of any signs of delays based on progress of design activities, they may wish to benchmark any of its ground for default based on actual construction activities. Strict adherence to contractual grounds is a prudent position to take particularly when considering termination of the contractor’s employment under the contract.

Roles of Contract Administrator In Termination For Default

As the contract administrator plays a critical role as regards termination by default, it is important to understand the basic principles of its function under law. It is trite law that a contract administrator such as the Superintending Officer under the PSSCOC is required to discharge its certification function fairly, independently and impartially notwithstanding the fact that it is concurrently an agent of the Employer. Further information on this subject can be found in a separate article published in this website entitled ‘Part 1 of SIA vs PSSCOC – Certifier’. Under REDAS, the Employer’s Representative administers the contract. It is interesting to note that based on a recent case precedent of CEQ v CER [2020] SGHC 70, it was held by the court that unlike other contract forms that typically require an impartial and independent certifier, the Employer’s Representative appointed under REDAS ‘is neither an independent certifier nor a referee between the parties in any meaningful sense’. The court cited an example of certification of progress payment where it is not an objective assessment of works done and monies due but instead a mere signal of the employer’s assent to the payment claim, as submitted by the contractor. The subsequent court’s decision on the role of Employer’s Representative such as Builders Hub Pte Ltd v JP Nelson Equipment Pte Ltd [2023] SGHC 120 affirmed this finding. In an apparent reversal, the REDAS 2022 (fourth edition) expressly stipulates that the Employer’s Representative shall at all times act impartially and independently from the Employer in respect of all or any matter or decision in the Conditions which requires his exercise of discretion or judgment. 

The chronology of events above is important as it relates to termination for default because the assessment as to whether the contractor is in default based on its performance such that it justifies the Employer’s exercise of its termination rights can be subjective. In this regard, it requires judgment call and an exercise of discretion by the contract administrator. As strict adherence to procedural requirements stipulated under the contract is necessary when exercising contractual termination rights, it is prudent that the contract administrator is not only impartial but also seen to be impartial in the course of its assessment of the contractor’s performance, leading to any issuance of notice or certification. Under the third edition of REDAS published in 2010 referred to in this article, as the Employer’s Representative’s independence is not a requirement, any of its notice that may be tainted with bias or prejudice may not meaningfully affect the Employer’s exercise of its contractual termination rights. In any case as pointed out earlier, the Employer’s Representative’s notice is likely to be non mandatory. However under the fourth edition of REDAS, if the Employer’s Representative decides to issue such notice to the contractor, the requirements of independence and impartiality shall apply. If the Employer subsequently decides to rely on the contractor’s failure to cure its default within 28 days of the Employer’s Representative’s notice as the basis of termination and the said the notice is found to be ‘defective’ due to elements of bias or prejudice in the course of assessing the contractor’s performance, there may be adverse consequences. This is because any reliance on defective notice as the basis of termination under contract may jeopardise the exercise of such termination rights. 

The situation is relatively more straightforward under the PSSCOC since the impartiality and independence of the Superintending Officer is an undisputed necessity under law. Likewise the Employer shall rely on the Superintending Officer’s Termination Certificate as it relates to contractor’s performance as the basis of its issuance of notice of termination. Therefore, the Superintending Officer shall in all cases discharge its function in a neutral, fair and unbiased manner.

Effects Of Termination On Any Partially Completed Design

Terminating the defaulting D&B contractor’s employment under the contract can be more complex than traditional contractor because of the outstanding design works that may need to be utilised. It is unlikely that an Employer when confronted with a partially designed and constructed project will choose to abandon works completed so far and to start from scratch entirely. Under Clause 31.2(1) of the PSSCOC, upon termination the Employer shall have the right to employ its own qualified persons and contractors to continue with the design, execution and completion of the construction works. The terminated D&B contractor shall upon request by the Superintending Officer, furnish such letter of release and hand over such information, drawings, specifications, designs and other documents and information as the Superintending Officer shall require to enable the Employer to continue with the design, execution and completion of the works. On the other hand, Clauses 30.3.2 and 30.3.3 of REDAS have similar provisions. Under these clauses, the Employer may employ other contractors to complete the design and construction of the works and the replacement contractors shall have the right to use the design documents and construction documents to complete the outstanding works. The Employer shall be entitled to appoint his own design consultant or qualified person to continue with the design of the works and to act as the qualified person for the works. The terminated contractor shall arrange for the issue of the Letter of Release from his qualified professionals and persons to the Employer. 

The PSSCOC provisions above work in conjunction with its Clause 3.6(1) where the copyright and other intellectual property rights in the contractor’s design shall remain with the contractor but the Employer shall be deemed to have a non-terminable non-exclusive royalty free license to copy, use and communicate the contractor’s design including making and using modifications of them for the purposes of completing, operating, maintaining altering, repairing and demolishing the works. Interestingly there is no equivalent provision for the same under REDAS. Therefore in the case of REDAS, when the Employer attempts to secure a Letter of Release from the terminated D&B contractor, there is an added difficulty of negotiating relevant intellectual property issues including payment for copyright. 

The issue is not just confined to the Employer securing the right to use the terminated D&B contractor’s design, but it also involves engaging a replacement contractor that is willing to shoulder the responsibility of completing the project using a ‘legacy design’. One of the ways to overcoming this problem is to arrange for novation of agreement of the existing design team from the terminated contractor to the replacement contractor. This is on the assumption that the terminated D&B contractor had outsourced the design responsibilities to a third party. Occasionally there are situations where the D&B contractor may self perform significant part of the design works but outsource the construction component of the project.

Conclusion

It is quite clear from the above that terminating a D&B contractor hardly offers any immediate relief to an aggrieved Employer and should be the last resort. Despite the obvious importance of having appropriate termination provisions, these are rarely negotiated in an upfront manner prior to entering into an agreement. Although the idea of utilising termination provision is fairly remote at the inception of any contract, it should not be the reason for having a false sense of security.




Koon Tak Hong Consulting Private Limited