Termination - the nuclear option
25/11/2010
By Chris Whittington, Partner and Head of Construction & Engineering.
Clients are increasingly seeking advice on termination. This is often because contractors losing money have stopped work or employers are failing to pay. However termination is a drastic step with serious consequences if you get it wrong.
Three key issues are:
- can I terminate?
- how?
- what if I get it wrong?
1. Check what your contract says
A standard form construction contract (e.g. a JCT form) will include specific termination rights to apply in the case of both the contractor's default (failure to meet the obligations of the contract), e.g. failing to progress the works, and the employer's failure (e.g. failure to pay).
If the type of default is specified in the termination provisions of your contract then you can terminate, as long as you follow the correct procedure.
Whether or not there are specific termination provisions within the contract, the aggrieved party can terminate the contract for 'repudiatory breach' by written notice. This can happen if either party shows it has no intention to continue to be bound by the contract (e.g. if the contractor just downs tools, or the employer throws the contractor off site, without contractual justification).
2. Follow the method specified in the contract exactly
The JCT Standard Building Contract 2005 for instance, requires two separate notices to be sent:
- the first sets out the ground(s) for termination and gives seven days to remedy the breach of contract;
- in default a second notice can then be issued terminating the other party's employment. Note any agreed methods of serving the notices, and particularly by whom they must be served.
In the case of a contractor's breach of the JCT Standard Contract, the first notice must be served by the architect/contract administrator. The second notice must be served by the employer.
Pay careful attention to any specified time limits and note what constitutes a day - in the JCT form public holidays do not count but weekends do.
3. If you do not follow a method specified in the contract, then any termination is likely to be wrongful and therefore invalid
You are also likely to be in repudiatory breach entitling the other party to terminate and claim damages. For a contractor, damages will be essentially his or her loss of profit on the work they cannot now finish. For an employer the damages would be the extra cost over what it would have cost if the contractor had completed in accordance with the contract.
Summary
Read the contract and check for any bespoke amendments. Also read any notice clauses - make sure you know who must send which notice and to whom; and calculate time periods with great care. Be clear of your ground(s) for termination. If you get it wrong, the financial consequences could be severe, so only terminate having considered the position carefully and taken proper advice.