When a construction contract is terminated, it is a serious legal process that has far-reaching financial and legal implications to a contracting party. As a contractor, developer, or property owner, you should know the legalities and ramifications of ending a construction contract, to ensure your interests, and not simply engage in a drawn-out conflict without spending good money.
Reasons that are legal to terminate
Most commercial contracts including construction contracts may be terminated with or without cause depending on the provisions of the contract and law under which the contract is governed.
Termination in Cause
Termination for cause normally ensues in the event of breach of contract in material done by one party. The shared grounds are:
- Inability to do work to specifications
- Late completion or habitual tardiness
- Non-payments
- The use of shoddy workmanship or safety violations
- Bankruptcy/insolvency
Majority of the construction contract forms such as the AIA or Consensus Docs provide that written Notice of Breach and the opportunity to cure must be issued by the terminating party before issuing termination. In the event that the breach is not fixed, then the contract can be terminated.
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Convenience Termination
There are also contracts which can be cancelled upon a so-called termination for convenience, i. e. one side gives up the agreement without accusing the other of unfaithfulness. Such a clause is usually inserted to allow owners of a project to vary the scope of the project or additional finance.
Nevertheless, the convenience-based termination has to go through the procedures regarding notice as required by the contract, and most often compensates the contractor with:
- Work done till the date of the termination
- Moderate expenditures made as a result of termination
- Part of expected profit (as initiated by the terms of contract)
Contractual Termination vs. Common Law termination
In case the contract clearly specifies how termination would be done, then a court would tend to follow such provision. Under common law such a termination may only be justified in case of fundamental or material breach. Minor or technical breaches are not a right of termination unless it is specifically mentioned in that case.
Misapplication of legal procedure like failure to give any required notice or stoppage of work which is too early may render the party dismissing a remedy to suffer wrongful termination action.
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Procedural Requirements
Termination Notice
Whatever the cause, dismissal normally needs a written, intelligible clarification pointing out:
The reason of termination
- The dead date
- Any curative periods (in case it exists)
- The notice should be in accordance with any necessary requirements in contract such as mode of delivery and time.
Opportunity to Cure
Most of the contracts are provided with so-called right to cure, under which the violating party has to eliminate the violation within the specified period, usually 7-30 days, and after that the termination can be effected. The omission of this process may make the termination null.
Penalties of wrongful Dismissal
When there is a wrongful termination of a construction contract then the damages could be severe in nature, amongst which are:
- Loss of profits compensation
- Delay claims
- Legal costs
- Reputational business damage
Termination actions are entered into keenly by the courts especially when no breach is evident making terminations during a project or rather the termination is not clearly stated.
Termination Contract Best Practices in Construction
In order to diminish legal risks:
- Make sure that legally, you can take action before acting or doing it.
- Put in writing every violations or performance problem.
- Use all steps of procedure such as the notice and cure periods.
- Visit a best commercial lawyers Perth early enough to lay your case.
Conclusion
Dissolution of a construction contract is not merely business-related event, it is the legally important action, which has to meet contractual and legal requirements. Litigation and liability could be costly in case of failing to act according to the sufficient procedures. Both instituting and responding to a termination, it is crucial that you obtain the assistance of experienced legal representatives as a way of protecting your interests and remaining within the confines of the law.
