Key considerations when terminating construction contracts
26 April 2022
1. Is there a viable alternative to termination?
- Termination and replacement of a contractor is a drastic measure that can lead to significant delay to the project and a substantial increase in cost, as well as potential issues with obtaining a warranty for the works. Termination can also often lead to a formal dispute, which can be time-consuming and expensive to resolve.
- Would a partial de-scope help a distressed Contractor focus on completing the remaining in-scope works.
- Would a negotiated settlement allow the parties to draw a line under a disputed issue, and move on with completing the project?
2. Do you have the right to terminate?
- Contracts often allow for termination only in certain circumstances.
- It is important to ensure that the facts and documentary record support your right to terminate. An unjustified attempt to terminate for cause would have significant consequences.
- Contracts may also permit termination ‘for convenience’, but there will usually be no ability for an employer to recover its completion costs.
- Are there any other termination rights available to you under the governing law?
3. What contractual steps must you follow before terminating?
- Are you required to give notice to the Contractor?
- Is there a cure period for the Contractor to remedy the relevant issue?
- Have you carefully considered and determined any claims for additional time?
- Do you need to provide notice or obtain approvals from anyone else? Consider whether there any requirements to provide notice, or obtain consents, pursuant to other agreements such as finance documents.
4. Is your termination notice adequate?
- Does it clearly articulate the grounds for termination?
- Does it identify all potential grounds for termination, including in the alternative?
- Does it avoid requesting that the contractor ‘do the impossible’, such as complying with a baseline programme in circumstances where it would not be physically possible to do so?
5. Have you carefully documented key decision-making?
- Have you kept careful records of compliance with the relevant contractual procedures or requirements, and the grounds for termination?
- If a formal dispute arises, the party with more complete records is often at a significant advantage.
6. Have you identified an appropriate replacement contractor?
- What procurement processes must be complied with?
- Carefully documenting negotiations with any replacement contractor may help an employer defend the reasonableness
of its completion costs.
7. What financial security do you have available?
- Are bonds, and any other security provided by the contractor, still valid? Careful consideration should be given before calling them, including establishing valid grounds for calling them, determining the amount to be called, and complying with any contractual requirements.
- Are you entitled to delay liquidated damages? If so, what impact will termination have on your entitlement?
8. What amounts do you owe the Contractor?
- Are you entitled to deduct liquidated damages and/or other costs arising out of termination?
- What is the process for payment for work performed?
9. What preparations need to be made for handover?
- What steps will be taken to secure the site after the Contractor’s departure, and protect the works from damage?
- What rights will you have over on-site plant, equipment and materials?
- What manuals, drawings, books and records will need to be provided by the Contractor?
- Have you made arrangements to record (e.g. by way of audit) on-site plant, equipment and materials, and the status/value of works completed by the Contractor? This will be relevant to the Contractor’s final account, as well as the replacement contractor’s scope of work.
- Will sub-contractor agreements be novated to the employer, or to the replacement contractor?
- How soon can the replacement contractor complete mobilisation and begin work?
10. Have you obtained legal advice?
- As noted above, termination is a drastic measure which can have significant consequences. It is critical to ensure that you have carefully considered your rights and obligations and that the documentary record supports your actions, including the notice to terminate, the engagement of a replacement contractor, and the recovery of your completion costs.