A Guide to Terminating Construction Contracts

Terminating a construction contract is one of the most significant decisions you may face. While it can be a necessary step to protect your interests, the process is governed by stringent legal principles where procedural rigor is king.

Under English and Welsh law, a failure to adhere precisely to these principles can see your attempt to terminate become a breach of contract, facing substantial financial liability. To get it right, the key considerations you need to consider are:

• the common law rules around termination of contracts

• terminating standard form construction contracts under their express terms

• the consequences of termination

• the risks of getting it wrong

  
  

When Do You Have the Right to Terminate?

The foundation of a valid termination rests on demonstrating a clear legal right. Your right to terminate can arise from either:

• the express terms of the contract itself,

• or the common law.

Terminating Construction Contracts Due to Terms

Most standard form construction contracts, such as JCT, NEC, and FIDIC, provide a detailed contractual framework for termination. These clauses create specific, often easier-to-satisfy grounds.

If the termination of a construction contract is by an employer: the reasons may include the contractor’s failure to proceed ‘regularly and diligently’, a persistent failure to remove defective work, or insolvency.

If the termination of a construction contract is by a contractor: the most common ground is the employer’s failure to pay, failure to provide access or even insolvency.

Mutual termination: The contract can be terminated by mutual agreement on commercial terms, which allows both parties to avoid a costly legal dispute. Any such agreement must be carefully documented.

Terminating Construction Contracts at Common Law

Alongside these contractual rights, the common law provides a separate, overarching right to terminate for a ‘repudiatory breach’. This is a breach so fundamental that it strikes at the root of the contract, such as a complete abandonment of the works or an unequivocal refusal to perform. It is critical to note that this common law right exists independently of the contractual terms, though the contract may seek to limit or supplement it.

Did You Follow the Correct Procedure for Termination?

Having a valid ground for termination is only the first step. The correct execution of the termination process is where many disputes arise. In construction contracts such as JCT, contractual termination clauses are typically conditional upon following a strict, sequential procedure and will vary from contract to contract.

This almost always begins with the service of a default notice. This notice must be compliant with the contract’s requirements. For example, the standard JCT terms require the notice to be in writing, specify the breach clearly, and grant the defaulting party the stipulated period to remedy the failure. Should the breach continue unremedied after this period, you have the right to issue a formal termination notice, for which attention must be paid to the requirements of the contract.

Any deviation from this procedure may render the entire termination ineffective. Examples of deviations include:

• An inaccurately drafted notice

• Improper service

• An insufficient cure period

Consequences and Financial Implications

A valid termination brings the parties’ primary obligations to perform future work to an end, but it activates a new set of financial and practical consequences. These are usually detailed within the contract.

The contractor: must cease work, leave the site, and/or return any design documents.

The employer: is obligated to make payment after termination of the construction contract for all work properly executed up to the date of termination.

Thereafter, if you’re the employer you’re entitled to employ others to complete the works and if the original contractor terminated without cause, in other words repudiated, it may be liable for the additional costs incurred in completing the project, less any unpaid sums. These costs can be significant, covering the difference between the original contract value and the, often higher, price of completion, along with associated professional fees.

What about duty to mitigate? This differs on a case-by-case basis but if your contract is terminated by the other party, you may be under a legal duty to take reasonable steps to mitigate your losses.

The Risks of a Wrongful Termination

The consequences of a wrongful termination are severe if the right to terminate has not actually arisen or the correct procedure for termination has not been followed. This will mean that the termination is then invalid and could amount to a repudiatory breach of contract.

The party who sought to terminate is placed in breach and liable to the other party for substantial damages. These risks are serious as we’ve explored above.

A Prudent Approach to a Critical Decision

Given the high stakes, termination should never be undertaken without careful preparation. You should first conduct a thorough review of the contract terms, gather comprehensive evidence of the alleged default, and consider whether alternative dispute resolution methods and negotiations could resolve the issue rather than pulling the plug entirely.

In summary, the power to terminate a construction contract is a vital but risky tool and should not be taken so simply. Its successful exercise depends on a clear legal grounding, scrupulous attention to procedural detail, and a clear assessment of the significant ramifications. Properly managed, it can protect your position, but if mismanaged, it can lead to considerable financial exposure.

Therefore, legal advice from a specialist in construction law is essential to navigate the complexities. That’s what we are here for.

Get Help Terminating Construction Contracts the Right Way

Don’t take the risk. Reach out to our team at Shemmings Hathaway LLP to support you through the legal process of cancelling construction contracts. We are experts in navigating the construction law landscape to protect your interests and achieve optimal results for your business. Call us today for a free consultation.

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