Termination: the pitfalls

There are many risks in terminating a contract, particularly in construction contracts – get it wrong and you risk being in breach of contract yourself. The two main pitfalls are:

• Not having valid ground for termination (these can be very limited), and
• Not giving the right notices.

The Contract

The starting point is the terms of the contract which will usually set out the grounds and process for, and the effect of termination. The standard form contracts tend to have various grounds for termination, which often include:

• Non-payment by the employer
• Specified defaults, g. failure to proceed regularly and diligently with the works and breach of certain contract provisions
• Specified events, e.g. force majeure
• Insolvency

It is unusual to find a clause in domestic construction contracts that entitles an employer to terminate just because it wants to i.e. “termination for convenience”. These can sometimes appear in consultants’ appointments. However, if the motive behind termination is to get someone else to do the same work for a better price, the terminating party risks being in breach of contract.

The contract also normally describes a specific process to effect termination. The JCT form provides for a two-notice procedure.  The first is a warning notice notifying the default and giving the defaulting party an opportunity to remedy.  The second is a notice of termination.  Any notices should be given exactly in accordance with the requirements of content (i.e. set out the basis of the default) and method of delivery.

Failure to comply with such notices is likely to prevent termination being valid. The contract may also impose limits on the right to termination i.e. that it should be reasonable or in good faith. For example, the JCT form says that a notice to terminate should not be given “unreasonably or vexatiously”.  This is normally a basis of challenge by the party that has been terminated.

Common Law Termination (non-contractual)

Unless the contract expressly excludes it, there is also a separate right at common law to terminate if there is a fundamental breach of contract.  This is called repudiation. However, establishing repudiation is not straightforward and it depends on the nature of the breach. It may also depend on what the contract says. It must be enough to demonstrate that one party no longer intends to be bound by the contract. The terminating party (here the “innocent party”) must demonstrate the breach justified termination. In this situation, it takes two to end the contract and the innocent party can choose whether to ignore the breach or accept it and bring the contract to an end and claim damages.

Do you have to choose between contract and repudiation?

This is a complex area and in certain circumstances, you can try to enforce both.  You should consider your position carefully before exercising your right to terminate and assess the risks of choosing one option over the other or trying to pursue both.

Also, if you try to serve notice of termination under the contract and you get it wrong, you risk being in repudiation yourself. This will entitle the other party to accept the repudiation (i.e. bring the contract to an end) and claim damages.

The consequences of termination

The contract will usually set out the consequences of termination and its effect on payment.

This was relevant in the recent case of Almacantar (Centre Point) Ltd v Sir Robert McAlpine Ltd (2018) which related to works carried out under a pre-construction services agreement at the Centre Point tower in London.  The contractor had completed all its services but the parties decided not to proceed to the second stage and the contract was terminated by mutual agreement.  There was a subsequent argument about the contractor’s entitlement to 50% of its fee which the agreement stated was payable if the parties entered into a construction contract.   The court held that the contractor was not entitled to this because the clauses dealing with payment on termination did not provide for it.  In this case the contractor should have ensured that all material terms of the termination (including payments) should have been agreed and recorded in the agreement to terminate.

Points to consider

As termination is a risky business here are some points to consider: 

• Does the contract have to end? Consider whether you can manage and/or take steps to improve the relationship. Often early advice in this regard can help save time and money later.
• Check the contract and comply with the terms. Again, obtaining early advice can ensure money isn’t wasted in dealing with problems later in the process.
• Can you hedge your bets? i.e. exercise contractual right to termination and elect to accept repudiation?
• Draft any notices carefully: State the grounds and refer to the contractual
• provision and/or repudiation and ensure that you check the method of delivery.
• If you are the party being terminated, check that it is on valid grounds, contractual requirements have been complied with and whether you can object (i.e. has the other party acted unreasonably?).