There are a number of ways that a construction contract can be terminated. It’s important that the contract permits the person to terminate. Any procedures regarding how and when the contract can be terminated must be followed.
In this article, we will explore the important things to be aware of when ending a construction contract. Our construction contract lawyer outlines some of the typical things we see in construction contracts when it comes to termination.
The first step in terminating a construction contract is to review the contract as a whole. Termination clauses are a good place to start. However, there are often other terms elsewhere in the contract that can:
A termination clause often outlines the specific grounds for termination and the procedures you must follow.
There are also other grounds for legally terminating a contract and which the contract is unlikely to touch on.
We have set out below the usual grounds for termination (other than the automatic termination or expiry of a construction contract).
Insolvency refers to a party being unable to pay its debts as and when they fall due. The contract might also set out other circumstances where a part is considered financially unable to meet its contractual obligations.
For example, bankruptcy, liquidation or a severe financial crisis that affects the party’s ability to continue work or pay for services. When a party is becomes insolvent, the other party typically has the right to terminate the contract.
In construction contracts, insolvency can be particularly disruptive because it can lead to:
A contract usually allows for termination upon insolvency. The aim is to prevent further financial losses and to give the other party the opportunity to engage a new contractor or take other remedial actions.
A breach of contract occurs when one party fails to perform its contractual promises. This could be because of:
A breach of contract can be:
In cases of material breach, the non-breaching party may have the right to terminate the contract. However, the contract may require that the breaching party be given an opportunity to fix the problem before termination. If the breach is not remedied within the specified timeframe, termination may proceed.
What’s important is to ensure that the relevant breach permits the party to terminate.
Termination for convenience allows a party to end the contract without the other party being at fault. This term is often included to give flexibility, especially in long-term contracts where circumstances may change. For example, a client might terminate a construction contract for convenience if they decide to abandon the project or if funding falls through.
Termination for convenience clauses offer flexibility. These clauses usually require the terminating party to compensate the other party for work completed up to the termination date. This type of termination is generally seen as a risk management tool.
Unlawful repudiation occurs when one party indicates, either through words or actions, that they do not intend to fulfil their contractual obligations. This can happen before the actual breach of contract occurs.
For example, a contractor might state that they will not complete the work as agreed, or a client might refuse to make future payments. This repudiation gives the other party the right to terminate the contract and seek damages.
Repudiation must be clear and unequivocal. The party mut do something more than simply express dissatisfaction or doubt. The repudiating party’s actions must clearly indicate a refusal to perform their contractual obligations.
Frustration occurs when:
Construction contracts will often describe what happens if the contract is frustrated.
A principal and a contractor can both agree to end the contract. Any agreement should be clearly stated in writing and signed by both parties.
Once you have identified the grounds for termination, the next step is usually to notify the other party.
It is essential to carefully review the construction contract to determine the required notice period for the specific grounds for termination. Each ground typically has its own notice requirements, and strict compliance with these timelines is important.
Even if the contract does not explicitly require it, we recommend providing notice in writing. Your notice should clearly state:
The contract may also specify how notice is to be given, for example:
You need to be fully aware of the consequences of termination set out under the agreement.
If you are the principal, you may need to pay for all services and materials supplied up to the date of termination. However, there may be some types of breach (such as insolvency) that mean that you do not need to pay anything further.
If you are the contractor, you may need to provide any materials or equipment that have been paid for by the principal.
If the other party refuses to acknowledge the termination notice, it’s important to document your efforts to communicate the termination. This could include sending the notice via registered mail or email and keeping records of any email communications.
If necessary, seek legal advice from a building contract lawyer to ensure you have met all your obligations and to explore further options.
Whether you can terminate a contract for convenience at any time depends on the specific terms of the contract. Some contracts may allow for termination for convenience at any point, while others might have restrictions or require a notice period. Always review the contract’s terms carefully.
Failing to follow the correct termination procedure can expose you to claims of wrongful termination or breach of contract. This could lead to financial liability or legal disputes. It’s essential to adhere strictly to the terms of the contract when terminating.
After termination, you may be required to settle any outstanding financial obligations as specified in the contract. This might include paying for work completed up to the termination date and reimbursing any reasonable expenses incurred by the other party.
While it may not be legally required, consulting a lawyer is highly recommended. A legal professional can help you understand your rights and obligations, ensure the termination process is handled correctly.
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