Firing the contractor rarely leaves construction projects better off, says expert

Out-Law Analysis | 16 Sep 2011 | 9:54 am | 2 min. read

OPINION: When a construction project is going badly wrong and a contractor is not doing its job it can be very tempting to punish that company by terminating its contract. But while that might seem satisfying it will almost certainly land you in trouble.

It is better if you can possible manage it to keep the contractor on, get the job finished and then consider what legal action you can take after the fact. This might not play to your sense of fairness in the way that sacking an under-perfoming contractor would, but it avoids some major legal pitfalls.

Why? For the simple reason that it is very difficult to terminate a contractor's contract properly. It can be done, and you should make sure you pay for the best advice if you are doing it, but the risks are enormous.

Even if you do walk this precarious legal tightrope you are then stuck with an unfinished job on your hands and a ticking clock. Every contractor on the block will know you are in a tight spot and your bargaining position will be fatally undermined.

The most important thing to do is to put feeling and sentiment aside. Many contracts are terminated when emotions are running high, but you should let cold reason, not emotion, govern your actions.

If you do decide to terminate a contractor's contract, though, you have a choice. You can either end it in accordance with the terms of the contract itself or you can claim that the contractor has acted so appallingly that it has effectively behaved as if the contract does not exist.

Often the same circumstances will allow for both of these courses of action, and each has its benefits and risks.

Terminating under the terms of the contract usually means giving notice, and this must be done strictly in line with the contract, such as clause 15 of the FIDIC model contract.

If you terminate because of the fundamental failures of the contractor then this is termination for 'repudiatory breach', which means that you take the other company's failure as a rejection of the contract as a whole and accept that rejection (the repudiation) and are therefore freed from its obligations.

This is high risk, though. If you get the process wrong then the other side can claim you have made a repudiatory breach of the contract and can escape its terms. On the positive side, though, you can terminate like this with no notice at all.

You have to choose which method you use carefully. Terminating under the terms of the contract, for example, is seen as an act that affirms the validity of that contract, so you lose the right to terminate for repudiation.

It is also worth bearing in mind that you are almost certain to end up in international arbitration over a terminated contract.

Termination as a whole is actually best avoided because the act of terminating risks undermining the contract itself, which can let the under-performing contractor off the hook entirely.

And even if you successfully escape the contract, the work still needs to be done, and usually to a shortened timescale and with very little in the way of bargaining power on your side.

If you do find yourself stuck with an under-performing contractor then put all your effort into getting the work out of that company and seeing the project to the end if you possibly can. You can then investigate suing the contractor once the work is done. It is perhaps not as satisfying as taking immediate action against the company you see as threatening your project, but it is almost always the wise course.

Mark Roe is a construction law expert specialising in international arbitration at Pinsent Masons, the law firm behind Out-Law.com