You may find yourself involved on either side of a termination. Terminating a construction contract is no simple matter. An incorrect termination constitutes a breach of contract, which could have expensive consequences for the party guilty of the breach. This article sets out to give you a basic understanding of what is involved.
Rights of the Contract
- Most contracts will provide both the Employer and Contractor with rights to terminate the contract using express termination clauses
- They provide the mechanism for termination including a period of times where the party at fault can rectify the reason for the termination notice being issued
Contractual rights for the Employer
The following are typical situations that would often (subject to the specific contract) give the Employer the right to terminate
- suspension without cause/abandonment of the works
- failure to proceed regularly and diligently/with due diligence
- refusal to comply with an instruction requiring to remove works/goods not in accordance with the contract/failure to remedy defects
- sub-contracting or assigning without consent
- failing to comply with the CDM requirements
- failure to provide security required by contract, e.g. performance bond
Contractual rights for the Contractor
Below are the circumstances that would ordinarily (again subject to the specific contract) give the Contractor the right to terminate
- non-payment
- interference with or obstruction of the issue of any certificate
- an assignment of the construction contract by the Employer without consent
- a failure by the Employer to comply with CDM regulation requirements
- if the works are suspended for a continuous specified length of time caused by Architect’s/CA’s instructions or any act of prevention by Employer
- The Contractor may also have a right to suspend works as implied by statute: see s.112 of the Housing Grants, Construction and Regeneration Act 1996 as amended (“The Construction Act”)
Notices
There is most likely a notice requirement set out in the contract and for the termination to be valid, it MUST BE FOLLOWED PRECISELY. Below is a checklist of items to ensure are addressed in notices to terminate generally…
- Reference to the clause(s) of the contract that relate to the notice so that the meaning of the notice will be clear to the recipient
- Time limits and considering how the contract deals with public holidays and dates of service (it is surprising how often this is misunderstood)
- The mode of service (how the notice is delivered e.g. hard copy letter, email etc) is less critical as long as it is equally efficacious (capable of achieving the intended result) and reaches the recipient. However, for the avoidance of doubt it would be advisable to follow the method prescribed by the contract
- The Contact may require a Default Notice to be served prior to the Termination notice so understanding if this is required and observing it are paramount
- Must be served BY the right person
- Must be served TO the right person
- Must be served to the correct address
- Have you got evidence to support the notice (e.g. delay analysis, correspondence, minutes, other records etc)
Common Law termination rights
In some situations, there may be no provisions in the contract to deal with termination. In such cases it is necessary to see if, under common law (the part of English law that is derived from custom and judicial precedent rather than statutes) there has been a repudiatory breach (a breach that the law regards as sufficiently serious to justify immediate termination). This is something you would need expert advice on.
Contract or Common Law?
It may also be that there are grounds to terminate both through contract and common law. The factors determining which is the better option are complex and require expert input.
Conclusion
Termination is a complex option and should not be taken lightly. Preparation and following the process prescribed (where a contractual termination applies) is critical. Common law breaches will invariably require legal advice. Be sure and understand what alternatives exist.
