Terminating a Construction Contract: Avoiding Disputes

Terminating a construction contract excuses the parties from having to perform their obligations under the contract from the termination date. However, failure to terminate a construction contract correctly may lead to a repudiatory breach (i.e. a serious breach that goes to the root of the contract, depriving the innocent party of the benefit of the contract). This enables the other party to terminate the contract considering that breach and potentially bring a claim for damages.

Kayleigh Whitman, Associate at Coodes, shares more details about the grounds to terminate a construction contract and why incorrectly terminating a contract could lead to dispute.

What are the grounds for terminating a construction contract?

Contract Law

A ‘repudiatory/fundamental’ breach is a serious breach going to the core of the contract. It deprives the innocent party of the benefit of the contract. Where one party has committed such a breach, an innocent party may:

• Affirm the contract by treating it as continuing, but bring a claim for damages for the breach of contract, or
• Bring the construction contract to an end.

A contractual provision will be classified as either:

• A condition – a breach of which will be regarded as so serious it will amount to a repudiatory breach enabling the innocent party to terminate the contract.
• Warranty – a breach of which will not give a party a right to terminate.
• Intermediate term – a breach of which will not automatically provide a right to terminate, although an innocent party may have a right to do so depending on the nature and consequence of the breach complained of.

Examples of breaches of contract which may be regarded as ‘repudiatory’ breaches may include abandoning a site or the failure to commence, carry out or complete the works.

Any secondary obligations such as the right to recover damages and the post termination provisions such as the right to instruct alternative contractors to complete the works, will survive the termination. Damages (losses) caused by the termination will be recoverable by the terminating party.

Pursuant to the construction contract

There may be an express contractual right for either or both parties to terminate the contract in specified circumstances. The right to terminate is not usually dependent upon an event which would constitute a repudiatory breach of contract.

The contract may specify the consequences of the right to terminate the contract being exercised, such as an ability to employ alternative contractors to finish the works in the case of employer termination, or for the final account process to take place in the case of termination by the contractor.

The benefit from terminating the contract pursuant to its terms rather than common law is that it gives clarity to the parties as to the circumstances that would justify termination.

What are the risks when terminating a construction contract?

The risks when terminating include but are not limited to the following:

• Terminating the contract pursuant to common law where the breach is not of a condition or considered repudiatory.
• Failing to terminate the contract in accordance with the terms or notice provisions in the contract.
• Failure to serve the correct notices.

If a contract was wrongly or incorrectly terminated, the terminating party risks putting themselves in repudiatory breach of the contract which could give rise to a claim in damages.

At Coodes Solicitors, we act for both employers and contractors in construction contract disputes and provide expert, personalised support. If you require any assistance, please get in contact with the Coodes Team. Call 0800 328 3282 or use our online contact form.