When things are not going to plan during a construction project, it can be very frustrating. Deviations from delivery schedules and variations to plans during the build can ultimately lead to delays and blown-out budgets. However, there are only limited circumstances where you will have the right to terminate your building contract. You will have these rights either under the law or under clauses within the contract itself. This article will explain the different ways that you can terminate your building contract.
What is Termination?
Termination of a contract is the process of ending or cancelling the contract before the parties have fully performed their obligations. Once a contract has been terminated, all remaining performance obligations created by the contract cease to exist.
Legal Grounds to Terminate a Contract
Under the law, three grounds that give rise to termination:
1. Termination by Agreement
You can terminate a contract when you and the other party agree to it. This can be either an express agreement or an implied agreement. Although you can expressly terminate an agreement verbally, it is recommended to do so in writing. Any implied agreement to terminate must be clear through the parties’ conduct. This conduct must indicate that neither party requires the other to perform their obligations under the contract.
2. Termination for Breach of Contract
When looking to terminate a contract because you believe that the other party has breached it, you must first clearly identify which clause has been breached. Then, you must determine whether the clause is an ‘essential’ term or ‘non-essential’ term.
Essential terms are the fundamental terms of the contract. In comparison, a non-essential term is described as a warranty and is sometimes known as an ‘intermediate’ term.
If the other party has breached an essential term of the contract, you will be entitled to terminate the contract. Essential terms in building and construction contracts commonly relate to payment and time stipulations.
However, a ‘sufficiently serious’ or substantial breach of a non-essential term may also provide you with a right to terminate. Commonly, a sufficiently serious breach is one that:
- goes to the root of the contract;
- is an obligation of basic importance; and
- substantially deprives you of the benefit of the contract.
3. Termination for Repudiation of Contract
An act of repudiation will occur where one party demonstrates an intention that they are either unwilling or unable to perform their obligations under the contract. This demonstration can be either:
- express: the party tells you that they will not perform their obligations under the contract; or
- implied: the party’s actions make it clear that they will not perform their contractual obligations. e.g. they sell off assets that they require if they were to perform the contract.
Termination will only occur if the repudiation relates to either a fundamental or sufficiently serious contractual obligation. You must accept that repudiation and be able to show that you were ready and willing to perform the contract if it were not for the other party.
If you are looking to terminate a contract either for breach or repudiation, you may be able to claim compensation, particularly if you suffered financial loss due to the non-completion of the contract. You should seek legal advice before pursuing these pathways.
Contractual Right of Termination
In some situations, building and construction contracts can allow for automatic termination. Furthermore, a contract may generate a right to terminate based on specific events or defaults.
Automatic Termination
Building contracts, like any other type of contract, might contain clauses that allow for automatic termination when a specified event occurs. Automatic termination clauses are more commonly formed as a pre-condition with a time stipulation.
Specific Events Creating a Right to Terminate
Most contracts contain a list of specific events that will give rise to a right of termination. Common examples in building and construction contracts include:
- failure to obtain municipal or government approval by a specified date;
- failure to obtain necessary finance by a specified date; and
- acts of insolvency, for example, where one party becomes bankrupt.
Here, if you have acquired a right of termination, you must provide the other party with a formal written notice that outlines your intention to terminate.
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Termination After Default
Often, building and construction contracts will contain a termination clause that sets out the specific breaches of contract that will give rise to a right of termination. These breaches are sometimes referred to as an event of default. However, only fundamental and sufficiently serious breaches will give rise to a right to terminate. Common examples in building and construction contracts include the failure to:
- make payment on time;
- complete building works;
- supply the requisite quality materials; or
- supply materials by a stipulated date.
Termination of a contract after default is not automatic. Where there has been an event of default, the building contract will generally include a ‘notice clause’. Here, you will need to provide formal written notice to the defaulting party that provides details of the breach. The defaulting party will then have an opportunity to rectify the breach within a specified time frame. If the defaulting party fails to rectify the breach, you should provide another written notice which confirms that you have terminated the contract.
How to Effect Termination
Properly executing contract termination requires you to adhere to specific steps and procedures under the law and within the contract itself. Below are several factors to consider.
1. Review the Contract
Start by thoroughly reviewing the building contract to understand its termination provisions. In particular, review any automatic termination clauses, predefined termination events, and notice requirements. Knowing your rights and obligations is essential before initiating the termination process, as it will have a direct impact on the process.
2. Document Breaches
If you believe the other party has breached the contract, ensure that you document the breach. This includes gathering evidence, such as correspondence, photographs, or other relevant records to support your claim. The more robust your evidence, the stronger your position will be during any dispute.
3. Communicate Your Intentions
If you intend to terminate the contract, communicate your intentions clearly and in writing to the other party. Depending on the contract, this may involve providing notice of a breach and giving the defaulting party an opportunity to rectify it within a specified timeframe. Ensure your communication complies with the notice clause in the contract.
4. Maintain Records
Throughout the termination process, maintain meticulous records of all communications, actions, and expenditures related to the contract. These records can be valuable in case of disputes or claims for compensation.
5. Consider Alternative Solutions
In some cases, exploring alternative solutions may be more beneficial before pursuing termination. Alternative solutions can include:
- renegotiating terms;
- seeking mediation or arbitration; or
- finding a mutually agreeable resolution to the issues at hand.
Alternative dispute resolution methods can often save time and resources compared to litigation.
6. Prepare for Dispute Resolution
If the other party disputes the termination or your claim for compensation, be prepared to engage in dispute resolution mechanisms. This may involve mediation, arbitration, or, in extreme cases, litigation.
Key Takeaways
There are different ways that you can terminate a building and construction contract. You can terminate a contract under the law either:
- by agreement;
- after a fundamental or sufficiently serious breach of the contract; or
- where there has been a repudiation of the contract.
However, if a specific event takes place, contractual termination may arise automatically. Furthermore, it is essential that you strictly comply with a notice clause to ensure effective termination.
If you need help determining whether you can terminate your building contract, our experienced building and construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Unless you agree with the other party to the contract to terminate, you need a reason to terminate the contract. Reasons to terminate a contract include breach of an essential term, a serious breach of a non-essential term, or if the other party repudiates the contract.
Repudiation can be implied. You do not need the other party to explicitly say that they do not intend to fulfil the contract. Their conduct may be enough to indicate repudiation.
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