Deconstructing the termination of construction contracts in Ireland

The termination of construction contracts in a time of economic uncertainty

Challenges faced by the construction industry come into sharp focus during difficult economic times. Projects are often hampered by the cost of credit, cashflow pressures, inflation in the cost of building materials and difficulties in securing and maintaining a sufficiently skilled labor force.

Such factors make the risk of events that may give rise to the grounds for termination, such as delay in the progression and completion of works under construction contracts or, at worst, the insolvency of a party to the contact, more likely to materialize.

Methods of termination

Where it becomes clear that a party to a construction contract has defaulted on its obligation, there are two main methods by which the innocent party can bring the contractual relationship to an end:

1. where a contractual clause providing for termination has been breached, the innocent party can invoke their express rights under the contract; and
2. where the breach is sufficiently serious to amount to a repudiatory breach of contract, the innocent party may accept the repudiation and terminate the contract at common law

Importantly in Ireland, the Irish Supreme Court ruled in the case of Galway City Council v. Samuel Kingston Construction Ltd (414/08), that generally the entitlement to rely on a contractual termination clause and the right to accept repudiation will not be mutually exclusive at the outset. A contract will usually only be held to exclude the remedy of acceptance of repudiation at common law where that intention is clearly expressed.

Method 1- termination under the contract

An innocent party will only be entitled to terminate a contract under contract law where this has been expressly provided by a provision within the contract. Such clauses are commonplace in many of the standard form construction contracts such as JCT, FIDIC, NEC 4 etc. Common contractual grounds giving an innocent party the right to terminate include:

1. a contractor’s suspension without valid reason or abandonment of the works
2. a contractor’s failure to proceed with the works regularly and diligently
3. a failure to provide security required by contract, such as a performance bond
4. an employer’s failure to make payments within the time specified by the contract and
5. insolvency of one of the parties

Where a party seeks to terminate a contract based on a contractual termination clause, there will usually be several steps to observe by way of contractual notice requirements. 

To this end, termination notices which set out the alleged breaches are normally required to be issued prior to the termination of the contract. While not strictly required, it is good practice to note and state the clause you are relying on in respect of the breach to leave no doubt in the mind of the defaulting party what the grounds for termination are.

In some instances, a warning notice will need to be issued prior to the termination notice, notifying the party of the wrong and that the innocent party will be entitled to exercise its rights to terminate within a set period of the warning notice. It is important that the notice is sufficiently clear and unambiguous in its terms to convey the intention to determine the contract and constitute a valid notice.

To ensure valid enforcement of the notice it is important that service of the notice is effective. The service of notices is often provided for under the contract, but it is recommended that parties effect service in a manner which not only complies with the contract but also enables the innocent party to prove that the notice was received by the defaulting party.

The right to recover damages when terminating a contract will be assessed in accordance with the relevant contractual provision and so any breach will be determined in accordance with wording of the contract. It is important to note that damages will normally only be accessed up until to the point of termination unless the contract provides otherwise.

Method 2- termination at common law

Repudiation occurs when a party commits a breach of contract that is sufficiently serious to entitle the innocent party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract at common law. Examples of a repudiatory breach include:

1. an absolute refusal to carry out the work or an abandonment of the works before it is substantially completed without any lawful excuse
2. rendering completion impossible
3. failure to give possession of the site at
4. a clear order for the contractor not to complete the works contrary to the contract
5. employing third parties to carry out work already contracted to the contractor; and/or
6. wrongful termination of the contract

When a repudiatory breach occurs, the innocent party will have an option to both accept the repudiation and terminate the contract or affirm the contract and continue the relationship as it exists.

When exercising a right to repudiate or affirm the contract, the innocent party must communicate its decision to the defaulting party. When electing to terminate, this communication should be done as soon as possible as a delay in accepting repudiation may be considered to be affirmation.

Where an innocent party accepts a repudiatory breach at common law, it will be entitled to damages including damages for the consequences of ending the contract. Damages are accessed under the principle that the innocent party is to be put into the position it would have been had the contract been properly carried out.

Notwithstanding the right to terminate for repudiatory breach, should you elect to claim for termination under contract, it would be prudent that you reserve your rights under common law.

Key considerations

As terminations become more prevalent, greater scrutiny will be placed on contractual provisions around termination and the enforcement of termination provisions. It is essential in both drafting and enforcing termination clauses that formalities and procedures are followed.

It is therefore essential that you consider the practical considerations of termination such as:

1. has a replacement contractor been sourced or has the process of selecting a replacement contractor begun? Will the new contractor novate appointed sub-contractors who are familiar with the project to the employer and are there complications with doing the same?
2. are sums outstanding to contractors and sub-contractors for works done to date?
3. after termination of the contractor, what steps will be taken in respect of securing the site? Has a site audit been taken reviewing plant, equipment, and materials on site and what is the position in respect of ownership of the same? Has security been to protect the site if there is a delay in appointing a new contractor?

As terminations can occur quickly, we recommend you contact us as early in the process as possible to secure the best outcome in a manner which protects your rights effectively.