Construction World September 2020

Wrongful termination of contracts – KNOWYOUR RIGHTS AND REMEDIES

Difficult economic times, exacerbated by the COVID-19 pandemic, serve as a springboard for contracting parties wanting to terminate contracts, whether they be construction related or otherwise, entered into prior to the introduction of the national lockdown. By Adine Abro – Director Abro Attorneys

T o put the issue of contractual termination in its correct perspective the various means through which this can be achieved needs to be considered. This requires a survey of some of the mechanisms that afford such an entitlement to a contracting party. Contractual clauses or provisions creating such an entitlement • Force majeure or vis major clauses: they generally give a contracting party the right to invoke such clauses where a VSHFLͤHG HYHQW force majeure event) occurs that makes the execution of the contract objectively impossible. • Lex commissoria clauses: they generally give a contracting party the right to cancel a contract in the event of non-performance or breach. Usually they are accompanied by a provision requiring the innocent contracting party to give a notice to remedy the breach to the defaulting party before the entitlement to cancel is resorted to. • Termination for convenience clauses: the wording of these clauses normally allow one of the contracting parties, usually the employer in a construction contract, to terminate the FRQWUDFW ZLWKRXW D VSHFLͤF UHDVRQ IRU GRLQJ VR Common law remedies affording similar relief Under the common law a party may terminate a contract for breach of a material provision that goes to the root of the contract. If QR GDWH IRU SHUIRUPDQFH LV VSHFLͤHG LQ WKH FRQWUDFW WKH ULJKW WR terminate can only be acquired by placing the defaulting party in mora. This can be achieved by giving the defaulting party reasonable notice of the default and the need to remedy same before the contract may be terminated. Where a contract is objectively impossible of performance at the time of its conclusion, the contract will fall away and become unenforceable due to such impossibility. The same result will follow if an event takes place subsequent to the contract’s conclusion – referred to as supervening impossibility of performance – that renders the performance of either one or both parties impossible. It is important to remember that the impossibility must be absolute before the contract will be effectively discharged. Any termination that does not fall squarely within the contractual clauses outlined above or that is not extended pursuant to one of the aforementioned common law remedies will result in a wrongful termination. A salutary lesson to bear in mind is that termination of any contract is a grave step and needs to be considered carefully before its implementation. Usually a contracting party should seek advise from his/her/its attorney before embarking on the steps to terminate a contract. Wrongful termination is a repudiatory breach of the contract

which in itself constitutes a material breach of contract, providing an opportunity to the other contracting party to pursue a claim for damages against the party that wrongfully terminated the contract. Damages for wrongful termination may include direct damages, consequential damages and all other damages necessary to place the innocent party in the position he/she/it would have been if the contract had been executed fully. In construction contracts where a contractor wrongfully terminates the contract with the employer, the latter – as the innocent party – would be entitled to recover damages from the contractor, including: • The costs of hiring a substitute contractor to execute the works to completion; • The costs associated with any delay in completing the works, LQFOXGLQJ ORVV RI SURͤW DQG • Any associated additional costs that may be proved relating to or arising from the wrongful termination. If the employer wrongfully terminates the construction contract with a contractor, the latter would be entitled to recover damages from the employer, including: • The cost of executing the works up to the point of termination plus such additional costs, e.g. his/her/its overheads, if there were to be any; • /RVV RI SURͤW RU • If the contractor believes that it he/she/it has completed the works, but it turns out that he/she/it is mistaken in such belief, it is still possible that the contract amount, less the actual costs that would have to be incurred to complete the works, may be recovered. In conclusion, beware before summarily terminating any FRQWUDFW DQG RQO\ GR VR LI WKH WHUPLQDWLRQ LV EDVHG RQ MXVWLͤDEOH legal grounds. ƒ

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CONSTRUCTION WORLD SEPTEMBER 2020