Legal: Complications with termination

When Dame Zaha Hadid’s Tokyo Olympic stadium project was cancelled or terminated in 2015, she moved on elegantly. “It is not the case that the recently reported cost increases are due to the design, which uses standard materials and techniques well within the capability of Japanese contractors and meets the budget set by the Japan Sports Council,” she said, adding: “The real challenge for the stadium has been agreeing an acceptable construction cost against the backdrop of steep annual increases in construction costs in Tokyo and a fixed deadline.” 

Hadid was exceptional: many UK contractors and consultants cannot simply “move on” when an agreement is cancelled or terminated. Readers will be aware of certain high-profile insolvencies, increased interest in profit warnings and a lack of liquidity in the sector. The irresistible conclusion is that some contracts will be terminated. 

A recent court judgment given on 21 February concerned the termination (albeit by consent) of an agreement relating to the Centre Point Tower and surrounding properties in central London. In Almacantar (Centre Point) Ltd vs Sir Robert McAlpine Ltd [2018] EWHC 232 (TCC) the developer, Almacantar, and the contractor, Sir Robert McAlpine (SRM) entered into a pre-construction services agreement (PCSA) in September 2012. In September 2014 the PCSA was terminated by consent. 

Pursuit of legal precision is tangible but there are often gaps or conflicting interpretations […] when cash flow is strained one can readily understand the commercial desire to find opportunity in such gaps

The dispute centred on SRM’s right to further payment of the balance of 50% of the fee under the PCSA. SRM had completed all the services under the PCSA but the parties were unable to agree the design and build procurement contemplated by the PCSA (SRM favoured construction management), which may explain the termination by consent. 

In September 2015 SRM issued its application no. 25 claiming 50% of the fee and subsequently issued an invoice in February 2016, which Almacantar refused to pay. In April 2017 SRM commenced adjudication. The adjudicator’s decision in June 2017 was in SRM’s favour.

Almacantar’s position may be best understood by looking at the declarations it sought:

“1. On a true construction of the PCSA, McAlpine was only entitled to payment in respect of the balance of 50% of the fee (as varied):

a) in the event that McAlpine and Almacantar entered a construction contract for the project; and

b) on the occurrence of the first valuation following commencement on site under such contract.

“2. As a result of McAlpine not entering a construction contract for the project before the PCSA was terminated on 15 September 2014, McAlpine has no entitlement to the balance of 50% of the fee awarded by the adjudicator […]

“3. The decision was wrong and does not bind the parties.”

SRM argued that as the contract stated the balance 50% fee became payable once a main contract was entered into, the engagement of another contractor in December 2014 triggered this payment to SRM. The developer argued the 50% was payable only if the main contract were entered into with SRM (which it was not). 

Putting things simply, the court was persuaded that the PCSA contained the following material terms: “The employer will hold back 50% of the pre-construction fee which will only be released at the first valuation subsequent to commencement on site under the main contract” (in recital V), and in clause 12: “For the avoidance of doubt, notwithstanding any other provision in this agreement the final fee instalment of £239,836.50 [50% of the final fee] shall not become payable to the contractor until the first valuation subsequent to commencement on site under the main contract.”

The court decided “main contract” could only mean a main contract between the developer and SRM. It also decided that the terms dealing with termination were engaged despite the fact the termination was by consent. The court considered the foregoing reflected the “commercial reality” of the PCSA. A lay reader may ask: “How can two major businesses have such differing views on how the PCSA operated?” In practice, pursuit of legal precision is tangible but there are often gaps or conflicting interpretations, which then polarise commercial positions. Ultimately when cash flow is strained one can readily understand the commercial desire to find opportunity in such gaps or conflicts. But in the context of termination this case provides several reminders:

• n If one is terminating by giving consent then perhaps all material terms of the termination (including payments) should be also agreed and codified in the agreement to terminate.
• n Non-paying parties should issue a pay less notice, even if after termination. This was a point made by Lord Justice Jackson in the Court of Appeal decision in Adam Architecture Ltd vs Halsbury Homes Ltd [2017] EWCA Civ 1735 when he said: “Section 111 of the 1996 act applies to both interim and final applications for payment” made pre or post termination.
• n  Legal fees are not ordinarily recoverable in statutory adjudication and so perhaps it is better to seek declarations using the courts (where costs are recoverable).