Construction project failure - getting termination right "do's and "don't's"

Construction projects are complex. Getting everything together is a huge task: the land, the funding, the planning and other permissions, the designs, the materials and the trades. All these elements will have to run seamlessly into each other if the project is to be completed on time, to budget and to the required standard.

But of course, problems happen. Hopefully, they can be overcome and a project completed successfully; however, what happens if relationships break down so that problems become seemingly insurmountable?

In such a situation, one party may wish to terminate the contract. Before hasty action, it is essential to understand that terminating a contract can have huge consequences, both from a practical and a legal point of view. It’s a drastic step that should be given careful consideration. Be sure it’s not a knee-jerk reaction when you throw your contractor off-site or you walk off-site!

What rights do you have to end a contract?

Parties may have contractual rights to terminate and common law rights to terminate. It may surprise you, however, to know that simply not being paid does not give you an automatic right to terminate the contract. It’s important to read your contract and see if there are procedures for termination. If there are, those procedures should be followed carefully. You must follow the timescales set out in the contract, ensure notices are served in compliance with the contract and ensure that the notices are in the proper form. Failure to do any or all of this could mean the party trying to terminate the contract is, in fact, in breach.

It should also be remembered that defective work from a contractor does not usually give an automatic right to terminate the contract. In such instances, it will be essential to obtain evidence of the defective work. Also, you are almost certainly going to have to give the contractor the opportunity to remedy any defective work.

Under the common law, you may have the right to terminate even if this is not explicitly set out in the contract, although you’ll need to check that the contract does not exclude such common law rights. It will be important to make time of the essence for any breach of contract to be rectified. For example, you might give a notice setting a deadline for an employer to pay overdue money or for a contractor to rectify defects. Having done this, if the other party does not then rectify the breach in the time set, you would be entitled to terminate.

Failure to follow the correct termination procedure can have serious unintended consequences.  Seeking to terminate the contract but doing so wrongly, means you will have repudiated the contract; the other party can accept that repudiation and terminate. In effect, this means that the innocent party is deemed to be the party in breach and its remedies could be severely affected.

For example, in one case an employer was so fed up with delays and defective works from his contractor that he threw the contractor off-site. The contractor said the employer had no right to do that…and he was correct! The contractual procedure had not been followed and, as a consequence, the employer had repudiated the contract, which the contractor accepted. Despite the considerable defects in the works, the employer had effectively limited what he could recover from his contractor in respect of those defects. Because he had not given the contractor an opportunity to remedy the defects he was not entitled to recover the additional costs that he incurred in rectifying them. Neither was he able to recover his other losses for the delays in completion of the project.

From a practical viewpoint, an employer should always consider how it will be able to complete the works if it terminates the contract. There will be a need to find an alternative contractor willing to take on the risks in a part-completed project, and that is likely to be difficult. There may also be issues with obtaining materials that match those already used. It may even be necessary to engage a fresh design team. Even if additional costs could, in theory, be claimed from the contractor, the contractor may not actually have the funds to pay.

If you are contemplating termination of a contract the important “do's" are:

1.     Read your contract and follow the procedures set out in it

2.     Ensure you have collected evidence of the breaches

3.     Have plans in place for what will happen after termination.

Important “don'ts" are:

1.     Have knee-jerk reactions to problems that occur on site

2.     Take steps to terminate without considering what happens afterwards

3.     Terminate a contract without obtaining good legal advice; this may well save you a considerable amount of money in the future.

Taking early legal advice on what is happening on a site and whether a contract can be terminated will often save considerable money and help avoid issues that can otherwise escalate into very substantial problems. Good legal advice could stop a party from repudiating a contract and having to face the consequences that follow, and the costs of that will be repaid many times over.

For help in dispute resolution in construction-related matters please contact me via email at [email protected] or call on 01245 453813.