Termination of Construction Contract

Termination of construction contract of a business can have very serious financial implications for the contractor. The business should therefore first give the contractor a “last chance” for most construction contracts by providing a default notice requesting that the problems be rectified within a certain length of time. Most types of construction contracts include termination clauses specifying the circumstances under which a contract may be terminated. The contracting parties are no longer obliged to fulfil their contractual obligations with the termination of a contract. Termination of a construction contract can be complex and following the right procedures is very important. This can include giving termination notice, providing notice periods and the ability to correct shortcomings. There are several reasons why one or both parties may attempt to terminate the contract.

 

Breach of contract in termination of construction contract

If the contractually agreed services are not provided by one of the contracting parties. This may constitute a breach of contract. If the infringement of the contract is serious (material infringement), the innocent party may also assume that it is exempt from any contractual obligations.

If a party acts in such a way as to indicate that it no longer intends to accept its contractual obligations, this is an area of refusal (or a fundamental infringement) that allows the innocent party to terminate and sue the contractor.  Generally, the contract specifies what these violations might be. However, these might include:

• Refusal to work.
• The task of the terrain.
• Removal of the plant from the construction site.
• Non-payment.
• Using other people to get the job done.
• Impossibility to authorize access to the site.
• Not being regular and conscientious.
• Error removing or correcting defective works.

 

This can lead to disputes, for instance, if the customer refuses to pay and proclaims that the contractor has failed to do something, while the contractor claims not to have done so because the customer has refused to pay. If one of the parties states to the other that they do not plan to fulfil their contractual obligations, an early (or premature) refusal exists.

Frustration towards the termination of construction contract

It is frustrating when situations beyond one party’s control make the continuation of the contract impossible. The contract ends without being considered unlawful by any party. However, in order not to break the contract, the parties must be sure that an event of frustration has occurred. Force majeure provisions may include conditions which would otherwise be deemed frustrating and may result in termination of the contract. Force majeure (such as extraordinarily adverse weather conditions) is generally regarded as a relevant event in construction contracts, which provides for an extension of duration and a claim for loss and cost rather than termination. This may be in both parties’ interests.

Suspension

Contracts can also allow execution to be suspended. Generally speaking, the circumstances where suspension is possible are similar to those around termination. For example, if the customer has trouble raising funds to pay for the work at the contract speed, the suspension may be useful.  Each party may have the obligation, without any real possibility of recovery, to terminate the suspension period or extend the suspension.

It is essential that the termination provisions leave no room for doubt, as if the business made a mistake (e.g. by failing to give notice of default before termination), it could breach the contract itself and be liable for the losses. As a result, the contractor will suffer (e.g. loss of profit for the remainder of the contract).

 

Termination by prior agreement

If both parties have mutually agreed in writing to terminate the contract for any reason, the contract may be terminated. An interruption clause is a usual name for this type of disposition. The agreement must contain information about what is a reason for contract termination. It should also imply what action is required for the termination of the contract by one of the parties. In many cases, to terminate the contract, one party must send a written notice to the other party.

As soon as the contractual obligations have been accomplished, a construction contract is effectively terminated. The parties must keep records showing that their contractual obligations have been fulfilled. The documentation is useful if the counterparty attempts to challenge the contractual obligations to be fulfilled later. In case of a dispute, a court requires proof of contract performance.

It seems that ensuring that the contractual mechanism to terminate the construction contract (including issuing a default notice). Is strictly adhered to is more important than ever. Where the contract contains some uncertainty as to whether such a default notice should be served, one should err on the cautionary side and issue one in any case.

 

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