Out-Law Guide 8 min. read
06 Dec 2022, 10:48 am
Most construction contracts contain termination clauses which give parties the right to terminate in certain circumstances. Fewer construction contracts entitle a party to suspend the performance of its obligations.
Both termination and suspension are self-help remedies that enable a party to mitigate the running up of costs and losses. The exercise of those remedies give rise to associated risks requiring very careful consideration and legal advice.
Under English law, termination for breach ‘under the contract’ can be permissible only in situations where there is an applicable express right to terminate the contract. When the qualifying breach occurs, the defaulting party is usually given a notice requiring the defaulting party to either:
Usually, the right to terminate ‘under the contract’ will arise only if the defaulting party fails to adequately act or respond to the notice in the manner required by the contract.
Under French law, pursuant to article 1225 of the Civil Code, termination clauses must specify the obligations which may lead to termination if breached.
Before the terminating party may terminate the contract, it must give notice to its counterparty and require rectification of the breach within a certain period. The notice must include a reference to the termination clause. If the breach is not rectified within the required period, the contract may be terminated.
As another feature of French law, termination clauses must be invoked in good faith. The terminating party may be viewed as acting in bad faith, for instance, if it seeks to terminate the contract based on a breach it has been tolerating for a long time.
Under English law, leaving aside the doctrine of frustration, addressed in our separate guide,, an automatic termination occurs only in situations where an express term provides for it on the occurrence or non-occurrence of a specified event. In construction contracts, insolvency is the most commonly specified event that allows for automatic termination.
Under French law, termination clauses can allow for automatic termination, in which case the terminating party does not have to give a notice to its counterparty before it can terminate the contract, pursuant to article 1225 of the Civil Code. Again, however, a party relying on an automatic termination clause must invoke it in good faith. Although insolvency is often designated by the parties as an event allowing for automatic termination, parties are strongly advised to comply also with the notice requirements of French insolvency laws.
As discussed in our guide to extracontractual relief from economic hardship, ‘force majeure’ or other hardship clauses typically provide for a temporary ‘suspension’ of the affected party's contractual obligations for the duration of the underlying event while keeping the contract alive. However, contracts sometimes provide also for a right of termination if the suspension exceeds a specified period. Clauses of this kind will usually require the affected party to comply with specified notice requirements – for example, that the disadvantaged party notify the counterparty within a reasonable time of the occurrence of the underlying event and its impact on the first party's performance.
Under French law, ‘force majeure’ is codified as a distinct, inherent basis for contractual termination under article 1218 of the Civil Code: the occurrence of a force majeure event leads to termination of the contract if the suspension caused by the occurrence of the event is definite.
English law recognises that a party might terminate a contract ‘for convenience’ only where an express term allows that party to do so. This has become more common in large scale construction contracts, especially to the benefit of employers, as can be seen, for example, in sub-clause 15.5 of the FIDIC Rainbow Suite. When terminating for convenience, it is usual for the terminating party to compensate the other party for costs expended and profits made up to the date of termination, the costs of breaking arrangements with other parties, as well as any demobilisation costs.
Under French law, article 1794 of the Code Civil allows the employer to terminate a contract for works unilaterally, provided that the contractor is compensated for expenses, work and expected profit. This provision is not mandatory. The parties may therefore agree to derogate from it and provide a contractual framework setting out in advance the amount due in case of unilateral termination.
Both English and French law allow parties to terminate their contract outside the framework of, or absent any, termination clauses in the contract.
Under English law, repudiation occurs when a party commits a breach of contract that is sufficiently serious to entitle the innocent party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract. A repudiatory breach must be accepted by the innocent party in order to bring the contract to an end. Once repudiation is accepted, the innocent party will be able to claim damages. Damages for repudiation aim to put the innocent party in the position it would have been in had the contract been properly performed.
Whether or not a breach can justify a termination for 'repudiatory breach’ depends upon the severity of the breach, its effect, and whether it concerns an essential term of the contract. In construction contracts, certain extreme types of breach will usually lead to repudiation, such as the refusal to carry out works, or the abandonment of the site by the contractor. Other breaches may also qualify as sufficiently serious and questions such as the party’s competence, willingness to rectify its breach, and overall conduct, will be considered by the courts. In any event, a party must be cautious in assessing the relevant breach before proceeding with termination, failing which it may commit wrongful termination and be in breach itself.
Under French law, a party can also terminate a contract if its counterparty committed a breach that is sufficiently serious. This principle is enshrined in article 1226 of the Civil Code, which provides that a party may terminate the contract for default “at its own risks”. Except in case of an emergency, the innocent party must first give notice to the defaulting party to perform its obligation within a reasonable time before it can terminate the contract.
A party takes some level of risk when it purports to terminate a contract for repudiatory breach. If it is found that the breach was not actually serious enough to be viewed objectively as ‘repudiatory’, then the terminating party might itself be considered to have committed a wrongful termination. In such a case, the tribunal might consider that the termination was ineffective and that the contract remains in force between the parties. The tribunal can also award damages to the counterparty if it suffered harm as a result of the wrongful termination.
Under English law, anticipatory termination occurs when a party terminates the contract because it becomes apparent that the other party will not perform the contract by the required date. In that case, the terminating party can suspend its performance and is entitled to damages. Anticipatory termination allows the creditor to find alternative solutions more easily and more quickly. It allows the debtor to avoid aggravating the loss and to limit the damages due to the creditor.
Under French law, absent an express clause to that effect, anticipatory termination is not allowed. The Civil Code does not provide for anticipatory termination, and the case law refuses to allow it. During the 2016 reform of French contract law, a proposal to introduce anticipatory termination in the Civil Code was rejected, for it was held to be contrary to the spirit of French contract law, which seeks to protect debtors and to keep contracts alive where possible.
The English law doctrine of frustration is discussed in our guide on extracontractual relief from economic hardship. Under French law, frustration is dealt with by article 1218 of the Civil Code, according to which, in case of a permanent impossibility to perform the contract, the contract is terminated and the parties are released from their respective obligations. No compensation is due to or from either party. Further, the parties cannot be held responsible for the damaging consequences of non-performance caused to third parties.
When termination is not warranted, there may be an option to suspend the contract instead.
Under English law, the courts have consistently refused to recognise a common law right to suspend a construction contract. This is because the obligations of each party are not viewed as interdependent on those of the other party. Therefore, suspension of the parties’ obligations under a construction contract is possible only if it was provided for by a statute or the contract.
In the absence of a suitable statutory right of suspension, noting the limited scope of section 112 of the Housing Grants, Construction and Regeneration Act 1996, parties should therefore consider having a suspension clause in their contracts. If so, they should also ensure that the contract deals adequately with the immediate practical consequences of suspension and how long a contract can be suspended for before termination may occur. Consideration should also be given to what happens when works are to resume following suspension.
Under French law, on the contrary, suspension is possible, even if not expressly provided for by the contract. Article 1218 of the Civil Code provides that if a 'force majeure' event renders the contract temporarily impossible to perform, performance is suspended for all parties. Although the parties may suspend performance of their obligations, they cannot claim compensation for damages suffered as a result of such suspension.
As this Civil Code provision is not mandatory, parties can tailor force majeure clauses to fulfil different aims:
The parties can also choose to include suspension clauses in their contracts. Suspension clauses enable the parties to specify which events will cause the contract to be suspended, without being restricted to ‘force majeure’events.
English and French law differ when it comes to the duty of the terminating party to act in good faith. For more details on the application of the “good faith” concept in English and French law, see our analysis on ‘good faith’ and its treatment in EMEA construction contracts.
For more details on the termination and suspension of construction contracts in the context of Covid-19, see our guide: construction contract termination and suspension: know your rights.
Termination in the UK and in EMEA was discussed in detail at Pinsent Masons events in October 2022. Recordings from those events are available on both events pages, or alternatively you can read our guide to terminating UK construction contracts for further information on the practicalities involved and pitfalls to avoid.
07 Sep 2022
25 Oct 2022