Considering terminating your construction contract?

Termination can be a necessary evil – essential to ensuring a project is completed, but often a trigger for formal disputes.

It is not a decision that should be taken lightly, given the likely, wide-ranging repercussions.

We appreciate that it may be necessary to terminate your construction contract, so with that in mind we have summarised some practical steps to mitigate the potential legal and commercial risks associated with termination.

Key steps and practical tips

1. Read your contract. Before taking any action, carefully review your contract terms to check your entitlement, any specific steps required (particularly with respect to notice and cure periods) and the financial consequences of termination.
   
   Standard form contracts such as JCT, FIDIC and NEC include termination rights for specified events; for example: insolvency, failure to make payments due, failure to remedy defective works and/or reaching or exceeding liability caps. The contract may also specify the consequences once the right to terminate is exercised (for example, the ability to employ alternative contractors or the financial account process). 
   
   It is also important to consider what accrued rights you and your counter party may have, so that you can fully understand your liabilities and your financial position.
   
   
2. Consider the applicable law. Confirm which law applies to your contract, and ensure you take into account both your legal right to terminate as well as any restrictions on termination.  There are important differences to consider between civil and common law, as well as among civil law jurisdictions. 
   
   
3. Communicate clearly. The ‘innocent’ or terminating party should promptly, clearly and unequivocally communicate its intention to terminate the contract by reference to specific grounds. Most contracts will specify the requirements for a termination notice and these requirements must be followed to avoid the risk of the notice being considered invalid. This, in turn, could lead to the defaulting party challenging the right to terminate, claiming a breach of contract and pursuing a damages claim. 
   
   It is also important to include all the grounds for termination in the relevant notices, including if applicable, termination for convenience. Whilst termination for convenience may have less favourable financial implications than termination for default, it protects the employer from an allegation that there were insufficient grounds to terminate. 
   
   
4. Financial position. Prior to issuing a notice of termination, a financial assessment of the sums due up to the date of termination should be carried out in order to fully understand your financial position and any outstanding liabilities. This can be a complex exercise, particularly in circumstances where the terminating party wants  to withhold or set-off any payments due(for example, LDs). As noted above, most contracts will deal expressly with the financial consequences of termination (and these will differ depending on the ground for termination) and it is important to factor this into the wider commercial strategy when considering termination. 
   
   
5. Record-keeping is key. As with almost all construction disputes, a dispute over termination is likely to be decided on the records. Keep clear, accurate records of the Project – well-organised to be able to evidence the reasons for termination years after the fact (in the event of formal dispute). 
   
   
6. Plan ahead. Consideration should be given to what will happen practically post termination. Prior to issuing a notice of termination, plans should be put in place to deal with: 
   - sub-contractors/suppliers
   - site security
   - insurance for the works
   - handover of materials/plant
   
   
7. Continuing obligations. Whilst termination brings the ‘primary’ contractual obligations to an end (i.e. the obligation on one party to perform and the other to pay), certain ‘secondary’ obligations survive termination and the parties continue to be bound by those obligations- for example, dispute resolution or confidentiality clauses. In addition, any rights accrued prior to the date of termination continue to be enforceable, for example, claims for breach of contract for defective works. 
   
   
8. Alternatives. Given the risk involved in termination, exercising the right is often seen as a last resort. Where performance of the works by a contracting party is poor and there are significant concerns around project delivery, there are a number of other commercial and strategic levers that the non-defaulting party might want to pull instead of bringing the contract to an end – suspending works (where entitled to do so), levying delay/performance related damages or calling on applicable security. These measures might constitute a significant enough threat to drive behavioural change and improve performance. 

Conclusion

In short, successfully exercising the right to terminate is complex and carries inherent risk. If you are considering terminating your contract, think carefully whether you actually want the relationship to end or whether there are other more appropriate (and less final) commercial options. For example, you could:

• continue with the contract but clearly reserve your right to claim damages
• escalate the dispute by proposing a commercial meeting to discuss settlement or re-negotiation
• consider other contractual levers (performance damages/LDs etc) to attempt to drive behavioural change

Being prepared and aware can make a significant difference to mitigating the risk involved with termination and the disruption to the project that follows.

Our team has extensive experience of assisting clients navigate termination issues and can work with you to provide practical commercial solutions.