In a world of basically instant communication methods, one of the poorer decisions a construction company can make is to try and fire off an email terminating a contract when it doesn’t have lawful grounds to do so.
Because it’s digging yourself into a legal hole that will ultimately cause you loss, legal fees, and general irritation.
So let’s talk about that.
Terminating a Contract 101
There are some fundamental rules when it comes to terminating a contract.
The first is this: not every breach of contract gives you a right to terminate.
Now, of course, some construction contracts have a clause allowing either party to terminate for no particular reason provided they give a certain amount of notice. This is called “termination for convenience”.
But otherwise, why can’t you just terminate when the other party did something wrong?
Because some things just aren’t that important, and it would be unjust to allow a party to terminate a contract. Terminating a contract is a significant step, so for a breach to allow someone to terminate in response it needs to have a degree of significance.
So, for example, accidentally mis-spelling the superintendent’s first name in the schedule to your contract might be, technically, a breach of your warranty that “all of the information in this contract is correct” – but in reality is not going to allow another party to terminate should they even spot it.
From here, the law has developed the idea of a “substantial breach” – that is, something that is either inherently important enough, or the parties have agreed is important enough, to warrant the innocent party terminating in response.
But even then, it’s not always that simple…
Does your Contract Have a Process for Termination?
These days, most construction contracts tend to agree on what a “substantial breach” is. Of course there might be other things that count as “substantial”, but it’s lower risk to stick with something that’s in your contract definition.
The contract normally then sets out a mandatory process to work towards termination.
Often that looks something like this:
- Party X commits a substantial breach;
- Party Y issues a “show cause” notice calling on Party X to fix the breach;
- Party X responds;
- Party Y remains unsatisfied and terminates the contract.
Let’s say Party Y didn’t want to jump through all those hoops, and just skipped to the “we’re terminating” stage.
What could happen then?
What if there Isn’t a Process for Termination?
Let’s say you didn’t get your terms and conditions signed off for this particular job. Instead you just exchanged emails and turned up on site.
What happens then?
Well, first you would need to identify the breach that you say is “substantial”. The law might agree with your assessment or it might not, and that’s a good time to get legal advice.
Next, it would be a good idea (though not necessarily mandatory, depending on the circumstances) for you to give the other party an opportunity to rectify that breach.
Finally, absent an appropriate response you might be in a position to terminate.
So what you’ll see is that the process is very similar to what most contracts provide anyway. You’ll also see we’re using a bit of wishy-washy language here, and that’s because there are a lot of variables and it’s really an area you should get specific advice about.
Repudiation – When you Terminate without Lawful Grounds
Repudiation is a fairly lawyery word that means “showing clearly you don’t intend to be bound by the contract”.
It’s now widely accepted that:
- Attempting to terminate without lawful grounds; or
- Attempting to terminate without following the agreed process,
are both forms of repudiation.
This then cascades into a series of things which are all bad for the party attempting to terminate, and mostly good for the party who was originally in breach.
First, your attempted termination probably isn’t effective at all.
Second, not only is your termination in effective, but in a stroke of irony, just attempting to terminate without the proper grounds is, itself, a repudiation of the contract. What does that mean? It means you have just handed to the other party an opportunity for them to terminate if they want to do so.
Finally, if they do terminate in response to your repudiation, then they probably have a claim for damages against you.
In short: you will have gone from position where you have grounds to terminate and claim damages, to a position where you failed to terminate and the other party has a claim for damages. Sure, there might still be ways to navigate around it but why would you want to invite that kind of complexity?
The Takeaways on Termination
There are a number of paths that might lead to a contract being terminated.
By far the lowest risk path is to follow the procedure set out in the contract. If it says to send a notice, then send a notice.
If you need to give the notice in a particular way, then do that.
If the notice needs to contain certain information, then ensure it does.
If you need to wait a certain number of days, then wait the days.
Of course, sometimes you might need to explore more urgent action and see if there is any opportunity to short circuit the process a bit. This tends to raise the stakes a bit, and introduces risks that should only be accepted if the urgency is worth it. And in any case, terminating should generally only be done with input from your construction lawyers who can help guide you through the process and minimise the risks along the way.