Termination of

Construction Contracts

Recently, we have been involved in There are three main ways that a contractual right allows for
termination in construction contracts. These include:
the termination of several high-profile
construction contracts. The purpose of 1) Automatic Termination
this update is to provide a refresher of A contract can be automatically terminated in situations where
there is an express term to terminate the contract on the occurrence
the key characteristics of termination or non-occurrence of a specified event.3 Such contracts should
and to explore the likely consequences stipulate the events giving rise to a right of termination with
sufficient specificity.
of such an event.
In construction contracts, insolvency is the most commonly specified
In construction contracts, it is commonplace to refer to the right
event that allows for automatic termination by way of an ipso facto
that flows from breaching a condition, repudiating a contract or
clause.
fundamentally breaching the contract as a right to terminate.
However, there are important differences in the consequences that 2) Default
arise from rescission and termination. For example, rescission treats
the contract as if it had never existed, whilst termination discharges The most common contractual rights of termination in construction
the parties from any future obligations. contracts are for specified breaches of the contract.

Where a contract is terminated for breach, repudiation or Upon the occurence of a specified breach, the defaulting party is
frustration, the contract is discharged either as a whole or partially usually given a cure notice requiring that either:
terminated. (a) The breach be rectified within a certain period of time

Contractual Right of Termination (b) The defaulting party show cause as to why the contract should
not be terminated
Ordinarily, construction contracts will outline the grounds upon
which either party may terminate and the steps that ought to The right to terminate the contract will only arise upon the
be taken to achieve lawful termination.1 More specifically, most defaulting party failing to adequately act or respond to the notice in
standard form construction contracts make provisions that allow the manner required by the contract. However, the terminating party
for termination upon the occurrence of specified breaches of the must adhere to the contractual provisions when terminating the
contract, such as any of the following: contract to ensure they are not seen as repudiating the contract.4

(a) Insolvency 3) Convenience

(b) Unlawful suspension of works by a contractor In large scale construction contracts, it has become more common
for one of the parties (usually the principal) to hold the right
(c) Consistent failure by an employer to make payment
to terminate at their discretion. This discretion usually has no
A contractual right to terminate is often the preferred method limitation on when or in what circumstance a termination for
of ending a contract, as it provides certainty as to the procedure convenience clause operates. However, case law suggests that,
to be followed by the aggrieved party. Typically, a contract will in the absence of clear warning, exercising a termination for
require a series of notices to be issued by the complainant prior to convenience clause simply to obtain a better price to complete the
termination.2 These notices are to be followed by a grace period, works from another party would amount to a breach of contract.5
allowing the defaulting party the opportunity to remedy the breach
before termination of the contract becomes effective.
The contract will generally stipulate the form, content, timing and
mode of service of a notice to terminate, with conflict between
terminating parties most commonly arising over whether the 3 See for example: New Zealand Shipping Co Ltd v Société des Ateliers et Chantiers
de France [1919] AC 1.
prescribed steps were followed. Therefore, it is essential that parties
4 Diploma Construction Pty Ltd v Marula Pty Ltd [2009] WASCA 229.
properly adhere to the contract’s process of termination so as to
5 The High Court has not yet settled whether Australian contract law should
mitigate the risk of claims being brought for wrongful termination. recognise an implied duty of good faith into contracts. However, in Carr v Berriman
(1953) 89 CLR 327, the High Court held that a contract’s variation power in absence
1 Holland v Wiltshire (1954) 90 CLR 409. of express wording did not permit a principal to omit works to provide to another
2 Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 2 All ER 29. contractor for a more attractive price.
When terminating for convenience, it is usual for the terminating party Traditionally, essential terms in construction contracts deal with
to compensate the other party for costs expended and profits made up timely performance of works or services and outline how payments
to the date of termination, the costs of breaking arrangements with are to be made in a timely manner. However, these essential terms
other parties, as well as any demobilisation costs. may also be implied under common law if the contract does not
explicitly contain them.
Common Law
A breach of an essential term of a contract does not automatically
In cases where there are no express contractual termination clauses, terminate the contract, but creates a right to terminate by the non-
termination is still available where one party has committed a breaching party. The party with that right must decide whether to
repudiatory breach. In circumstances of this kind, the aggrieved party terminate (by providing written notice of immediate termination) or
is entitled to terminate the contract immediately and claim damages. continue to keep the contract ‘on foot’, while reserving the right to
be paid damages for the breach.
Repudiation
A repudiatory breach is one that goes to the root of the contract, Frustration
frustrates the commercial purpose of the contract or deprives Frustration of a contract occurs when neither party has defaulted on
the non-defaulting party of substantially the whole benefit of the the contract but other circumstances have prevented the contract
contract.6 Certain types of breach will amount to a clear repudiation from being performed as originally intended. In order for the
of the contract including an absolute unlawful refusal to carry out contract to be frustrated, further performance of the contract must
work, abandonment of the site or failure by an employer to give be impossible, illegal or radically different from what the parties
access to the site. Other breaches, including delay by the contractor, contemplated when they entered into the contract.
may not amount to a clear repudiation of the contract and largely
depends upon the facts of the case. If frustration of the contract has occurred, the contract automatically
ends and all future obligations of the parties are discharged.
Repudiation by one party will not, of itself, end further contractual
obligations. A right to terminate for repudiatory breach is Exclusion of Common Law Right of Termination
conditional upon the aggrieved party not affirming the contract. A common law right to terminate is presumed to exist unless there
With this in mind, it is generally recommended that in order to avoid is an express term excluding such a right in the contract.11
inadvertently affirming the contract, the aggrieved party should
not delay in commencing the process of termination, nor should Statutory Right of Termination
it continue to act under the contract. Rather, the aggrieved party
A statute can create rights to terminate a contract or impart certain
should promptly notify the defaulting party in writing to confirm
conditions, which, if breached, may create a right to terminate as if
that it is terminating the contract and do nothing further in relation
those conditions had been written into the contract.
to its own obligations under the contract.7 If this is done correctly,
both parties are released from performance of their unperformed Consequences of Termination
obligations and damages are payable to the party at fault.
In some cases, albeit rarely, a contract will allow for rescission,
Damages for repudiation aim to put the aggrieved party in the which, upon termination, treats the contract as if it never existed.
position it would have been had the contract been properly Rescission of a contract rarely occurs in present day construction
completed. If the aggrieved party does not accept the repudiation, contracts, and usually only arise where something invalidates the
it affirms the contract and the contract will continue, with the contract from forming.12
possibility of damages being claimed for the breach. Further, the
aggrieved party will likely pursue its contractual entitlements (e.g. Where rescission takes place, the contract is set aside to (as nearly
for unpaid monies). as possible) restore the parties to their original position prior to
entering the contract. The parties will therefore have no accrued
Breach of an Essential Term rights or obligations under the contract.
It is well established that simple breaches of a contract will not An alternative to rescission, and more common in construction
create a common law right to terminate.8 Therefore, in order to contracts, is a right to determination, which relieves the parties from
terminate a construction contract, the term must be an essential performing their future obligations under the contract.13 This means
term by way of being a condition of the contract or a non-essential that the parties are still liable for their breaches pre-termination,
term that has caused substantial loss.9 A condition is a term in the with some contracts specifically prescribing that certain obligations
contract that is of such importance that the promisee would not are to continue post-termination, including any limitations on
have entered into the contract without assurances that the term liability and indemnities.
would be strictly adhered to.10
If a party terminates a contract, it is likely that it will seek to recover
any additional costs that flow from the breach of the defaulting
party that led to the termination event.
6 Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.
7 Heyman v Darwins Ltd [1942] AC 356, 361. 11 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 4.
8 Bentsen v Taylor Sons & Co (1893) 2 QB 274, 281 12 Highfield Property Investments Pty Ltd v Commercial & Residential Developments
9 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61. (SA) Pty Ltd [2012] SASC 165.
10 Tramways Advertising Pty Limited v Luna Park (NSW) Pty Ltd (1938) 38 SR 632. 13 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 469-470.
Conclusion Contacts
Given the increased number of construction contracts being
terminated (for whatever reason), and the significant consequences Brendan J. Reilly
flowing from such events, it is as important as ever that parties Partner, Perth
understand their rights, risks and obligations prior to commencing T +61 8 9429 7611
contractual relations. Equally, if you find yourself in a situation E [email protected]
comparable to any described in this update, it would be prudent to
seek legal advice in order that your rights and entitlements are best Tim O’Shannassy
protected. Associate, Perth
T +61 8 9429 7602
Squire Patton Boggs is listed in the First Tier for Construction
E tim.o’[email protected]
& Infrastructure Lawyers by Doyle’s Guide 2017.

The contents of this update are not intended to serve as legal advice related to individual situations or as legal opinions
concerning such situations, nor should they be considered a substitute for taking legal advice.

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