Out-Law Guide | 12 Oct 2012 | 1:41 pm | 4 min. read
This guide gives a checklist of things to do and things to avoid when terminating a construction contract. More information about termination is available in our guide to termination and suspension of construction contracts.
Things you should do:
Explain why you wish to terminate: has an event listed in the contract that allows a party to terminate happened (e.g., a failure to proceed regularly or diligently; an insolvency event)? This would be contractual termination.
Has there been a 'material' or 'substantial' breach, that is, a breach so serious that it would be unreasonable to expect the other party to continue with the contract? Or has a party shown an intention not to be bound by the contract (which is a repudiatory or anticipatory breach)? This is common law termination.
Consider if you are entitled to terminate: bear in mind that some contractually defined events are more straightforward than others. Contrast an insolvency event, which is straightforward, with a failure to proceed regularly and diligently, which is not so straightforward.
Has a contractor failed to proceed regularly and diligently when completion date is some time away and arguably the contractor in theory can still finish on time? If you wish to exercise common law termination, be sure that the breach is in fact 'material' or 'substantial'. If not, you run the risk of putting yourself in repudiatory breach if you wrongfully terminate the contract. For that reason if there is doubt about whether or not a breach is repudiatory, the innocent party may consider exercising a contractual right to terminate instead.
Consider what you wish to recover if you terminate: if termination is contractual, the contract will specify the categories of loss that can be recovered and, possibly, the limits on recovery. The remedies for common law termination are wider, and aim to put the innocent party in the position it would have been in had the contract been properly completed which, for a contractor, can extend to loss of profit.
Understand that rights and obligations accrued prior to termination remain: if the contract was terminated before the contractual completion date, no liquidated damages would be owing, because they would not have accrued during the term of the contract: liquidated damages only start accruing when works are delayed past completion date. Sums due for work carried out under the contract prior to termination remain due, and they are calculated in accordance with the pricing mechanism under the contract.
Elect whether you wish to continue with the relationship: if a repudiatory breach has occurred, elect whether to accept the repudiation and terminate the relationship (and claim damages), or to affirm the contract and push for the work to be completed. If you are seeking damages there is a duty to mitigate, which means that you have to take reasonable steps to limit additional losses. Sometimes affirming the contract is the best tactic. If the contract is kept alive then sums due under the contract may give rise to a debt claim with no requirement to mitigate your loss.
Understand the consequences of accepting a repudiatory breach: if a repudiatory breach is accepted then neither party can insist on future performance - the breaching party cannot remedy the breach and the innocent party cannot withdraw their acceptance. The breaching party can, however, retract the repudiation by performance at any time before acceptance of the repudiatory breach and, in those circumstances, the contract would remain in force. If the innocent party initially calls for performance by affirming the contract, this does not prevent him from terminating the contract at a later date as a result of an actual breach as opposed to an anticipatory or repudiatory breach.
Follow the notice provisions under the contract strictly if you are exercising contractual termination: the contract will usually set out a procedure for termination, which typically involves a "tiered" approach. This means that as the party wishing to terminate the contract, you are required to give notice to the other party, assert that the party is in breach, specify the nature of the breach and cite the correct contractual termination clause, and give the party in breach a chance to rectify the breach within a specified period.
If the breach continues beyond the specified period a second notice can be served terminating the contract. If the notice provisions are not followed then as the innocent party you can end up unlawfully terminating the contract and therefore be in repudiatory breach, entitling the other party to terminate at common law. If you have wrongfully terminated, you could be exposed to damages.
Seek advice from solicitors if you are faced with a potential termination: this is the case whether you are the innocent party or the party potentially in breach. As the innocent party you may wish to keep your options open. As noted above, however, affirmation can happen unintentionally, particularly if the other party is led to believe it is business as usual. If you are the party potentially in breach there are options available to resist termination. Performance of the contract includes the operation of the dispute resolution procedure in the contract. Therefore by referring a potential dispute to adjudication for a determination (even though you are potentially failing to perform other aspects of the contract), you could avoid a challenge that your conduct was a repudiation.
Things you should not do
Don't affirm the contract once you have accepted a repudiatory breach: give clear instructions to staff on site.
Don't delay: by delaying you may be held to have affirmed the contract by conduct thereby waiving your right to terminate. In those circumstances the contract continues and you may find yourself in breach of contract if you stop performing your obligations in the mistaken belief that you have accepted the repudiatory breach.