When Terminating a Building Contract, Do it Properly 4

Tuesday, October 6th, 2015
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One of my first legal jobs was that of a legal and contracts officer at a trade association where we gave legal advice to members.

Members often asked me to look at at contract termination documentation to determine whether the contracts had been terminated correctly. Sometimes the notices were drafted by owners, sometimes by builders and occasionally they were drafted by lawyers unfamiliar with the construction law jurisdiction. The instruments were often flawed as key matters of contractual import were omitted. The net effect was that the contracts were not correctly terminated even though some of them had been fashioned by lawyers. The fact that lawyers, albeit those whom were unfamiliar with the jurisdiction, sometimes got it wrong showed the area of contractual termination was and still continues to be a vexed area if not a minefield.

It follows that if you are an owner and you want to terminate a building contract, you are strongly counselled to engage the services of construction lawyer well drilled  in the art of drafting default notices and termination instruments. If you don’t, and the termination paperwork is defective, then you run the risk of repudiating the contract. A contractual repudiation occurs where a party “evinces an intention to no longer be bound by a contract.” When a repudiation  occurs and the other party to the building contract accepts it, the repudiator is in an invidious position at law and may well end copping a sizeable damages claim.

So what are some of the seminal tenets when one terminates a contract?

One has to read the termination procedure very, very carefully; one has to be somewhat of a pedant. There will ordinarily be a default procedure and it will be spelled out in the contract. The procedure will typically state the grounds upon which one can terminate. Where grounds are stipulated, one must stick to those stated grounds. It is very risky to import other grounds or grounds that are not articulated in the contract default provisions.

The grounds for termination then have to be married up with the clear instances of contractual breach. If, for instance, the criteria is time related – i.e. the project is way behind crucial path – then this will be the ground to terminate assuming there is a time default clause under the contract on point. But it is critical that the delay is real and tangible and moreover that the owner can prove the delay lest the delay default criteria is challenged. Absent proof or the ability to substantiate the grounds upon which one issues a default notice, the notice can be challenged.

Once must allow the clock to run

Default clauses invariably state the number of days within which the default must be remedied. The time period must run out before a notice of termination can be issued. Furthermore, the termination notice can only be issued if the default is not remedied within the number of days specified in the contract. There must be non-contentious evidence available that can be relied upon that confirms that the default was not remedied before the termination notice is issued. The owner should keep a diary and a photographic record of that which occurs or does not occur during the default rectification period. In the case of defects, the owner should get independent technical advice to confirm that a default notice for defect rectification has either been complied with or not within the given default period. Assume that the notices will be challenged and prepare for that in proactive and meticulous fashion.

Be careful with the drafting of the default and termination notices.

Novices often misjudge or “butcher” the drafting of the notices. As pointed out above, even non-specialist lawyers can make a game changing error in the drafting of a default notice. Resist the temptation to import default criteria that are alien to the criteria specified in the contract. I cannot stress this enough, you must be a pedant, you must be meticulous and you must stick to the letter of the contract. Often, less is more if there is an economy of wording with respect to the actual wording of the contractual provisions.

You cannot issue a default notice if you are in default

Make sure that you do not issue a default or termination notice if you, the drafter of the instrument, are in default at the time the default notice is issued. If perchance you ignore this advice, then you will be the contractual repudiator as it is the first repudiator that is the germane repudiator at law. By way of example, if an owner were to issue a default notice on account of delays to the completion date but at the time of service of the notice, the owner owes the builder money, then the owner may be considered to have repudiated the contract if the owner terminates the contract whilst payment is still outstanding at the time the termination notice is dispatched.

Make sure you comply with the service notices under the contract

Contracts normally have a provision that states how the giving of notice must be affected or served. If the notice states that service must be effected by registered mail, then for God’s sake serve it by registered post. If it states that is must be served by hand delivery, then do that. A failure to serve the notice in accordance with the contract can mean that notice is not validly served.

Remember: terminating a contract is not for the faint of heart as a great deal of legal gravitas attaches to such an act. So if you need to terminate a building contract and you have the grounds to do so, make sure you get it right. If you feel that you are out of your depth, then brief a building lawyer. Yes, there will be a cost, but it is a false economy to be “penny rich and pound poor.”

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  1. Samuel Affel Bedu

    This article is clear on what to look out for before terminating a contract. Currently I have issued a notice to terminate and looking up to the contractor to call a meeting to dialogue then we can think of allowing him to continue with the works. However, a week has passed out of the 14 days notice and the contractor is not showing up any concern. I have good grounds to terminate the contract. Please kindly advise if I can still let the contractor to continue the works on specific terms and descoping the remaining works. The contract is under FIDIC,99 Design and Build Contract. Many thanks

  2. Kim Norman Lovegrove

    Samuel, the article clearly spells out what you need to do, see a construction lawyer; see paragraph 2. It would take a very foolhardy solicitor to give advice on contract termination without having a) met with the client b) looked at the contract c) after having been briefed on the facts, determining whether there were sufficient grounds. I may be many things Samuel but I am not inclined to be foolhardy. Best of luck in getting on to a good construction lawyer. I`m sure if you google construction lawyers or building lawyers you will find someone who will be up to speed but as with everything do your due diligence.

  3. Kim lovegrove

    Poignant feedback James, deft and economy of language.

  4. James O'Donnell

    Great article. The important messages from this article are as follows: 1) look at the termination provisions in the contract; 2) make sure you are apprised of all the circumstances surrounding the contract; 3) determine which party is in default; and 4) keep default and/or termination notices brief. It is important that sound legal advice is obtained before issuing a default/termination notice pursuant to a contract to ensure you are not the defaulting party to the contract.