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Termination of Building Contracts - a risky business

Scotland
01.02.2012
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Termination is a risky business - get it wrong and you risk being in breach of contract yourself. The two main hurdles are: not having a valid ground to terminate (these can be very limited); and not giving the right notices.

1. Valid grounds for termination
The starting point is the contract. The terms of the contract will set out the grounds for, the process and the effect of termination.
1. Specified defaults e.g. failure to proceed regularly and diligently with the works and breach of certain contract provisions.
2. Non payment by the employer.
3. Specified events e.g. force majeure.
4. Insolvency - although this is usually dealt with specifically.
It is unusual to find a clause in domestic construction contracts that entitles an employer to terminate just because it wants to (a termination for convenience clause). These can sometimes appear in consultants’ appointments. However, if such a provision is included and the motive is to get someone else to do the same work for a better price then the terminating party risks being in breach of contract.

Unless the contract expressly excludes it, there is also a separate right at common law to terminate if there is a fundamental breach of contract (lawyers call this repudiation). However, establishing repudiation is not straightforward - it depends on the nature of the breach (it has to be enough to demonstrate that one party no longer intends to be bound by the contract e.g. abandoning the works) and perhaps on what the contract says. The terminating party (here, the “innocent party”) has to demonstrate that the breach justified termination. In this situation it takes two to end the contract and the innocent party can choose whether to ignore the breach or accept it and bring the contract to an end and claim damages.

Do you have to choose between the contract and repudiation? The short answer is that you can try to enforce both. However, this is a complex area. Think carefully about the best way to terminate the contract. You may be able to terminate under the contract in circumstances where there has not been a fundamental breach giving rise to repudiation. Either way, be careful as getting it wrong may result in being in breach yourself.
2. Give the right choices
The contract also normally describes a particular process to effect termination. For example under the JCT standard form there is a two notice procedure. The first is a warning notice - notifying the other party of the default and asking for it to be sorted out. The second is a notice giving effect to the right to terminate. Any notices should be given exactly in accordance with the terms which may include setting out the basis of the default. Failure to comply with such notices is likely to prevent termination being valid.

The contract may also impose limits on the right to termination, e.g. the JCT standard form states that a notice of termination shall not be given unreasonably or vexatiously. However, if the contract is silent the right to terminate should normally be operated reasonably or in good faith. This is normally a basis of challenge by the party that has been terminated.

So what if you get it wrong ...

If you get it wrong you risk being in repudiation yourself. This will entitle the other party to accept the repudiation (i.e. bring the contract to an end) and claim damages.

Points to consider
1. Does the contract have to end? Consider whether you can manage and/or take steps to improve the relationship.
2. Check the contract and comply with the terms.
3. Draft any notices carefully - state the grounds and make reference to the contractual provision and/or repudiation.
4. Can you hedge your bets i.e. exercise contractual right to termination and elect to accept repudiation?
5. If you are the party being terminated - check that it is a valid ground, contractual requirements have been complied with and whether you can object (i.e. has the other party acted unreasonably?).

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