HS2 Phase 2 Cancellation – What are your options?

It has now been officially confirmed that Phase 2 of High Speed 2 (“HS2”) will not be going ahead, while a new management team will take over the development of the Euston station site. See this article from last year for some thoughts on the impact of cancellation of HS2.

Whilst part of the project will continue, HS2 is Europe’s largest infrastructure project so the disruption cancellation of Phase 2 will cause to the construction and infrastructure sector will be significant.  The Transport Secretary has admitted that paying off contracts for the cancelled HS2 sections will cost hundreds of millions of pounds.

Those involved in the sections of HS2 impacted by the news will now be facing significant challengers given the resources committed to the project, any work carried out but not yet paid for, any abortive work and the loss of anticipated revenue.

It is clearly important that the terms of the contracts in place are considered carefully.  It is likely that HS2 or the relevant client if further down the supply chain will now seek to terminate the contract so the grounds of termination should be considered carefully.  Many contracts will include rights for the client to terminate at will but if not there may not be a clear right to terminate.

The sums payable on termination should also be considered.  Many of these HS2 contracts are NEC based. Under the NEC4 Professional Services Contract, the amount due on termination includes:

• an amount due assessed as for normal payments;
• a Defined Cost reasonably incurred in expectation of completing the whole of the service; and
• any amounts retained by the Client.

Depending on how the Termination Table has been filled out in the contract and which Option has been chosen, the amount due also includes:

• (for Options A and C) the fee percentage applied to any excess of the total of the Prices at the Contract Date over the Price for Service Provided to Date; or
• (for Option E) the fee percentage applied to any excess of the first forecast of the Defined Cost for the service over the Price for Service Provided to Date less the Fee.

In circumstances when there is no right to terminate this may also be an option it may be possible to recover additional costs to the above.

In our experience, however, HS2 contracts are heavily amended versions of the NEC form, meaning that each contract will need to be considered afresh in order to determine how much is due on early termination of the contract, particularly if any design work has already been completed.  For example, many include incentivisation mechanisms which link the profit, overhead or fee recoverable to completion of the project.  The impact of termination on these should be considered carefully.

The impact on any joint venture arrangements (which are common on HS2 contracts) should also be considered carefully.

This is clearly disappointing news for the industry and it is important that those affected by the news review where they stand and put themselves in the best position possible.  It is likely that exit payments will be negotiated to provide clarity as to the sums being paid and the position regarding work carried out to date.  These should be recorded in a formal agreement to ensure they are effective.

In addition, as mentioned in our previous note, historically group actions have been considered in circumstances like this and this could provide strength to those involved in seeking redress and help share some of the costs.  Those considering this route will of course need to tread carefully and ensure they do so in the correct way.

Please do get in touch if you would like to discuss the points raised in this note or if we can help any further with your HS2 contract.