Construction contracts conclude at the time when the contractors and subcontractors deliver on what was agreed in the contract and have performed the contract in its entirety. This usually refers to completion of construction, and the liability period. Nonetheless, not all contracts go smoothly and face obstacles in terms of operations and finances. Ceasing a construction contract can be a complex process. This article will help contractors to understand how to terminate contracts and what key considerations should be kept in mind when doing so.
Ending a Construction Contract
All contracts are automatically terminated when the agreed has been performed in its entirety and both parties have duly delivered on their responsibilities. Contracts not only cover the abovementioned, but also the process ending of the contract, detailing the procedures that must take place when doing so. Construction contracts are no different. A construction contract ends when the contractor has completed construction and the defect liability period has also expired. A contract is also terminated when either party chooses to terminate the agreement based on a stipulated reason.
Regardless of the way in which the contract ends, there are legal obligations to be followed met. These are often included in the contract while some are mandated by the law.
Ending contracts post completion of the project
As mentioned above, most contracts end when both parties have delivered their respective responsibilities and an exchange has taken place. However, construction contracts are slightly more complex.
A construction project is not automatically terminated at the time the contractor has completed construction and hands over the possession (the ‘principal’). The project must be in the stage of ‘practical’ completion when handed over.
Understanding practical completion
Practical completion is generally defined as when you as a contractor,
- Have completed the work and the building is ready to be used for its intended purpose. Notwithstanding minor defects if they do not hamper the intended use of the building.
- Have handed over guarantees, warranties and certificates (e.g. certificates of occupancy), manuals and any information necessary to make use of the building. Any documents mandated by the law should also be passed on to the owner.
According to AS 4000, the construction standard under the Standards Australia, the contracts are supposed to define the date for and of practical completion.
The date for practical completion refers to the date estimated as to when practical completion shall be reached. Failure to reach this stage before this date will lead to the contractor having to pay monetary compensation as liquidated damages to the other party.
It shall be noted that the date of practical completion is when the certificate of practical completion is issued, even if the stage has been reached earlier.
When is the project finally completed?
The final completion stage of a contract is when the DLP ends. The DLP, Defect Liability Period, is the time period where the contractor will have to be on-site to fix any defects that may arise. The DLP period is generally up to 12 months post-completion of the project.
Completion certificates are usually issued at this point and all payments from either side are settled. The certificate represents the official termination of the contract.
Ending contracts through termination
Not all construction contracts may be completed in its entirety. The contract may be terminated prematurely by either party. There can be multiple reasons for the termination, but as a contractor, you need to know what considerations to account for when a contract is terminated.
A contract may be terminated in one of the following 3 ways:
- Express contract provision;
- Statute; or
- Common law.
Express contract provision
Contracts contain express rights that will give rise to a termination. These express rights specify reasons and circumstances when contracts can be terminated and the process of which to do so. The common express terms include:
- Specified event: the termination may be justified when an agreed term is meant to take place but does not. For example, if the owner fails to obtain finances before the construction is expected to begin, the contractor may terminate the contract.
- Breach: a breach provides reasonable grounds on which to end a contract. Clauses in the contract often detail what breaches can lead to the termination of the contract by both parties.
- Convenience: this clause allows a party to terminate the contract for reasonable convenience, even where the other party has done nothing wrong. This right however, is not one that exists at law but rather one that exists only if expressly noted in the contract.
- Force Majeure: a force majeure is an event that prevents contract performance and is usually beyond the control of either party such as war or natural disasters. In this case, the contract is terminated.
Statute
Legislation may also offer conditions under which a contract can be terminated. For example, the Home Building Act has provisions for the termination of contracts in the case of certain events taking place or when a contract term is breached.
Common law
Under common law, there are provisions for when a contract can be terminated. These include the breach of an essential term; in this case, the party not in breach can choose to terminate the contract or opt to proceed with it. The contract may also be terminated if there is unlawful repudiation. This is when one party refuses to perform their end of the contract. Adversely, the other party in this case has the option of termination of the contract.
Further considerations
Ending a construction contract is also subject to a few other considerations. When considering a termination, it is important to identify the stage of construction. Contracts may define termination rights based on the stages of the construction process.
Therefore, it is important for contractors to identify when the right comes into effect to legally terminate a contract.
Ending a contract before the completion also necessitates identifying the work that has not been performed. This is known as the partial performance of a contract, and the remaining performance will need to be compensated accordingly.
Contract clauses often also detail the obligations either party must fulfil when terminating the contract. It is important to know how and when to exercise your termination rights to avoid problems in the future.
Key Takeaways
- When entering a contract, contractors must understand what rights they have which will allow them to terminate the contract.
- Contractors are obliged to comply with the stages of practical completion of the project.
- Contractors need to be aware of the legal formalities and obligations required to comply with when terminating a contract.
Need Legal Advice?
Ending contracts abruptly or without strong grounds can land you in legal trouble especially if you do not fulfil your contractual obligations. At Lazarus Legal, we specialise in construction laws and can help you negotiate and navigate closing construction contracts. Get in touch with our expert construction lawyers today for a consultation.
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Mark Lazarus
Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.
