Construction Disputes – Termination

Can I terminate? What are my rights?

Incorrect termination of a construction contract by either party can have a significant impact on parties and lead to substantial disputes. It is important to be aware of the risks of termination as complex rights and obligations are often involved.

Do I have a right to terminate the contract?

If there is a written contract in place, it should provide for specified circumstances and processes for terminating the contract. To address temporary problems, the contract may include a provision enabling a party to suspend performance rather than terminate.

Termination clauses may be fairly straightforward, such as requiring a specified notice period or the insolvency of one of the parties. It can become more complicated if the ground relied on is that the other party is in breach of a term of the contract.

If there is not a specific term to cover the termination, a party may be able to terminate the contract if the other party has breached an important term of the contract. This is likely to require that party doing something which goes to the heart of the contract or indicates that they do not intend to perform their obligations under the contract.

What can I do if the other party terminates?

A dispute will often arise regarding whether a party is entitled to terminate or not. This may involve the interpretation of a termination clause. It is important that the terminating party complies with the requirements of a clause if it is giving notice.

More fundamentally, there is likely to be a dispute as to whether a breach has taken place which is serious enough to bring the contract to an end. This is called ‘repudiation’.

If a party attempts to terminate a contract in circumstances where they are not entitled to do so, that attempt can itself be a breach of contract. The other party can accept such a breach and bring a claim for damages.

By way of practical examples, this could result in:

1. An Employer may wrongfully attempt to terminate. The Contractor may accept that as a breach of contract and claim its loss of profit on the remaining works.
2. A Contractor wrongfully attempts to terminate. The Employer may accept this and bring a claim for the increased cost of completing the works and other additional costs.

If there are circumstances in which you are entitled to terminate the contract, it is important that you do not act in a way which may waive your right to accept the termination. For example, if an employer breaches the contract but the contractor continues to attend site and complete works, the contractor may lose the right to rely on that breach of contract.

There are other concepts which may mean that something which would otherwise be a breach of contract is excused. In particular, the parties should consider if their contract contains a ‘force majeure’ clause. Alternatively, an unforeseen event may occur which makes performance of the contract impossible, which is called ‘frustration’.

If you have any queries about either party’s entitlement to terminate or the possible consequences of termination, Berry Smith can assist contractors or employers in engaging in (or avoiding) a construction dispute.