Forfeiture Clauses in Construction Contract

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In building and engineering contracts it is usual to insert a provision empowering the employer to forfeit certain rights or property of the contractor on the occurrence of certain events. “Forfeiture clause” is a loose term usually used to describe a clause in a written building contract giving the employer the right upon the happening of an event to determine the contract or the contractor’s employment under it, or to eject the contractor from the site, or otherwise to take the work substantially out of his hands. In standard form building contracts it is usually referred to as ‘determination of employment’ or termination. In this sense JCT SBC 05 clauses 8.4 and 8.9 which relates to termination by employer and contractor respectively are forfeiture clauses.

It is common in construction contracts to find determination clauses allowing either side to bring their contractual obligations to an end should an event specified occur due to the actions or inactions of the other. It would seem that common law determination and determination under a clause of contract are alternatives. There are differences between the processes. First, whereas common law determination depends upon repudiatory conduct or a fundamental breach, the grounds of determination specified by the contract need not exhibit these features, although frequently such will be present. Second, the remedies for common law determination are provided by law, whereas with a contractual determination the clause itself must expressly deal with the issue of remedies. Third, at common law in the face of repudiatory conduct or fundamental breach the innocent party need only indicate to the other that he accepts the breach and considers the contract discharged. Under a contractual determination clause the procedure specified must be carefully followed, failure to so may prevent a successful determination.

The right of forfeiture may be stipulated to accrue either
1) on the bankruptcy of the contractor only, or
2) on his bankruptcy and also on the occurrence of other events, or 3) on the occurrence of other events only

Clause 8.5.1 of the JCT SBC 05 states that if the contractor is insolvent, the employment may at any time by notice to the contractor terminate the contractor’s employment. Similarly Clause 8.10.1 of the JCT SBC 05 states that the employer is insolvent, the contractor may by notice to the employer terminate the Contractor’s employment under the contract.

A provision empowering the employer to forfeit the contract on the bankruptcy of the contractor is introduced into building and engineering contracts for the purpose of preventing a contractor’s trustee in bankruptcy from electing to complete the contract, and such a provision is valid, if it is coupled with a stipulation that the contractor’s contract shall be a personal one; and further, so far as the forfeiture affects the mere licence of the contractor to enter upon the site, it would seem that the revocation of that licence can be conditioned on bankruptcy, as a mere licence does not seem to be included in the definition of property[1]. A trustee, however, would be entitled to enter the site to remove property of the bankrupt in respect of which the employer had no right under the contract

The validity of a right to forfeit on the bankruptcy of the contractor is dependent on the nature of what is stipulated to be forfeited. In addition to bankruptcy, forfeiture is usually conditioned upon the happening of one or more of the following events: 1)not commencing the work 2) not regularly proceeding with the work for a fixed number of days[2], 3) not proceeding to the satisfaction of the employer or the architect[3], 4) not proceeding with such despatch as, in the opinion of the architect, will enable the works to be duly completed by the time stipulated, 5) not observing some stipulations of the contract[4] 6) leaving the works in an...
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