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.