Sometimes a long-term contract cannot be terminated, even where there are good reasons for doing so. This is because termination may not offer the best value for money.
So, if you cannot afford termination, what else can you do to better your position?
- Seek to negotiate a reduction in the scope of the works or services;
- Exercise contractual rights more stringently, e.g., levying deductions to encourage better service delivery;
- Refinance the project (with lower interest rates); and/or
- Put in place stronger performance monitoring and enforce mechanisms to incentivise improved performance.
Another option available is “Lender step-in-right or novation”
The Lenders’ step-in rights may be either permanent (novation) or temporary (step-in/out).
The Lenders will have rights under the funders’ direct agreement with the Client:
- To step-in to rectify the problems which give rise to the party’s termination right; and/or
- To novate the Project Agreement to a suitable substitute contractor.
In the event where the Lender exercise the above rights, it strengthens the Lender’s position further. For example:
- The Client’s right to take any steps towards terminating the project are likely to be contingent on Lender’s consent;
- The Lenders may have the ability to prevent the Client from exercising its own termination rights. For example, in the case of Tees Esk and Wear Valleys NHS Foundation Trust v Three Valleys Healthcare Ltd  EWHC 1659 (TCC); the giving of a prior notice of termination by the Employer to a Lender was a condition precedent to terminating a PFI project agreement.
- So, on receipt of such termination notice, the Lender may be able to ‘step-in’ and take over the Employer.
Step-in – here the positive right of obligations under the relevant project document will be suspended until the Lender steps out, at which point the original parties will pick up where they left off.
Novation – it is permanent on novation to the Lender, who may transfer the project agreement to a suitable substitute contractor. If the breach is not remedied by the Lender/their designated novatee, then it is likely that the Client will be able to continue with the termination.
The “threat” of step-in might encourage better performance and if you need to convince your funder to provide more support, it can equally galvanise their intentions/support.
Avoiding termination was discussed in our webinar on 25 March 2021 with Gordon Nardell QC, Twenty Essex and Sue Kim, HKA. Click here to view the webinar and detailed notes.
How can Barton Legal help?
At Barton Legal we have extensive experience in all the standard contract forms, including JCT as well as NEC, IChemE, and FIDIC.
We believe that an increased understanding of contractual terms and the roles and responsibilities of all parties ensures a successful conclusion to a project, which is why we always use plain English and ensure you understand and can apply the terms of your contract.
Our aim is to reduce legal gobbledegook and increase collaboration between parties to increase the prospects of completing your project on time and on budget
We place great emphasis in the early stages of the contract on understanding and preparing thoroughly, in order to avoid costly disputes later.
If you have any queries regarding any of these contracts or any form of construction dispute, please do not hesitate to get in touch by email email@example.com or call our office on 0113 202 9550.