Contracts Termination: Main Contract vs Subcontract Back-to-Back Practices

Abstract

Contract termination is one of the rights to be exercised by employer or contractor whenever serviceable. However, opting to terminate the main contract by the employer is a serious issue that should be approached with utmost care and caution. In similar situations, contractors can open the chains of communication with employers to have this decision cordially revoked and the terminated contract reestablished. Regardless of the outcome of such negotiations, there is a number of ramifications that will emanate upon terminating the main contract, propagating ‘back-to-back’, affecting the lower tier participants, mainly subcontractors. The main objective of this study is to outline the possible means of action by contractors towards their employers and subcontractors upon the termination of the main contract or in the case when this decision gets amicably revoked. The followed methodology includes (1) drawing out and analyzing contract termination timelines from six different standard conditions of contract, (2) Reviewing caselaw databases extracting 24 cases that deal with wrongful contract termination to analyze causes and consequential liabilities and (3) investigating a case study that aims at validating a proposed hypothetical model of possible actions to be taken by contractors vis-à-vis their employers and subcontractors upon main contract termination or in case this decision gets revoked. By that, the spectrum of mechanisms yielded 4 different steps that termination processes include: notice of default/correction, notice of intent to terminate, notice of termination and termination certificate. Moreover, the updated version of FIDIC 2017 removed the ambiguity of effecting termination due to the addition of a 2nd notice to terminate. Moreover, the research identified and itemized the reasons of wrongful termination as not establishing the grounds of termination, failure in following notice requirements, acting in bad faith and breach by terminating party. Consequently, the liabilities of wrongful termination were payment for loss of profit, damages for wrongful termination, work executed, reasonable overhead, proven loss of tools, supplies and machinery and cost of repair. The research also revealed that ramifications of termination of the main contract exceeds that specific contract and ripples to the lower tier participants, mainly subcontractor. For that purpose, a hypothetical diagram was established to understand the possible contractor’s actions due to consequential back-to-back effects on the chain of participants having the main contract terminated. When the main contract gets terminated, the subcontractors are either terminated and reemployed under the umbrella of the employer or suspended in the hopes of revoking the decision by the employer where the main contract gets reestablished in consent. That said, the investigated case study in the UAE showed how the subcontractors were affected by the termination of the main contract that upon reinstating the main contract, the subcontract was still terminated. The sequence of events that took place in the tunnel of this contract termination validated the hypothesis in question and identified the possible options and outcomes of all decisions, the most important of which being the opportunity of revoking.