Commissioning construction works to be completed by a third party in the event of a non-performing (sub)contractor

As a contracting authority, are you entitled to terminate a construction contract with a non-performing contractor and have the works carried out by a third party? If so, how would you approach this matter? Recently, the Dutch court Zeeland-West Brabant issued an interesting ruling that provides insight as to how these questions should be answered.

Facts of this matter

After a tendering procedure, the municipality and winning bidder concluded a contract for the performance of several construction works - the removal of roadwork, placement of roadwork/pavement, sewer inspections, repair (and removal) of sewers, realisation of public green areas and the placement of several light poles. The contractor subcontracted the works, and the subcontractor at a certain point failed to comply with the contract. The breach of contract was caused by delays, quality concerns, the contractor failing to provide an updated detailed planning following delays caused by the subcontractor terminating its works due to a conflict with the contractor and the contractor not having enough capacity for the project. The municipality notified the contractor on two occasions (17 August 2021 and 15 October 2021) of the non-performance and communicated that, pursuant to the contractual arrangements, it intended to have the works completed by a third-party.

The relevant contractual provision (paragraph 46 of the UAV 2012) stipulates as follows.

“If the contractor fails to comply with its obligations under the contract, the employer shall notify the contractor in writing and provide the contractor a reasonable period to remedy the breach. (…) If the contractor fails to remedy the breach, the employer shall be entitled to have the works completed, at the contractor’s expense, without prejudice to the employer’s right to claim damages.”

Due to the breach of contract, the municipality drew the bank guarantee, and on the basis of the aforementioned provision, the municipality assigned one of the shortlisted bidders to complete the works.

Dissatisfied with the municipality’s approach, the contractor initiated legal proceedings. It argued that the municipality was not entitled to terminate the contract and have the works completed by a third party. The contractor claimed that the municipality terminated the contract for convenience and requested an award for the reimbursement of damages accordingly. In these legal proceedings, the municipality also claimed damages from the contractor, including damages for the costs of the third-party that the municipality engaged as well as other costs such as the costs for the retendering of the works.

Lessons learned

The court considers that the municipality gave the non-performing contractor sufficient notice and opportunity to remedy the breach of contract, and that accordingly the municipality was entitled to terminate the contractual relationship and engage a third-party to complete the works at the expense of the defaulting contractor.

The court ordered the contractor to pay the municipality damages. The exact amount of compensation is determined on the basis of the costs that the municipality could properly substantiate. The municipality for instance claimed the payment of the costs associated with the retendering of the contract (i.e. the costs involved with involving one of the other bidders), but the court dismissed this claim as it considered the costs to no be adequately substantiated.

We can conclude that contracting authorities have options to ensure the continuation of the works, even when it is confronted with a contractor that fails to perform its contractual obligations. This ruling is also a good reminder to follow the procedural steps as set out in the contractual arrangements – i.e. not to terminate the contract without following the formal requirements in place such as the requirement to notify and to provide an opportunity for remediation – and to carefully monitor and substantiate any damages due to the non-performance. On this occasion, the municipality offered the contractor the opportunity to provide an updated planning, including measures to address quality concerns and to accelerate the works to ensure that the work would be completed by the agreed date for completion. The municipality further requested the contractor to outline the manner in which quality issues would be addressed, and requested confirmation that the schedule, measures and descriptions provided would be complied with by the contractor.

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