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Termination of building contracts

By Meika McHardy - 13 Sep 2018

Occasionally the relationship between parties to a building contract turns sour. In some cases the parties will be able to get things back on track so that the project can be brought to completion. However, in other cases there is an irreparable breakdown in trust and one or both parties want to part ways. The owner may not want the builder around anymore and/or the builder may not want to continue racking up cost on credit with little prospect of being paid. So how does a party terminate the building contract and what risks does a party face if they get it wrong?

Short of being able to negotiate a mutual termination of the building contract, a party's rights to terminate are set out in the contract itself and the Contract and Commercial Law Act 2017 (CCLA). However, a party can only rely on the CCLA where the building contract does not set out the rules in relation to termination of the contract. Given that all standard form building contracts stipulate when a party can terminate a contract, those circumstances will be rare.

Understandably, the rights under a contract providing for termination of that contract are usually very limited. This is because of the potentially grave consequences faced by the party who is on the receiving end of the other party exercising a right of termination. A builder may have invested a lot upfront relying upon the profit they stand to make and an owner may face delays and difficulties in finding another builder to finish the job.

Typically, the contract will provide that a party may terminate the contract if the other party is in substantial breach of the contract. However, a party seeking to rely on this right of termination should exercise great caution and would be well advised to seek guidance from an expert. Not every breach of contract will constitute a breach that is serious enough to justify termination.

An owner seeking to terminate on account of alleged defective workmanship should be forewarned that case law on this issue establishes that:

  • The standard of workmanship is to be assessed on completion of the building work; and
  • An owner cannot cancel the contract and claim damages for defects unless the defects cannot be remedied before completion or the builder refuses to rectify them.

The consequence of a party purporting to terminate a contract when they are not entitled to do so is that their attempt to terminate will be seen as a breach of contract and/or repudiation on their own part. That will entitle the other party to damages for the losses they suffer as a result, for example in respect of loss of profit or costs to complete the building work. To avoid a potentially costly mistake a party should get professional advice. Contact Meika McHardy or any of our construction law team for assistance.


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