When things aren’t 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 get out of 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. 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 are sometimes known as an ‘intermediate’ term.
For example, a requirement for the other party to build an apartment building in exchange for your payment will likely be an essential term. In comparison, a term requiring the other party to use brass door knobs on the wardrobes within the apartments will likely be a non-essential 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’ 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.
Contractual Right of Termination
In some situations, building and construction contract can allow for automatic termination. Furthermore, a contract may generate a right to terminate based on specific events or defaults.
Building contracts, like any other type of contract, might contain clauses which allow for automatic termination when a specified event occurs. Automatic termination clauses are more commonly formed as a pre-condition with a time stipulation.
For example, if Party A does not obtain clear title of the subject land by X date, the building contract will automatically terminate.
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.
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.
To ensure that you can effectively terminate the contract, you must strictly follow the notice clause. If you deviate from the steps in the notice clause, you may be considered to have repudiated the contract. This could potentially give the defaulting party a right to termination.
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.
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