Terminating Contracts and the Potential for Dire Unintended Consequences

Terminating Contracts and the Potential for Dire Unintended Consequences

5 Jun 2017

By Kim Lovegrove FAIB of Lovegrove & Cotton – Construction and Planning Lawyers

When you invoke the termination procedures in a building contract, as long as you treat the process like sweating dynamite you should be OK, save for one caveat – make sure you use a construction lawyer.

Early in my career, I worked as a legal and contracts officer at the MBA, and builders frequently brought in paperwork drafted by owners or their lawyers that purported to terminate their contracts. About a quarter of the termination notices were, from a legal point of view, fatally flawed. Be it the default criteria, the time to remedy the default, or a flagrant disregard for the black letter law of the contract, something was up the creek.

The net effect was those dreaded words – wrongful termination of contract – with the consequence being a “get out” for the contractor, the turning of the tables and the opportunity for the contractor to claim quantum merit – cost of building works and profit rather than fixed price, a bit like cost plus if you will.

When you terminate a contract, regardless of whether you are an owner, a builder or a subcontractor, you must very strictly adhere to the letter of the default and termination provisions of the contract. You must have regard to the contractual grounds and criteria for termination, you must commit them to writing, you must ensure that you give the defaulting party the time specified in the contract to remedy the default and you must then very carefully consider the termination provisions of the contract before you pull the plug.

Most importantly, you must have a valid reason to issue the default notice and that valid reason has to resonate with the on point provisions of the contract.

Here is an example that illustrates the perils of termination nonchalance, i.e. the failure to apply the contract to the letter:

A bloke was having a rocky relationship with the client, and they were both hot blooded characters. One was classically Teutonic and the other quintessentially Mediterranean. For some reason, they just didn’t click, the chemistry was all wrong, which was problematic when you consider that the builder was charged with the responsibility of building an abode for the aspirational soul looking forward to a controversy-free home building experience.

By all accounts, there were frequent squabbles, and things reached fever pitch one afternoon when the owner apparently screamed a torrent of expletives and threatened to report the builder for trespassing if the builder ever set foot on the building site again. The builder was only too happy to accommodate as he lacked any ability to resile from the contract absent any default perpetrated by the owner.

the owner.
The owner then sued for breach of contract and claimed damages which in part comprised a higher cost to complete the project than that which would have been the case if the contract had run its course. The case took two years to get to trial, it then ran for two weeks. The owner had an instructing solicitor and a barrister represent her for two weeks and sadly clocked up a huge legal bill. The builder, on the other hand, chose not to be legally represented. He ran the trial himself.

Who do you think won?

It was the builder, hands down, for the case was very simple. It revolved around the issue of who repudiated the contract.

In this case, it was the owner, because in summarily and in histrionic fashion, she ordered the builder off the site, wrongfully terminated the contract, repudiated the contract, and whether she had grounds to do so was not the germane issue. The seminal point was that the owner neglected to have regard to the default and termination provisions of the contract. The contract required a default notice to be issued, specifying the grounds along with a time period for the rectification of the default(s) and absent the remedying of the default(s) the contract provided that then – and only then – could the contract be terminated by further written notice.

Let this tale be a warning for those that don’t treat the process of contractual termination deadly seriously. It is not a task for the layperson, and it is not an area where one penny pinches, as the consequences can be parlous.