Contracts do not always end well. Relationships between the parties in a contract may deteriorate for a variety of reasons—failure to meet timelines or budgets, deficient work and personality conflicts are a few of the common causes. In these difficult circumstances, the parties may agree to terminate, or one party may attempt to unilaterally terminate the contract. Unilateral termination has significant risks and should be carefully considered. Improper termination may lead to significant damages.
Termination clauses
Well-drafted construction contracts often contain express termination clauses that outline when a party has a right to terminate. A contractor may be entitled to terminate a contract if work is suspended for a specified period of time. An owner may be entitled to terminate a contract if the contractor fails to perform the work properly, makes an assignment for the
benefit of its creditor because of insolvency or fails to cure certain breaches. The parties may also be contractually entitled to terminate for convenience upon giving notice or paying a sum.
Prior to exercising any termination rights contained in the contract, it’s important to review the reasons for termination. In order to rely on a contractual right of a termination, a party must ensure the contract actually provides a right to terminate for the breach in question and that the procedures laid out in the contract are followed. These may include requirements to give notice and provide an opportunity for the party to rectify a default.
Common law
Beyond express termination clauses, there are a few circumstances that might lead to common law rights to terminate. Under common law, a party to a contract has the right to terminate on the grounds of a fundamental breach. A fundamental breach goes to the root of the contract and has the effect of depriving the non-breaching party of substantially the whole benefit of the contract. Examples of fundamental breach include the failure by an owner to pay a contractor when payment is due and the failure of the contractor to have proper certification to carry out its work. The right to terminate a contract also arises in the event of an anticipatory breach. This occurs when one party clearly and unequivocally informs the other party, either directly or through conduct, that they do not intend to perform the contract.
An interesting, albeit rare example, is illustrated in Trio Roofing Systems Inc. vs. The Atlas Corporation [2004] O.J. No. 707. In this case a contractor had hired a subcontractor to complete two identical roofing contracts. Upon completion of the first contract, the contractor had only paid the subcontractor about 80 per cent of what was owed. The contractor had made unrealistic demands on the subcontractor to begin roofing the second project, even though the building was not ready to be done uninterrupted.
The contractor had also made unfounded allegations of deficiencies as a basis for holding back payment and had demonstrated a pattern of failing to communicate. Given all of this, the subcontractor refused to begin the second contract and claimed the contractor’s behaviour constituted an anticipatory breach of the second contract. The Court determined that it was reasonable to conclude that Atlas’s behavior would continue and, as a result, concluded Atlas was in anticipatory breach of the second contract.
Make your election
The existence of a right to terminate under the express terms of the contract or at common law does not necessarily mean a contract has to be terminated. The innocent party may elect to affirm the contract or accept a breach as a repudiation of the contract. If the innocent party elects to affirm the contract, then the contract is still in effect and the parties are bound to complete their respective obligations. Conversely, acceptance of the breach as a repudiation of the contract brings the contract to an end.
When contemplating termination under the express terms of the contract or for a fundamental or anticipatory breach, a party must be careful to ensure they have proper grounds. If the process required to terminate is not followed under the contract or the conditions required for fundamental and anticipatory breach are not met, the party attempting to terminate the contract will be in breach and may be faced with a claim for wrongful termination and damages.
This article is for information purposes only and may not be relied on for legal advice. Matthew Swanson and Bill Woodhead are lawyers at Borden Ladner Gervais LLP. Send comments to editor@on-sitemag.com.
