REUTERS | Jason Lee

Do’s and don’ts of terminating a construction contract

A practical ten-point guide for those considering whether to exercise a contractual right to terminate, or a common law right of termination, on their construction or engineering project.

  1. Do explain why you wish to terminate. Has an event listed in the contract that allows a party to terminate happened, such as a failure to proceed regularly and diligently or an insolvency event (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, that is a repudiatory or anticipatory breach (common law termination)?
  2. Do consider if you are entitled to terminate. Bear in mind that some contractually defined events are more straightforward than others. Contrast an insolvency event (hopefully, straightforward) versus a failure to proceed regularly and diligently (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. 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.
  3. Do consider what you wish to recover if or when 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 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.
  4. Do 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.
  5. Do 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 performance. Note that if you are seeking damages, there is a duty to mitigate, that is, 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.
  6. Don’t affirm the contract once you have accepted a repudiatory breach. Give clear instructions to staff on site.
  7. Don’t delay. By delaying you may be held to have affirmed the contract by conduct, 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.
  8. Do understand the consequences of accepting a repudiatory breach. Once a repudiatory breach is accepted, neither party can insist on future performance: the breaching party cannot remedy the breach and the innocent party cannot withdraw their acceptance. However, the breaching party may be able to 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 a further breach.
  9. Do 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, as the innocent party, the notice provisions are not followed, 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.
  10. Do seek advice and consider your options. As the innocent party, you may wish to keep your options open. However, as noted above, affirmation can happen unintentionally, particularly if the other party is led to believe it is business as usual. As 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.

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