Ending a construction contract is not a straightforward process. If you are a contractor or subcontractor about to enter into a contract for a construction project, you probably have the completion date in mind. However, you are also aware that getting to the finish line may not be as smooth as you anticipate. Accordingly, it is important to understand how to end your contract properly. This article will outline how you can end a construction contract and the key considerations to keep in mind.
When Do You End a Construction Contract?
As a contractor, your obligations under a construction contract will end when the project (including rectification of defects) is complete and any defects liability period has expired. Alternatively, the contract ends when either party terminates the contract.
The contract will usually outline the mechanisms for ending the contract and, as a contractor, you will need to understand your rights and obligations. You may also have rights at common law (law built through court cases rather than legislation) to terminate the contract.
1. Ending the Construction Contract When the Work is Complete
Once the work is complete, ending the contract isn’t as easy as giving access to, or possession of, the site back to the owner (also known as the principal). In relation to the performance of the work, the contractor will generally have to bring the works to the stage of “practical completion”.
Your contract should define practical completion. However, a common definition is that you:
- complete the work except for minor defects, which will not prevent the works from being used for their intended purpose; and
- supply to the owner all warranties, guarantees, certificates (including certificates of occupancy), manuals and any information necessary to use the work, as well as those required by law.
There are two other definitions usually in construction contracts which deal with practical completion. These are:
- the date for practical completion; and
- the date of practical completion.
The date for practical completion is the date you should reach practical completion. This date is important, as a failure to reach practical completion by this date can make you liable to pay liquidated damages (money to the other party).
Once you reach practical completion, your responsibilities are not usually over. Construction contracts will often allow for a defects liability period (DLP), which is when you may be required on site to fix any defects. The DLP usually lasts for 12 months.
It is important to note that contracts for residential building works imply a statutory warranty period for the rectification of defects which are often longer than DLPs.
Final completion occurs after the DLP.
The final completion date refers to the completion of the contract, rather than the project. This date is when you no longer have any work to complete, including rectifying defects after practical completion.
The superintendent usually issues the final certificate at this stage, which outlines the amounts payable to you and any set-offs by the owner. It is common for you to be able to serve a final payment claim before the final certificate is granted.
The final certificate officially signals that the work is complete and the contract is over.
2. Ending a Contract Through Termination
Unforeseen circumstances could mean that one of the parties has to terminate the contract. This could be due to the party’s acts or omissions or, alternatively, something out of the control of both parties.
There are three main ways to terminate a construction contract:
- express contract provision;
- statute (legislation); or
- common law.
Express Contract Provision
A contract will usually provide express termination rights. These are clear justifications for termination and often specify the process. The four common express provisions for termination include:
- Specified Event: The contract may provide that if a certain event occurs, or doesn’t occur, you may be able to terminate. For example, some contracts provide termination if the owner fails to obtain finance approval before construction.
- Breach: The contract may provide for termination for a breach of the contract. Most of the time it will outline which provisions will trigger termination if breached. For example, if the owner fails to provide access to the site for a period of time, you may terminate.
Convenience: This type of termination right is usually for the benefit of the owner. It allows them to terminate the contract for the convenience of one (or both) of the parties. Such a clause does not require any reason for the termination to be provided.
- Force Majeure: In general, an event that triggers a force majeure is an event that is beyond the control of either party that prevents or hinders the performance of the contract. At times, the force majeure cannot be overcome and prevents the parties (or one of the parties) from performing the contract. In this instance, a well-drafted force majeure clause will allow the contract to be terminated. Examples of force majeure events include wars and natural disasters.
Statutes may also provide rights to terminate a contract, usually contracts between contractors and consumer owners. Legislation such as the Australian Consumer Law and the Home Building Act 1989 (NSW) will sometimes allow a party to terminate a construction contract where certain events arise or where a party (usually the contractor) is in breach of the legislation.
You may be able to terminate the contract under common law if there is:
- a breach of an essential term: Breaching an essential term (usually relating to performance and time) does not automatically terminate the contract. The party seeking to exercise its’ termination right will need to elect to do so, otherwise, they may waive that right;
- a breach of an intermediate term; or
- unlawful repudiation, which is where one party refuses to perform their duties under the contract. In this situation, the other party may be able to terminate.
However, parties can exclude these common law rights of termination in their contract. While you can do this with common law rights, you cannot contract out of statutory rights.
When you are considering ending a contract, it is important to consider the stage of the construction you are at. This may affect whether you have a right to terminate and, if so, how you can lawfully end the contract.
It is also crucial to have a right to terminate before doing so. If you say you are terminating and you do not have an entitlement to do so, the other party may accept this as repudiation and terminate the contract themselves.
If you are ending the contract before the work is complete, you need to consider if any work has been completed and whether or not you have been compensated for it.
Contracts will often provide for ongoing obligations even after the contract ends. For example, certain indemnities in a construction contract will survive the end of a contract.
Finally, you need to consider what happens if you don’t exercise your rights or don’t exercise them properly. If you have termination rights but do not exercise them, your actions may be taken to be a waiver of your rights of termination.
When you are entering into a construction contract for a project, it is important to understand how the contract may come to an end and what rights you have to terminate a contract if certain events unfold.
Therefore, before entering into and ending your construction contract, it is essential to understand the correct process and your obligations and rights under the contract, along with relevant statutes and common law.
If you have questions about terminating your construction contract, or need assistance drafting or reviewing your contract to protect your termination rights, get in touch with LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page.
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