Construction law solicitor, Abbie Chisnall, and Trainee construction solicitor Alicia Hilton look at termination of construction contracts which is a common area of dispute in the construction industry. This article discusses events which may lead to termination and some key information of how to avoid common disputes that arise out of termination.
Construction contracts will often contain clauses which expressly set out grounds upon which either party may terminate the contract. Most standard form contracts make provision for termination as a result of specific events occurring, for example the unlawful suspension of works without reasonable cause or failing to diligently perform obligations under the contract.
If a party defaults on a construction contract, often they will contain a specific termination procedure that the terminating party must adhere to in order to terminate the contract lawfully. For example, standard unamended JCT contracts state that if a sub-contractor commits any of the specified defaults listed in the contract, the contractor must give notice to a sub-contractor specifying the default/s, and if the sub-contractor continues the specified default/s for 10 days from the receipt of the first notice, the contractor may on or within 21 days after expiry of the 10-day period, terminate employment by serving a further notice.
It is important when there is a termination procedure set out in the contract that it is followed correctly because failing to do so may lead to wrongful termination, and this could expose the terminating party to a costly loss of profit claim against them.
Construction contracts can also contain termination at will clauses, which may also be referred to as termination for convenience clauses. Termination at will is not an automatic right by law and must be an express term of the contract. These clauses allow a party, usually the Employer or Main Contractor (if you are a subcontractor), to terminate the contract for any reason, at any time, at their own discretion regardless of whether the party being terminated is in breach.
These clauses are onerous, as if exercised correctly, the terminated party can be asked to leave site for no reason. In addition, these clauses also usually state that the terminated party will not be entitled to any loss of profit. Contract reviews can help you identify onerous clauses like these and having awareness of such clauses is important.
A repudiatory breach is a breach that is so serious that it strikes at the heart of the contract and deprives the injured party of its benefit. Examples of a repudiatory breach include a contractor abandoning site, or the employer refusing the contractor access to site.
If a repudiatory breach occurs, this does not automatically end the contract. It allows the injured party to either accept that a repudiatory breach has occurred but carry on with the contract i.e. affirming the contract or accept the repudiatory breach of contract and treat the contract as ended, and seek damages for the breach. The remedy of damages aims to put the injured party back in the position they would have been had the breach not occurred. So for example if a subcontractor has been awarded a contract for a new home development for the scaffolding works for 100 plots, but only completes 30 plots and are then told that they are no longer allowed on site and a third party will be carrying out the works, this is likely to amount to repudiatory breach. The subcontractor can accept the breach and notify the main contractor that the contract has been breached and therefore it has come to an end. The subcontractor would then be entitled to pursue the main contractor for damages for loss of profit on the remaining 70 plots they were entitled to complete under the contract. This is a very complex area of the law and advice on this area is very fact specific. If you are therefore seeking to argue that a party is in repudiatory breach, it is very important to seek legal advice.
It is vital to know your rights if your construction contract is terminated, or if you want to terminate your construction contract. If a party does not follow the termination process as set out in the contract, this could lead to wrongful termination and exposure to a costly loss of profit claim. Therefore, make sure that you understand your contract and what rights you or the other party has to terminate.
Furthermore, ensure you seek legal advice if you are seeking to terminate a contract or if your contract is being terminated. This is an area of construction law where unfortunately costly disputes arise, so it is important to seek early advice.
The Holmes & Hills Construction Division offer both contract reviews and ‘in-house’ training which covers termination of construction contracts. We would be more than happy to host a training session at our Commercial Hub in Marks Tey, attend your offices in person or remotely to offer training on a variety on topics.
Please do not hesitate to contact our team of construction lawyers if you would like to discuss anything in this article further or have any construction law or construction dispute queries that you would like to discuss.
Call us on 01206 593933 today to speak with one of our specialist construction solicitors. Or complete the form below.
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