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Practical Guide for termination of construction projects

FEATURED PAPER

Hands on application in FIDIC and NEC3 Contracts

Dr. Moustafa I. Abu Dief1, Dr. Khaled Y. Almedalah2 and Ahmed S. Elwan3

1 Contracts and Claims Manager, ZAMIL Group, Ph.D, CFCCTM
2 CEO and Project Management Expert, Ph.D, CVS,
3 Construction Manager, Saudi Oger Ltd, Msc, PMP

Cairo, Egypt


Abstract

Severe risk is rigorously invading the construction industry in the Middle East due to the unexpected economical recess caused by wars, terrorism, and fall back in the oil and gas products. The construction projects became a nightmare in the region for potential obstacles, risks, and potential disputes inherent due to the shortage of funding by the Employers who have been impacted by the fall back of the governmental budgets. Consequently, many new projects were postponed or cancelled and the progressing projects had been suspended, de-scoped, and or terminated. These existing circumstances generated many disputed cases and events due to improper contract management or defects in the signed contracts. This paper has adopted the termination case as the most common case in the troubled projects that may generate construction claims and un-favored disputes and will analyze the termination process to present a practical guide for successful termination and dispute free contract closure.

Key words:   Construction- Termination- Practical- FIDIC- NEC3- Claim- Middle East- troubled projects

  1. Introduction

Termination of the construction projects is a discretionary action may be elected by a contract party that considers himself an innocent party. The Employer has two different termination bases to process the termination, first event gives the employer the right to terminate is the contractor’s default in different actions by the contractor that the Employer decides that the termination is more proactive to get a chance for surviving the project. The second case of termination is the termination for convenience, where the contractor has its reasons to terminate which are out of the contractor involvement, for reasons like change in business needs or economics and investment strategies in the Employer’s organization. For the contractor entitlement to terminate the contract different standard forms of contract provides the contractor the right to terminate the contract in case of a material breach by the Employer. Termination can be categorized as contractual termination and common law/applicable law termination, depending on the default experienced in the project. This paper will discuss and analyze the termination process and procedures under the FIDIC and NEC3ECC standard forms of contracts in order to provide practical guidance for safe and successful termination process.

  1. Termination Categories

The termination process in the construction contracts is classified in two categories the first category is the contractual termination, which is generated based on a contractual clause of the project contract. The second category is the termination based on the applicable law of the project contract, can be considered as no contractual rights to terminate, these categories are discussed in the following paragraphs:

2.1 Contractual termination

Standard forms of for construction contracts will usually recommend the essential basis upon which a contract party can terminate the projects and the procedures to be carried out in order to accomplish the termination of the contract. The standard forms for construction contracts, such as FIDIC, NEC3ECC provide clauses for termination, for example the New Engineering Contract- Engineering and Construction Contract, NEC3ECC. 2005, provides the core clause 9 for termination. Such clauses provide the innocent party to terminate the contract in some predefined and specified material breaches of contract, for example; bankruptcy/insolvency; groundless suspension of works; failure to proceed with the works; and delay in payment by the Employer. The following sections will demonstrate guidance for the termination procedures as demonstrated by the RED FIDIC 1999 and the NEC3ECC 2005. The importance of such guidance is to secure a safe and successful termination process where the innocent party remains entitled to terminate and generate the contractual clauses for termination payments and avoid any potential claims in case of wrong termination, such as, demobilization costs, early termination of subcontractors, in addition to loss of profit claims.

2.2 Applicable Law termination

In some construction contracts, the termination clause is not included and the contract doesn’t enable termination in the event of any breach apart from some specific breaches only.   In such circumstances the termination may be processed at the applicable law, for example the English law/ common law,  enables the innocent party to terminate the construction contract in case of the other party has committed a “repudiatory breach” and consequently the innocent party has the right to terminate the contract. In this case the innocent party should be care not to be in situation that he may be affirming the contract, i.e. not to delay the termination, or proceed with the work as issuing instructions, approving submittals, etc.  Another case of termination under this category is when frustration occurs, then the contract automatically ends. It occurs when some circumstances had interfered to preclude the contract to be carried out as per the original plans. This case doesn’t refer to ant defaults by any contract party, but the through put of such circumstances should be that advance progress cannot be achieved. Frustration reliefs the parties from their further obligations under the signed contract, but any ensued responsibilities will remain valid for either party.

More (with figures, footnotes and references)…

To read entire paper, click here

 


 

About the Authors

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Dr. Moustafa Ismail Abu Dief

Contracts Manager and Claims Consultant.

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Dr. Moustafa Ismail
, Ph.D., FICCP,  CFCC™, CCP, PMOC, PMP® is a project management professional and Certified Forensic Claims Consultant with over 25 years of experience in the field in Egypt and Saudi Arabia, mainly in contract and claims domain. Moustafa is delivering training courses in FIDIC, NEC3 contracts and claims management.  Website: www.Benaa-pm.com – Email:  [email protected],   [email protected] or [email protected]

 

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Dr. Khaled Medallah

Arbitrator, Facilitator and Trainer
Khaled Almedallah Consulting Office

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Dr. Khalid Medallah
, PhD, is a seasoned expert in the projects and engineering management domain, a certified Arbitrator and value specialist, with more than 40 years’ experience as an Arbitrator, trainer and project management expert. He received his PhD from Michigan State University in the United States and is a retired associate professor at Dammam University in Saudi Arabia.  He can be contacted at [email protected]

 

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Ahmed Salah Elwan

Construction Manager.

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Mr. Ahmed Elwan
, Msc, PMP® is a construction manager with 11 years expertise in construction implementation and supervision in the buildings sector (governmental facilities, schools, hotels, offices, commercial and  residential buildings) that relate to planning and  finishes, special construction and  modern material.  In addition Ahmed is a certified project management professional and holds a master’s degree in the architectural engineering. He can be contacted at [email protected] or [email protected]