Termination and Discharge

Building and engineering contracts generally provide for termination of the contractor’s employment in the case of specified serious breaches.  There is generally a procedure involving notice.   There will commonly be a warning period upon the expiry of which, the termination takes effect if there has been no intermediate remediation.

Typically, the procedure discharges the obligations of one party.  The provisions of the contract may continue to apply in respect of payments, compensatory payments and other consequences.

Where a contract provides a  procedure for termination, this may and usually will by implication exclude common-law rights of termination, except where the other party demonstrates an intention not to be bound by the contract, effectively, committing a repudiatory breach. Other courts have taken the view that the contractual rights of termination are in addition to the common-law rights.  The contracts may expressly preserve the common-law rights.

Contractor’s Breaches

The contract may specify certain fundamental breaches that entitle the contractor to terminate the contract.  They include the following:

  • a failure to give possession of the site,
  • non-payment of sums due of a  certain duration as specified,
  • withholding certificates,
  • interference with the contractor in undertaking the work.

The following may constitute fundamental breaches by the contractor entitling the employer to terminate:

  • abandonment and the suspension of work,
  • very serious defects in the work such as to that there is no substantial performance by the contractor,
  • delay.

Construction contracts generally provide rights of termination for the employer for certain key defaults including,

  • suspension of work without reasonable cause,
  • failure to proceed regularly and diligently,
  • failure to comply with the administrator’s instruction to remove defective work,
  • unauthorized contracting and assigning,
  • failure to comply with the health and safety regulations.

The contractor’s insolvency is commonly a basis of termination.  Insolvency will generally end the ability of the contractor to perform.

Procedure and Consequences

A contract will provide procedures in respect of termination on foot of a default.  The contract administrator may issue a notice specifying the default.

If the default continues for a specified period, then the employer may have a right within a certain period to terminate employment by giving notice.  Where termination does not take place, the right may arise again on repetition of the default.  Under some form of contract, it is not necessary to repeat the procedure in the event of repetition of the breach.

The contract will usually spell out the consequence of termination.  The employer may generally employ others to complete the work, making use of the contractor’s materials, plant and equipment to the extent that it is available.

The contractor’s equipment must be removed from the site if instructed.  The contractor is to provide copies of the design document.  The employer may require an assignment of subcontracts and contracts for the supply of material.

The contractor is not entitled to further payments until works have been completed by another contractor or at some other later point in time. A contractor might be entitled to any difference between what he would have earned by completing the contract and what the breach has cost.  If as commonly so, the employer’s losses exceed what would have been due to the contractor, the contractor is liable for the difference.

Employer’s Breaches

A contractor is given grounds of termination under standard contracts.  This includes in particular the following breaches by the employer:

  • failure to pay the amounts due within time limits,
  • interference by the employer with the issue of certificates by the contracts administrator, unauthorized assignment,
  • failure to given possession,
  • failure to comply with obligations in relation to health and safety,
  • suspension of the whole or part of the works by reasons of instructions from the contractor, dealing with discrepancies for a prolonged period.
  • any impediment, prevention or default by the employer, administrator or other persons employed by the employer unless due to the contractor’s negligence.
  • the employer’s insolvency.

Procedure and COnsequences

In each case, the contract specifies a procedure involving notice by the contractor to the employer.  In some cases, a warning notice must be given and if it is not complied with, the right of termination arises.  As is the case with notices by the employer, there may be requirements that they should not be given unreasonably or vexatiously.

Where the contractor has terminated the contract, he must remove all equipment and materials including subcontractors from the site as soon as reasonably practicable and safe.  He must provide the employer with copies of the contractor’s design documents.

In relation to payment, the contractor is entitled to

  • value of the work completed
  • work begun but not completed,
  • direct loss and expense for  which the contractor has a claim,
  • cost of removal,
  • cost of materials ordered which on payment become the employer’s property,
  • direct loss and damage caused to the contractor.

The contractor is to provide an account of the sums due.  They must be paid within 28 days of the submission of the account without deduction.

No-Fault Termination

Contracts may allow termination on the grounds which are the fault of neither party.   In these cases, the position is more neutral because of neither party is at fault.   Once again, the grounds may not be exercised disproportionately unreasonably or vexatiously.

The contract will describe the circumstances in which the rights arise.  They will typically include the following:

  • Force majeure
  • loss and damage by certain risks, civil commotions.

The consequences of termination are broadly similar to those in respect of termination by the contractor.  However, a contractor is not entitled to compensation for direct loss or expense arising out of termination, in most cases.

Termination of Sub-Contracts

Generally, the termination provisions in subcontracts mirror those in the principal contracts.  In some cases, there may be significant differences. Determination of the subcontractor’s employment by the main contractor is provided for under certain standard appointments.  They are similar to those in which the employer to employers may terminate the main contract.

The subcontractor may terminate the contract if

  • the main contractor suspends without reasonable cause either wholly or substantially the carrying out of the main contract works,
  • fails to proceed without reasonable cause with the main contract work so that reasonable progress of the subcontractor is seriously affected,
  • fails to comply with health and safety legislation,
  • fails to comply with the terms of the sub-contract.

There are procedures for termination similar to those in the main contracts.

If it becomes impossible to perform a contract due to some external event, performance becomes impossibly illegal or radically different from that contemplated, the common law doctrine of frustration may apply. Neither party must be at fault.

Generally in standard form contract matters which might otherwise be the subject of the doctrine of frustration are specifically provided for.  If this is the case, then the option of common law frustration will not apply.


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