Terminating a construction contract is one of the most drastic steps a party can take. The consequences of getting it wrong can be severe, meaning the difference between being owed significant sums of money, or having to pay out significant sums of money.
Here we look at why getting termination right is so important, what you need to consider when terminating a contract, and what you should do if your contract has been terminated.
Why is getting termination right so important?
Terminating a contract can be very risky for the party trying to terminate. For example, the ordinary expectation of an Employer terminating a Contractor is that they will employ another contractor to finish the work and charge the extra costs of doing so (and any other costs caused by the termination) to the original contractor.
However, if the Employer tries to terminate but gets it wrong, perhaps because they did not follow the processes in the contract, or because they did not have sufficient grounds to terminate, then that attempted termination is itself a breach of contract that will entitle the Contractor to terminate lawfully.
The result of this is that even if the Employer thinks they are in the right, they will not be entitled to the extra costs to complete the work or their other losses caused by the termination. Worse still, they will be liable for the Contractor’s loss of profit and overheads on the work that they did not get to finish, as well as any other costs that the Contractor has incurred as a result of the termination.
There can be a very big ‘swing’ between being owed significant amounts of money and having to pay out significant amounts of money, which all depends on which party terminated correctly.
It always pays to take a step back and make sure that you are doing everything properly. Advice should always be sought before terminating a contract.
Terminating a contract
A party can terminate a contract in one of three ways, either
- by agreement with the other party, or
- under the terms of the contract, or
- at common law.
1. Terminating by agreement
Both parties can agree to end the contract, which might be advantageous if they want to avoid falling out and preserve their relationship.
To help avoid future disputes about the termination, the terms should be recorded in a formal agreement that sets out:
- Who owes what to whom;
- How that should be calculated;
- How and when that should be paid;
- How defects are to be dealt with; and
- Any other terms relevant to the agreement.
2. Terminating under the terms of the contract
Contracts such as the JCT and NEC include detailed terms which explain who is entitled to terminate, in what circumstances they can terminate, and what parties need to do to terminate lawfully.
If you are considering terminating in this way, then you should check the terms of your contract carefully. You must any schedule of amendments because it is very common for parties to make changes to the termination provisions. Sometimes collateral warranties will require steps to be taken, such as notification of beneficiaries, before termination can occur.
It is crucial to follow all the procedural steps including any requirements about how notices should be given. If you do not follow the contract properly then the termination could be invalid. This could leave you responsible for the other parties’ losses, even if you otherwise had good grounds to terminate.
Generally, parties are only entitled to terminate in certain specific circumstances which are set out in the contract. These circumstances may include:
- If the other party is insolvent.
- If the Contractor has continued a specified breach for a specific period of time following a notice from the Employer of that breach. Common examples include failing to proceed regularly and diligently with the works, or suspending works without reasonable cause. An often-overlooked provision in many JCT contracts is that they allow the Employer to terminate where the Contractor has sub-contracted without consent!
- If the Employer has continued a specified breach for a specific period of time following a notice from the Contractor of that breach. A common example is failing to make payment in accordance with the contract.
Contracts sometimes include (or are amended to include) termination ‘at will’ clauses. These clauses usually mean that the Employer can terminate the contract for any reason, or for no particular reason at all. When reviewing contracts we often advise parties not to accept termination at will provisions in their contracts, as they give the other party an unacceptable contractual advantage.
The contract may also have requirements that further notice is given to terminate, and there are likely to be timescales that must be adhered to, such as that notice being given within a certain window. The crucial thing is to check the provisions of the contract and follow them closely.
3. Terminating at common law, for repudiatory breach
Sometimes contracts do not contain termination provisions, or there may be no written contract terms at all. The parties may still be able to terminate at common law. Furthermore, even where there are termination provisions in a contract, parties can elect to terminate at common law rather than via the contract mechanism.
A party is entitled to terminate at common law where:
- The other party has breached a condition of the contract that the parties have agreed should allow the innocent party to terminate; or
- The other party has committed a ‘repudiatory breach’ of the contract, a common definition of which is a breach that is so serious that it deprives the innocent party of substantially the whole benefit of the contract or goes to the root of the contract, such that it makes further performance of the contract impossible.
Such a breach must be very serious – whether it entitles termination is highly dependent on what exactly has happened.
For example, a Contractor abandoning their works may amount to such a breach, but an Employer missing a payment is unlikely to. Likewise, an Employer locking a Contractor out of the site may be such a breach, but a Contractor inadvertently installing the wrong materials is unlikely to be (depending on the circumstances).
Crucially, alleging to terminate a contract without a proper basis for doing so is usually a breach that is serious that it gives the other party the right to terminate lawfully.
It is very easy to get this sort of termination wrong, and it is likely to be impossible to backtrack afterwards!
Do you have adequate grounds to terminate?
Whether or not there are adequate grounds for termination of a contract is often hotly contested. You must be confident that you have sufficient evidence to back up the alleged defaults or breaches that are relied on in relation to the intended termination.
Some grounds for termination, such as a failure to ‘proceed regularly and diligently’ or a ‘material breach’ are easier to recognise than define, so it is important that you have the documents and information to back up your position.
When and how should notice to terminate be given?
It is extremely important to make sure that the contractual provisions are followed to the letter. For example, the contract may require that notices be given to a certain person, in a certain form, or in a certain manner. They might be required to be given at a certain time. Often, they will require notices in relation to termination to be given in a manner that is more formal than other notices.
The risk is that if the termination provisions are not properly followed or there are not grounds to terminate, then the party purporting to terminate may be in repudiatory breach. Even terminating a day early can be a problem. This would entitle the other party to damages for breach of contract.
For the party having the work carried out, this will often include:
- All the ‘extra over’ costs of having the work carried out by others.
- All of the costs of any resulting delay.
For the party carrying out the work it will often include all of their lost overhead and profit.
Collateral warranties or third party rights might require that notices be given to beneficiaries before any steps can be taken in relation to termination.
What to do if your contract has been terminated
If your contract has been terminated, you should seek advice as soon as possible. There may be actions that you can take, but they are technical and, more importantly, they are time critical. The response that you give to a purported termination can affect your ultimate entitlements.
There are various practical steps you should take depending on what stage the work is at. Carrying out a survey and making a record of the status of the work and the materials on site (including schedules, photographs and even videos) is likely to be important and useful in the future.
How CCC can help you
You might be considering terminating a contract, or have received a notice of intention to terminate, or your contract might have already been terminated. CCC has considerable experience in assisting parties in these situations. We can provide the advice and support that you need, including:
- Providing advice to help you make sure that you are taking the right steps at the right time.
- Drafting termination notices or drafting responses to termination notices.
- Helping parties quantify their construction claims following termination.
- Assisting parties with dispute resolution following termination.
