We highlight the risk of getting termination wrong and potential alternatives.
It is not unusual for an employer to fall out with the contractor during a project, leading to one of the parties wishing to escape the contract. A party who improperly terminates a contract could find itself accused of repudiatory breach, entitling the other party to claim damages.
THE RISK OF GETTING IT WRONG - REPUDIATION VS TERMINATION
A breach of contract by one party does not automatically entitle the other party to terminate the contract unless:
- the parties have agreed that a particular breach of contract will entitle the other party to terminate the contract; or
- the consequence of the breach has the effect of depriving the other party of substantially the whole benefit of the contract.
When deciding whether a breach was sufficiently serious to justify the termination, the courts will look at the factual circumstances and the commercial significance of the breach.
If a party purports to terminate the contract but is not entitled to do so, then this may constitute a repudiatory breach of contract. If so the other party may elect to either accept that repudiation and treat the contract at an end or affirm the the contract and continue to fulfil its obligations. If the repudiation is accepted, the accepting party can claim damages which flow from that repudiation.
TOP TIPS AND TRAPS
- Check carefully that grounds for termination have arisen. Many building contracts expressly state that the contract can be terminated for reasons such as insolvency, failure to proceed regularly and diligently or non-payment of sums properly due. If the ground for termination is not a matter of indisputable fact (e.g. formal insolvency), then there will always be some risk associated with termination.
- The contract usually explicitly states the steps required to terminate the contract. These steps must be strictly followed. For example, JCT contracts have a two-stage termination procedure, whereby the contractor must be given 14 days' notice of defaults before the right to terminate arises.
- Ensure that notice of termination is sent to the correct person at the correct address. In addition, check the notice of termination is sent by the correct party. For example, the contract may specify that the notice must be sent by the employer rather than the contract administrator.
ALTERNATIVES TO TERMINATION
Termination of the contract is often seen as a last resort. You may wish to consider alternative options. For example:
- Negotiate a variation to the contract to change the scope or terms of the contract.
- Adjudicate to obtain a relatively swift decision in relation to the other party's default. Adjudication does not have to be limited to money claims and you can apply for declaratory relief. For example, you can seek a declaration that a contractor's work contains a defect and he must put it right.
- Negotiate with the other party. It may be that mutually acceptable termination terms can be agreed.
Given the potential dangers associated with termination, it is often appropriate to seek legal advice at an early stage in order to maximise your prospects of achieving a successful outcome.