Termination is one of the most high-stakes steps a party can take on a construction project. It can protect you from escalating risk, but it can also create a new dispute about the termination itself, distracting from the original issues and increasing exposure.
This article sets out a practical overview of the main routes to termination and the commercial points that are often missed until it is too late.
Three routes to termination
Most termination situations fall into three broad categories:
- termination under the contract
- termination at common law
- termination for convenience, but only if the contract expressly allows it
Each route has different triggers, different process requirements, and different consequences for what can be recovered afterwards. It is essential that the correct process is followed to avoid being in breach of contract.
1. Contractual termination
Contractual termination is termination using the specific rights and procedures set out in the contract. Standard forms typically provide termination grounds, notice requirements, cure periods, and a mechanism for valuing work and dealing with materials and plant. Different rights usually apply to each of the parties and the consequences of the termination will vary depending on which party is exercising the right and what the basis for the termination is. These are all set out in the contract.
The commercial point is that contractual termination is rarely a single letter. It is usually a sequence. Getting that sequence wrong can mean the termination is ineffective, or worse, that it gives the other party ammunition to claim you were the one in default.
Typical termination provisions in standard form construction contracts vary, but they often allow termination for a range of serious defaults such as sustained failure to perform the works, suspension or abandonment, insolvency, non compliance with key contractual notices or instructions, and significant health and safety breaches.
The detail matters, including any amendments, because contracts commonly distinguish between grounds that allow immediate termination and those that require a warning notice and an opportunity to remedy the default within a specified period.
Common pitfalls with contractual termination
The problems we most often see are:
- relying on informal correspondence rather than serving a valid contractual notice and following all of the steps strictly in accordance with the contract
- terminating too early, before a cure period has expired or before a required sequence has been completed
- mixing grounds, which can undermine clarity and invite challenge
- not having the proper grounds to exercise the contractual right to terminate or having the evidence to back it up.
2. Common law termination
Common law termination is separate from contractual termination. In broad terms, it allows a party to treat the contract as at an end where the other party’s conduct is sufficiently serious to justify ending the bargain. This is often described as repudiatory breach, but the label matters less than whether the facts, viewed objectively, support that conclusion. Common law can also be engaged where a party renounces the contract or commits an anticipatory breach, for example by making clear in advance that it will not perform a key obligation or cannot meet the completion requirements.
Not every breach will justify common law termination, even if it feels commercially unreasonable. Courts generally look at the overall impact of the conduct on the contract, including whether the breach deprives the innocent party of the main benefit of the bargain, whether it indicates an unwillingness or inability to perform going forward, and whether an accumulation of breaches shows a clear pattern of non performance. In construction disputes, where contracts are designed to be performed and remedied over time, that threshold is often difficult to meet.
Common law termination also carries procedural traps. If you intend to treat the contract as terminated, you must usually do so promptly and clearly. If instead you continue to perform, accept performance, or otherwise proceed as if the contract remains ongoing, you may be taken to have affirmed the contract and lose the right to terminate for that breach. Equally, you cannot assume common law termination is available simply because a contractual termination event has occurred. A contractual trigger may justify termination under the contract but still fall short of the seriousness required at common law.
Finally, there are other, less common ways a contract may come to an end outside the termination clause, such as frustration (where an unforeseen event makes performance impossible or radically different) or rescission for misrepresentation (where a party was induced to contract by a false statement). These are fact sensitive and rarely straightforward on live projects.
The overall risk is that common law termination is highly fact dependent. If you call it wrongly, you may be exposed to a claim for wrongful termination. This can be one of the fastest ways to turn a payment or performance dispute into a much larger claim involving loss of profit, delay consequences, and completion costs. For more on the concept of repudiation, see our ‘Commercial Terms Explained: Repudiatory Breach’ article.
3. Termination for convenience
Termination for convenience means ending the contract even where there has been no breach by either party. It is not an automatic right and only applies where the contract expressly provides for it. It is an onerous term and one to look out for in contracts at review stage.
The main issue with termination at will / for convenience is usually compensation. Some clauses limit payment to work properly carried out to date and exclude or restrict recovery of profit, overheads, demobilisation costs, cancellation charges, and procurement commitments. In the worst cases, a subcontractor can be left carrying the cost of orders placed and labour commitments, with only limited recovery.
If a termination for convenience clause is proposed, you should consider whether this is a risk you are willing to accept at all. Important points to check are when and what you get paid following such a termination and how that is assessed, whether off site materials, design and procurement commitments are covered, how demobilisation and cancellation costs are treated, whether any contribution to overheads or profit on unperformed work is allowed, what notice is required, and whether the right is subject to any conditions on use.
Before you press the button: a practical checklist
Before taking any termination step, it is usually worth doing four things:
- confirm the trigger, contractual or common law, and what evidence supports it
- check the notice requirements and the required sequence, including any cure periods
- collect the evidence to support the grounds that are being relied upon
- plan what happens next, including site access, materials, records, and communications
- It is often sensible to take advice, because the consequences of getting it wrong can be so serious.
How CCC can help
If you are considering termination, or have received a notice from the other party, it is rarely a step to take without a careful review of the contract, the evidence and the required procedure. CCC can help you assess whether the right trigger exists, ensure notices and process requirements are handled correctly, and protect your position on valuation and recovery following termination. Please get in touch if you would like assistance with reviewing any termination requirements in a contract or in dealing with any dispute or termination issues.
