How Can A Construction Contract Be Terminated?
In contract law, there are only limited circumstances where you will be able to exercise your right to terminate your building contract. Termination of a contract entails cancelling the contract before the parties have fully performed their obligations. All contractual obligations will cease to exist upon valid termination. Your rights to terminate arise under the law or otherwise under clauses within the contract you have entered into.
There are three grounds at common law that will give rise to termination.
1. Termination by agreement
A contract is able to be properly terminated when both parties to the contract either expressly or impliedly agree to termination. An agreement as such may arise in circumstances where the course of the construction project has gone so left that neither party will no longer benefit from the completion.
An express agreement to terminate can be made orally but for better security it is recommended to have the agreement evidenced in writing. Establishing an implied agreement can be difficult as it must be clearly inferred by the parties’ conduct that neither party requires the other party to perform their contractual obligations.
2. Termination for Breach of Contract
A contract can be terminated on the grounds that a term of the contract has been breached. However, for the contract to be terminated on these grounds the term must be considered an ‘essential’ term, constituting a fundamental breach. An ‘essential’ term is often a condition of the contract. Consequently, it must be determined whether the breached clause is an ‘essential’ term or ‘non-essential’ term before gaining a right to terminate.
A condition is a promise of such importance that the promisee would not have entered the contract without an assurance of strict or substantial performance of the promise. In construction contracts, ‘essential’ terms are usually considered to deal with timely performance of works or payments.
A ‘non-essential’ term is referred to as a warranty and will only give rise to damages not termination.
Note that a ‘sufficiently serious’ breach of a non-essential term may also provide you with a right to terminate. Whether it is a ‘sufficiently serious’ breach will depend upon the nature of the contract and the extent of the breach and consequences for the innocent party.
3. Termination for Repudiation of Contract
A contract can be terminated as a consequence of repudiation. An act of repudiation is where one party demonstrates an intention that they are either unwilling or unable to perform their obligation under the contract. Repudiation can be expressed or implied by the other party.
Express repudiation will obviously be when the party tells you that they will not perform their obligations under the contract. Otherwise, if the party’s actions make it clear that they will not perform their contractual obligations then repudiation can likely be implied.
For repudiation to serve as a ground for termination, you as the other party must be able to show that you were ready and willing to perform the contract if it were not for the other party’s repudiation.
Termination can arise by way of an expressed term in the contract that automatically terminates the contract if a specified event occurs. Otherwise, your right to terminate may arise under the contract as there may be terms that allow for a right to terminate upon a default or specified event occurring.
Automatic termination clauses are considerably straightforward and clear. These clauses are more commonly formed as a pre-condition with a time stipulation e.g if that pre-condition is not satisfied within the required timeframe, the contract will terminate automatically.
Another typical example of a contract automatically terminating is when the parties have performed all their obligations.
A contract may include a term that specifies an event where the right to terminate will arise if that event materialises.
Most construction contracts contain a list of specific events that will give rise to a right of termination. A common example of a specified event is insolvency and failure to obtain municipal or government approval by a specified date.
Termination in this context is usually only made effective by the non-breaching party giving a written notice to the other parties that outlines their intention to terminate.
The most common contractual rights of termination are for specified breaches of the contract. Typically, construction contracts will contain a termination clause that sets out the specific breaches of the contract that will give rise to a right of termination. Usually only serious breaches are specified as activating the termination of the contract such as making payments and completing building works on time. Generally, a default will not give rise to automatic termination.
The defaulting party should be given a notice either requiring the breach to be rectified within a specified time or requiring the defaulting party to justify why the contract should not be terminated. A right to terminate will arise once the defaulting party has failed to adequately act on or respond to the notice within the timeframe required.
Indeed, the circumstances that call for termination are limited meaning not every frustration and delay in the course of construction will confer a right to terminate. The terms of the contract will heavily dictate the grounds where the contract can be terminated, so look to your contractual rights. Otherwise, there are three ways you can terminate at common law, which are:
- By agreement
- By breach of essential term
- By repudiation
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