How performance-based contracts could help South African municipalities improve water supply
Out-Law Guide | 16 Aug 2011 | 10:35 am | 8 min. read
This guide covers contractual and non-contractual rights to terminate a construction contract. Contractual rights may include the right to terminate 'at will' where there has been no breach by the other party.
The majority of standard form building contracts contain express provisions regulating the rights of either or both parties to terminate the contract in defined circumstances.
Frustration: this occurs when neither party has defaulted on the original contract but other circumstances have intervened to prevent the contract from being performed as originally intended. The result must be that further performance of the contract is impossible, illegal or radically different from what the parties contemplated when they entered into the contract.
If a frustrating event occurs the contract automatically ends and the parties are excused from their future obligations, although any accrued liabilities will remain.
It is important that a party is sure that frustration has actually occurred if it is going to rely on frustration to justify ceasing to perform its obligations under the contract to avoid being in breach if the event is not in fact a frustrating one. Case law gives some examples of events that are not frustrating events - for example, if the contract is more expensive to perform this is not a frustrating event. If an event happens which is provided for in the contract the consequences of that event happening will be as set out in the contract and it will not be a frustrating event. Parties therefore need to be wary of the potential overlap with force majeure clauses.
Repudiation: this occurs when a party commits a breach of contract that is sufficiently serious that it entitles the innocent party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract. Whether a material or anticipatory breach will depend upon the severity and effect of the breach, and whether it goes to the root of the contract.
Ordinarily, certain extreme types of breach will amount to a clear repudiation of a construction contract. Examples include:
Other breaches may not be clear-cut. If the innocent party purports to treat the contract as repudiated because of a breach that is not in fact repudiatory it will have committed wrongful termination and be in breach itself. 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 if available, although the amount of damages recoverable would usually be lower than damages for repudiatory breach.
Repudiation by one party will not by itself bring an end to further contractual obligations - it must be accepted by the innocent party. There is no particular form that this acceptance must take but it must be an unequivocal acceptance. If it is accepted, both parties are released from performance of their respective unperformed obligations and damages, assessed under the normal rules, will be payable by the party at fault. Damages for repudiation aim to put the innocent party in the position it would have been in had the contract been properly completed.
If the innocent party does not accept the repudiation it 'affirms' the contract. It is still entitled to claim damages for the breach but the contract will continue.
Difficulties can arise if the innocent party inadvertently affirms the contract instead of accepting the repudiation by acting in a way that contradicts acceptance or is equivocal in some way. It may find itself in breach of contract if it stops performing its obligations in the mistaken belief that it has accepted the repudiatory breach.
In some cases a breach may give the innocent party both a right to terminate for repudiation and a right under the contract. The innocent party does not necessarily have to elect to use one right or the other in these circumstances, but if exercise of the contractual right is inconsistent with acceptance of repudiation - for example, if the consequences of terminating under the contractual right are different - or the response to the breach is less than unequivocal the innocent party will be taken to have 'affirmed' the contract and will have to rely on the contractual right rather than repudiation.
Termination clauses in contracts give parties right to terminate in certain circumstances. These most commonly deal with breaches of specified contractual obligations. There may be rights to terminate in other situations too, such as the occurrence of a force majeure event.
Termination 'at will' or 'for convenience' wording may be inserted into a contract allowing one party to terminate without having to establish that some event has occurred or breach has been committed by the other party. This can be useful where:
This type of provision has been traditionally less common than those permitting termination for default in some of the unamended standard forms, but employers are given the right to do so in some forms such as GCWorks and NEC3 and in the majority of PFI contracts. However, contractors and consultants are rarely given the right to terminate for convenience.
A contract may provide no express limitation on when, or in what circumstances, a termination for convenience clause can be operated. However case law tends to suggest that, in the absence of sufficient wording, it will be a breach of contract to exercise a termination for convenience clause simply for the employer to obtain a better price to complete the works from another contractor. The English courts tend to look to Australian cases for guidance on this issue.
Provide for compensation: to be effective, termination for convenience clauses will need to provide for contractor compensation. The standard forms which contain these clauses already do so. An Australian case in 2000 held that where compensation is provided for in the contract in clear, unambiguous terms it will usually be enforceable.
Clear wording: as with most contract provisions, clear wording will be required before a termination for convenience clause will be fully effective. Unreasonable provisions, such as allowing the employer to pass work on to a third party, must be stated in clear, unambiguous terms otherwise they will be unenforceable.
Use of omissions clauses to tackle bad bargains and poor performance: the courts have decided that an employer will not be able to use an omissions clause to get out of what it now considers to be a bad bargain. It is also doubtful that such a clause can be relied on by an employer to switch contractors in the event of dissatisfaction with the current contractor's work.
An example of an attempt to do this can be found in a 2003 case between Abbey Development and PP Brickwork Ltd. Here, the contract allowed for the employer to reduce or increase the quantity of work offered to the contractor as well as containing a termination for convenience clause. Abbey relied on these provisions to remove work from PPB after putting the contractor on notice for insufficient supervision and poor workmanship. The judge found that the provision was not clear enough to allow Abbey to use it to pass the work on to another contractor – it only allowed Abbey to reduce work where this was no longer required for the completion of the project.
Rational, honest and proper reasons: this was discussed in another 2003 case between Westminster Council and Hadley Design Associates. HDA was contracted on a rolling basis to refurbish flats built in the late 1950s. The Council terminated the contract under a one-month termination clause that did not require reasons, citing:
The judge held that these reasons were 'rational, honest and proper'.
In summary, the case law warns us that even if the contract does contain an express provision dealing with termination for convenience:
As with termination, suspension can take many forms. For example, a contractor may wish to respond to actual or alleged breaches of contract by an employer by suspending works, or an employer may wish to respond by suspending payment. Suspension clauses in the contract can be very helpful, but can sometimes be overlooked when the parties' focus has been taken up by negotiating the termination provisions.
There is a very close relationship between suspension and termination and, depending on how the clause is drafted, the end result of a suspension clause may be much the same as a termination clause in that either party will have the right to terminate the contract at the end of the agreed suspension period.
The justification for suspension clauses will be broadly similar to termination – for example, there may be a change of circumstances on the ground that makes continuing with the works impossible in the short term. Occasionally suspension can be used by one party to allow it space to consider how to proceed with a project, which should be acceptable to the other party if kept within bounds.
In the absence of an express contractual term, it would be difficult to argue that a general right to suspend exists in law as the courts have consistently refused to recognise such a right. It is therefore a good idea for the parties to 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 a suspension order 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.
Proceed with caution before using termination and suspension provisions and, if these rights are to be invoked, make sure you strictly follow the contract's notice and procedural requirements
Be careful with your wording. If a contract contains a termination for convenience provision, it is likely that it will be considered in breach of contract if this is used simply to obtain a better price from another party to complete the works - even where there is no express limitation on the circumstances when the provision can be used.
Where no provision is made in the contract for termination for convenience, it may be appropriate to consider whether any default or neutral grounds of termination are applicable or appropriate in the circumstances.
How performance-based contracts could help South African municipalities improve water supply