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DEFECTS LIABILITY AFTER THE CONTRACT HAS BEEN TERMINATED BY THE

CONTRACTOR

THE DEFECTS LIABILITY OF THE CONTRACTOR Clause 4.1 of the FIDIC Red Book (hereafter, “Red Book”),
“Contractor’s General Obligations”, states that the contractor shall execute and complete the works in accordance
with the contract and with the engineer’s instructions, and shall remedy any defects in the works. This obligation
exists not only during the Defects Notification Period, it exists throughout the carrying-out of the works. The
expression “defect” is not explicitly defined in the different FIDIC forms. In several common law jurisdictions
“defect” is defined by reference to conformity with the contract. 1 Thus, “defect” means that the work or the
material does not comply with the requirements stated in the contract. 2 To remedy defects and damage during
the Defects Notification Period is one of the main obligations of the contractor.

The Defects Notification Period is defined as the period for notifying defects in the works or a section under sub -
clause 11.1 of the Red Book (Completion of Outstanding Work and Remedying Defects), as stated in the Appendix
to Tender (with any extension under sub-clause 11.3 of the Red Book (Extension of Defects Notification Period),
commencing from the date the works or section is completed as certified under sub-clause 10.1 of the Red Book
(Taking over of the Works and Sections).

All work referred to in sub-clause 11.1 (b) of the Red Book shall be executed at the risk and cost of the contractor,
if and to the extent that the work is attributable to the contractor. If any defect or damage is attributable to any
other cause than stipulated in sub-clause 11.2 of the Red Book, the contractor is obliged to rectify all defects or
damage notified by the employer too, but is also entitled to payment. If and to the extent that the works, section
or a major item of plant cannot be used for the purposes for which they are intended by reason of a defect or
damage, the employer is entitled under sub-clause 11.3 of the Red Book to an extension of the Defects
Notification Period. 1 Baker, Mellors, Chalmers, Lavers, FIDIC Contracts: Law and Practice (2009), 3.454. 2
Halsbury’s Laws of England, Vol 4 (3), Section 95: Defects. Pt 3] Defects Liability after Termination by Contractor
353

Breach of Contract
When a contract is intentionally not honored by one party, it is called a breach of contract and is grounds for
contract termination. A breach of contract may exist because one party failed to meet his obligations at all or did
not meet his obligations fully. A material breach of contract allows the hiring party to seek monetary damages,
and an immaterial breach of contract does not allow the party to seek monetary damages. For example, if you
purchased a product that did not arrive until a day after the agreed upon delivery date, that is an immaterial
breach of contract. However, if your order did not come until two weeks after the delivery date and it affected
your business, then that is a material breach of contract.

Prior Agreement
You may terminate a contract if you and the other party have a prior written agreement that calls for a contract termination
because of a specific reason. The agreement must give the details of what qualifies as a reason for contract termination. It
should also state what actions need to take place for one of the parties to terminate the contract. In most cases, one party
must submit a written notice to the other party to terminate the contract.

TERMINATION AND SUSPENSION OF CONSTRUCTION CONTRACTS

This guide covers contractual and non-contractual rights to terminate a construction contract.
Contractual rights may include the right to terminate 'at will' where there has been no breach
by the other party.

The majority of standard form building contracts contain express provisions regulating the
rights of either or both parties to terminate the contract in defined circumstances.

Non-contractual rights to terminate

Frustration: this occurs when neither party has defaulted on the original contract but other
circumstances have intervened to prevent the contract from being performed as originally
intended. The result must be that further performance of the contract is impossible, illegal or
radically different from what the parties contemplated when they entered into the contract.

If a frustrating event occurs the contract automatically ends and the parties are excused from
their future obligations, although any accrued liabilities will remain.

It is important that a party is sure that frustration has actually occurred if it is going to rely on
frustration to justify ceasing to perform its obligations under the contract to avoid being in
breach if the event is not in fact a frustrating one. Case law gives some examples of events
that are not frustrating events - for example, if the contract is more expensive to perform this
is not a frustrating event. If an event happens which is provided for in the contract the
consequences of that event happening will be as set out in the contract and it will not be a
frustrating event. Parties therefore need to be wary of the potential overlap with force majeure
clauses.

Repudiation: this occurs when a party commits a breach of contract that is sufficiently serious
that it entitles the innocent party to treat the contract as terminated with immediate effect and
to sue for damages for breach of contract. Whether a material or anticipatory breach will
depend upon the severity and effect of the breach, and whether it goes to the root of the
contract.
Ordinarily, certain extreme types of breach will amount to a clear repudiation of a construction
contract. Examples include:

 refusal to carry out work;


 abandonment of the site or removal of plant by the contractor;
 employing other contractors to carry out the same work;
 failure by an employer to give access to the site.

Other breaches may not be clear-cut. If the innocent party purports to treat the contract as
repudiated because of a breach that is not in fact repudiatory it will have committed wrongful
termination and be in breach itself. For that reason if there is doubt about whether or not a
breach is repudiatory the innocent party may consider exercising a contractual right to
terminate instead if available, although the amount of damages recoverable would usually be
lower than damages for repudiatory breach.

Repudiation by one party will not by itself bring an end to further contractual obligations - it
must be accepted by the innocent party. There is no particular form that this acceptance must
take but it must be an unequivocal acceptance. If it is accepted, both parties are released from
performance of their respective unperformed obligations and damages, assessed under the
normal rules, will be payable by the party at fault. Damages for repudiation aim to put the
innocent party in the position it would have been in had the contract been properly
completed.

If the innocent party does not accept the repudiation it 'affirms' the contract. It is still entitled
to claim damages for the breach but the contract will continue.

Difficulties can arise if the innocent party inadvertently affirms the contract instead of
accepting the repudiation by acting in a way that contradicts acceptance or is equivocal in
some way. It may find itself in breach of contract if it stops performing its obligations in the
mistaken belief that it has accepted the repudiatory breach.

In some cases a breach may give the innocent party both a right to terminate for repudiation
and a right under the contract. The innocent party does not necessarily have to elect to use
one right or the other in these circumstances, but if exercise of the contractual right is
inconsistent with acceptance of repudiation - for example, if the consequences of terminating
under the contractual right are different - or the response to the breach is less than
unequivocal the innocent party will be taken to have 'affirmed' the contract and will have to
rely on the contractual right rather than repudiation.

Contractual rights to terminate

Termination clauses in contracts give parties right to terminate in certain circumstances. These
most commonly deal with breaches of specified contractual obligations. There may be rights
to terminate in other situations too, such as the occurrence of a force majeure event.

Termination for convenience

Termination 'at will' or 'for convenience' wording may be inserted into a contract allowing one
party to terminate without having to establish that some event has occurred or breach has
been committed by the other party. This can be useful where:

 the employer reconsiders the use to which land should be put, cannot secure financing for the
whole of the project or cannot secure anchor tenants'
 the contractor finds the project will be unprofitable or too risky, or the project has been
suspended for a significant period with no prospect of it being recommenced.

This type of provision has been traditionally less common than those permitting termination
for default in some of the unamended standard forms, but employers are given the right to
do so in some forms such as GCWorks and NEC3 and in the majority of PFI contracts.
However, contractors and consultants are rarely given the right to terminate for convenience.

What does the case law say?

A contract may provide no express limitation on when, or in what circumstances, a termination


for convenience clause can be operated. However case law tends to suggest that, in the
absence of sufficient wording, it will be a breach of contract to exercise a termination for
convenience clause simply for the employer to obtain a better price to complete the works
from another contractor. The English courts tend to look to Australian cases for guidance on
this issue.
Provide for compensation: to be effective, termination for convenience clauses will need to
provide for contractor compensation. The standard forms which contain these clauses already
do so. An Australian case in 2000 held that where compensation is provided for in the
contract in clear, unambiguous terms it will usually be enforceable.

Clear wording: as with most contract provisions, clear wording will be required before a
termination for convenience clause will be fully effective. Unreasonable provisions, such as
allowing the employer to pass work on to a third party, must be stated in clear, unambiguous
terms otherwise they will be unenforceable.

Use of omissions clauses to tackle bad bargains and poor performance: the courts have
decided that an employer will not be able to use an omissions clause to get out of what it now
considers to be a bad bargain. It is also doubtful that such a clause can be relied on by an
employer to switch contractors in the event of dissatisfaction with the current contractor's
work.

An example of an attempt to do this can be found in a 2003 case between Abbey


Development and PP Brickwork Ltd. Here, the contract allowed for the employer to reduce or
increase the quantity of work offered to the contractor as well as containing a termination for
convenience clause. Abbey relied on these provisions to remove work from PPB after putting
the contractor on notice for insufficient supervision and poor workmanship. The judge found
that the provision was not clear enough to allow Abbey to use it to pass the work on to
another contractor – it only allowed Abbey to reduce work where this was no longer required
for the completion of the project.

Rational, honest and proper reasons: this was discussed in another 2003 case between
Westminster Council and Hadley Design Associates. HDA was contracted on a rolling basis to
refurbish flats built in the late 1950s. The Council terminated the contract under a one-month
termination clause that did not require reasons, citing:

 the need for market testing driven by a requirement for compulsory competitive tendering;
 their desire to have a single firm supply maintenance and repair services, having already
appointed another firm to supply maintenance services after the competitive tendering
process;
 residents' dissatisfaction with HDA's services.
The judge held that these reasons were 'rational, honest and proper'.

In summary, the case law warns us that even if the contract does contain an express provision
dealing with termination for convenience:

 trivial breaches may preclude termination;


 harsh objectives need clear wording, otherwise termination will be seen as an intrusion on the
contractor's right to finish the work;
 work transferred between contractors is questionable;
 an employer cannot use an omissions provision to get out of a bad bargain, and it is also
doubtful it can be used if the employer is dissatisfied with a contractor's performance;
 a termination clause should provide for compensation to avoid being treated as unenforceable
because it is unfair.

Suspension

As with termination, suspension can take many forms. For example, a contractor may wish to
respond to actual or alleged breaches of contract by an employer by suspending works, or an
employer may wish to respond by suspending payment. Suspension clauses in the contract
can be very helpful, but can sometimes be overlooked when the parties' focus has been taken
up by negotiating the termination provisions.

There is a very close relationship between suspension and termination and, depending on
how the clause is drafted, the end result of a suspension clause may be much the same as a
termination clause in that either party will have the right to terminate the contract at the end
of the agreed suspension period.

The justification for suspension clauses will be broadly similar to termination – for example,
there may be a change of circumstances on the ground that makes continuing with the works
impossible in the short term. Occasionally suspension can be used by one party to allow it
space to consider how to proceed with a project, which should be acceptable to the other
party if kept within bounds.

In the absence of an express contractual term, it would be difficult to argue that a general
right to suspend exists in law as the courts have consistently refused to recognise such a right.
It is therefore a good idea for the parties to consider having a suspension clause in their
contracts. If so, they should also ensure that the contract deals adequately with the immediate
practical consequences of a suspension order and how long a contract can be suspended for
before termination may occur. Consideration should also be given to what happens when
works are to resume following suspension.

Summary

Proceed with caution before using termination and suspension provisions and, if these rights
are to be invoked, make sure you strictly follow the contract's notice and procedural
requirements

Be careful with your wording. If a contract contains a termination for convenience provision, it
is likely that it will be considered in breach of contract if this is used simply to obtain a better
price from another party to complete the works - even where there is no express limitation on
the circumstances when the provision can be used.

Where no provision is made in the contract for termination for convenience, it may be
appropriate to consider whether any default or neutral grounds of termination are applicable
or appropriate in the circumstances.

How to Terminate a Construction Contract


How to Terminate a Construction Contract

Terminating a construction contract can be tricky. It must be done under the right terms and
legally. There are usually questions surrounding whether or not a client has good reason to
terminate the contract.

Things You'll Need

 28-day notice
 Notice of contract termination

Instructions
1. Determine whether or not there is plausible cause to terminate the contract. Plausible
cause is for something like default on the contractor’s end. The contractor is allowed
reasonable excuse for failure--however, if no reasonable excuse is found for why the
contractor could not or did not complete the contract, the contract should be served with
the proper notice.

2. In some states, a verbal contract is still a legal contract. For example, if a contractor makes
a verbal agreement with a customer over a business transaction, it may be a valid contract
. A verbal contract must include an offer, acceptance of the offer and consideration of the
offer in order to be valid contractually. A verbal contract is also very easily contested, even
though many states still consider them to be a valid form of a contract. It is important to
determine whether or not your state is a state that recognizes a verbal contract as a legal
contract before proceeding.

3. Once default has been determined, serve the contractor with a 28-day notice, also
referred to as a Notice of Termination or Notice of Suspension. The notice must
oftentimes be filed with the clerk of courts in order to be valid and enforced, but it allows
the contractor 28 days to respond to the situation or problem (or to get the job or task
completed) before the contract is terminated. Contact local state agencies to find out
what notices are appropriate and required, as well as what steps to take to process these
notices. Follow through with all necessary paperwork, according to your local court or
state agency.

4. After the appropriate steps have been taken and notices have been served, according to
your county or state laws and regulations, the contract can be terminated and the
contractor should be notified in writing of the termination of the contract. If applicable,
notices should be filed with the jurisdictional clerk or courts (this is usually by county).

5. It’s important to understand the local laws and to take appropriate steps and measures. If
each step is not followed, the termination may not be validated, even if you have a valid
claim. The laws vary from state to state. If you are unsure of the proper steps, you may
need to retain a lawyer to produce appropriate notices, as well as fight your claim. A
lawyer can also tell you if you have a valid case. Appropriate notification must be
provided to the contractor before a contract is terminated.

Amicably
1. contract is a binding agreement between 2 parties that involves some sort of
exchange or transaction. When the involved parties have fulfilled all their
obligations or have no more desire to fulfill such terms and conditions, a
contract termination is arranged. This is usually done when a contract is no
longer needed.

2. A contract termination can be done in an amicable manner if all the involved


parties mutually decide on ending their contract with one another. Such a form
of contract termination involves merely filing the appropriate documentation
with the proper authorities and ensuring that all the rights and terms of each
party has been fully satisfied.

3. It is also possible that a contract may include a notification provision that allows
any of the parties involved to cancel the contract upon fulfillment of certain
terms and conditions. The provision provides the manner in which contract
termination can be done. A stipulated time period of notification is detailed in
the provision as well as other necessary conditions.

4. However, a contract termination may also arise from a breach of contract. If


there arises a situation where in one party does not fulfill the terms agreed to in
the contract, the offended party may bring the case to court and file a lawsuit to
claim damages or injuries suffered due to the breach of contract. Thus, a breach
of contract occurs. Any violation or lack of fulfillment of the terms or conditions
in a contract by any party is considered a breach of contract

Termination, Some Good Hints


✐ Contract termination letters are business letters and should be written only on company letterheads.

✐ The language used in a contract termination letter should portray politeness, apologetic tone and
regret for sudden termination of a contract.

✐ It is essential to mention the contract number at the beginning of the letter, preferably in the
subject/reference line.

✐ Mention the names and specific details of all the parties to the given contract.
✐ Mention the notice period for termination of the contract.

✐ The writer must specify the reasons for termination of a contract. e.g. breach of contract,
fraudulence, misrepresentation, impossibility to perform terms of the contract, etc.

✐ Include the terms and conditions of the contract that empower the parties to terminate the contract.
If the contract is silent about termination terms, you will have to follow the common procedure which
has been prescribed by the law.

✐ When termination takes place with a monetary penalty, mention the mode of payment that you plan
to use.

✐ Besides the date at the beginning of the letter, you need to mention the date of the original contract
and specific dates of performance/delivery mentioned in the contract.

✐ The best way to end this letter is by indicating that you are willing to do business with the party in
future.

Some Legal Facts

✐ Contracts may be bi-partite or tri-partite in nature. Common parties to a contract are:


Manufacturers
Service providers
Organizations and NGOs
Contract employees
Consultancy firms
✐ Legally, presenting a contract termination letter is not viewed as a breach of contract. It is just an
indication that either of the parties would not be able to perform or execute the terms of the original
contract.
✐ A contract termination letter is as important as the contract itself. It is a proof that parties to a
contract have accepted the contract termination. For this, both the parties must have authentication
rights, original termination letter and its copies, and other related documents.

✐ If a proper termination of contract cannot be reached, arbitration process might be initiated by


holding joint meetings. This demands a lot of negotiation skills.

Termination of a contract tends to harm the reputation and goodwill of a company in the business
world. The best way to avoid such a problem is creating a perfect draft for the contract itself.