How to Terminate a Building Contract, Don’t be Trigger Happy
By Lovegrove & Cotton
A typical building contract generally requires the parties to stick to a well-trodden path. The Builder is required to complete Works as per the plans and specifications, claiming payment from the owner as per the agreed method of payment enshrined within the Contract.
The Owner, for their part, is required to pay all amounts claimed by the Builder which are due and payable pursuant to the contract. The majority of projects follow this path to completion, and the Owner ends up with a completed dwelling, whilst the builder moves on having been paid what is due.
However in some cases something will occur which causes this relationship to de-rail. Where one party believes that the other party is not keeping up their end of the bargain, they have a number of options.
The first step parties often attempt is to try to use your own contractual obligations as leverage. For example the Builder may suspend the works if the Owner hasn’t paid a progress payment. Likewise an Owner may withhold payments claimed by the Builder. However even taking these steps can place a party in danger. A wrongful refusal to pay a progress payment, or a wrongful suspension of the works may constitute a substantial breach of contract in itself. Whilst these tools do have some value as leverage, their use can be dangerous, and should not be attempted without seeking advice from a construction solicitor.
A repudiation is where a party evinces an intention no longer to be bound by the terms of the contract. Threatening to terminate the contract, or attempting to terminate the contract without proper justification and without following the correct procedure can be a repudiation. Even simply voicing an intention to terminate can amount to a repudiation of the contract, so parties must be measured in what they say, and act only after proper consideration.
The voicing of an intention to terminate the contract usually brings matters to a head. Therefore if the termination is wrongful, it is likely that the other party will accuse you of repudiating the contract, and will immediately have obtained the upper hand for the ensuing legal battle.
The Correct way to Terminate
In most building contracts there are detailed provisions governing the rights of parties in the event of a breach of contract by the other party. The mere fact that the other party is in default is not necessarily grounds for termination. The contractual procedures must be strictly adhered to.
Grounds for Termination
In many cases the contract will specify what grounds suffice as a basis for termination of the contract. Simply because the other party is in breach, it does not necessarily follow that you have the right to terminate. Many contracts require that the other party must be in ‘substantial breach’ before the termination provisions can be invoked. The contract may not exhaustively describe what a substantial breach involves, meaning good judgment needs to be exercised.
The Typical Procedure – Termination by Notice
The first step in most cases is to issue a ‘Notice of Default’ (otherwise known as a notice of intention to terminate). Such notice must specify what ground or grounds are relied upon as a basis for the notice. Other requirements include that the notice must state a period of time by which the other party must remedy the defaults listed, and that the notice must note that failure to comply will mean that the contract may be terminated by further notice. A notice must be served on the other party in precisely the manner that the contract dictates.
If the defaults are not rectified within the time stipulated in the notice, the contract will usually require a second notice to be served on the other party to formally terminate the contract.
The Correct way to Terminate
In most building contracts there are detailed provisions governing the rights of parties in the event of a breach of contract by the other party. The mere fact that the other party is in default is not necessarily grounds for termination. The contractual procedures must be strictly adhered to.
Grounds for Termination
In many cases the contract will specify what grounds suffice as a basis for termination of the contract. Simply because the other party is in breach, it does not necessarily follow that you have the right to terminate. Many contracts require that the other party must be in ‘substantial breach’ before the termination provisions can be invoked. The contract may not exhaustively describe what a substantial breach involves, meaning good judgment needs to be exercised.
The Typical Procedure – Termination by Notice
The first step in most cases is to issue a ‘Notice of Default’ (otherwise known as a notice of intention to terminate). Such notice must specify what ground or grounds are relied upon as a basis for the notice. Other requirements include that the notice must state a period of time by which the other party must remedy the defaults listed, and that the notice must note that failure to comply will mean that the contract may be terminated by further notice. A notice must be served on the other party in precisely the manner that the contract dictates.
If the defaults are not rectified within the time stipulated in the notice, the contract will usually require a second notice to be served on the other party to formally terminate the contract.
Termination following alternative dispute resolution
The terms of some contracts dictate that the contract can only be terminated after an alternative dispute resolution process has been undertaken. Usually the alternative dispute resolution process will be triggered by one party giving the other notice that it is invoking the action of the relevant contractual provision.
In some cases there will be several mandatory stages of alternative dispute resolution before a contract can be terminated. For example the parties may have to initially meet to discuss the matter within 14 days. If there is no resolution the parties may then have to attend a mediation before one can exercise a termination right.
Conclusion
Termination of a contract is a minefield. Things which are said or done ‘in the moment’ can potentially have consequences which hang around for years. The issue of termination – whether it is lawful or wrongful – can be decisive in many legal disputes. The advice of a solicitor is critical at an early stage.
By Alex Milne, Solicitor, Lovegrove Solicitors
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© Lovegrove Solicitors 2013
