Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?
Construction (2nd edition)
Termination for convenience
Termination for convenience clauses are commonly included in construction contracts.
There is no common law doctrine of force majeure in Australia. However, it is common for a force majeure clause to be included in construction contracts, which will allow the principal (or sometimes both parties) to terminate if the force majeure event persists for an extended period (6 or 12 months). A force majeure clause will operate on its terms, based on what the parties define as a force majeure event, and the allocation of risk in those events. The clause may operate more broadly than the doctrine of frustration at common law.
As a general rule, the client is allowed to terminate for convenience pursuant to article 1794 of the Civil Code. However, in that case the contractor has to be compensated for all works executed, all costs already incurred in view of the further execution of the works and lost profits. This is a default rule from which the parties can, and oftentimes do, (partly) derogate.(e.g. limit or exclude compensation for loss of profit).
The parties can stipulate a termination for convenience provision in a contract and according to the Chinese law, the parties are entitled to terminate the contract in case the purpose of the contract is rendered impossible to achieve due to a force majeure event. Where the law provides for or the parties agree upon a time limit for the exercise of termination, parties need to exercise termination right within such time limit, otherwise, the said right may be extinguished.
The termination must be made in accordance with the good faith principle. The termination for force majeure, as well as for convenience, is permitted by the Civil Obligations Act.
The consequences of the termination for convenience is the obligation of the employer to pay to the contractor the agreed price, reduced by the amount of costs the contractor did not have but would have had, had the contract not been terminated, and by the amount of the profit he realised in other projects or intentionally failed to make.
Under a construction contract governed by the provisions of the German Civil Code (BGB) the customer may terminate the contract any time until completion of the work even in the absence of any breach of contract on the contractor’s side (sec. 648 BGB). However, if he does so, he has to pay the contractual remuneration to the contractor minus expenses saved (see section 650q subsection 2 BGB and section 648 BGB). The same applies to construction contracts governed by the Standard Building Contract Terms (see sec. 8 subsec. 1 VOB/B).
Both parties may terminate the contract if the other party does not fulfil its contractual obligations. However, the party willing to terminate the contract usually must grant the contractual partner an appropriate period of grace.
The termination needs to be made in writing (written form – see section 650h BGB).
Given that there is no general provision in Greek law relating to the termination of contracts, the termination of a specific contract depends either on the parties' particular agreement (based on the freedom to contract) or on any special provision regulating this particular type of legal relationship. Pursuant to Art. 700 of the GCC, unless otherwise agreed between the parties, the employer may terminate a works contract for convenience at any time prior to completion of the relevant project; however, the contractor is entitled to the agreed fees decreased by any benefits enjoyed by the contractor due to such termination, whereas contractor's death qualifies as ground for termination pursuant to Art. 701 of the GCC. Further to the above, under Law 3588/2007 (Insolvency Law), bankruptcy of a commercial entity does not necessarily lead to the termination of any contracts to which such entity is a party, except for certain specific cases as provided for in same law. As far as the public works contracts are concerned, the contracting authorities may unilaterally terminate a public contract, only on the grounds specifically laid down in Public Procurement Law, whereas same law provides for the automatic termination of the contract in case of the contactor's insolvency or death.
Force majeure is recognised by Greek law, thus the contracting parties may freely stipulate, under the principle of the freedom to contract and always subject to good faith, good morals and non-abusive exercise of right (178-179, 281 GCC), that the occurrence of a force-majeure event shall lead to the termination of their contract. Finally, termination of a contract can also be ordered by the courts as a resort of last recourse in case of unforeseeable and unpredictable events, rendering fulfilment by a party of its obligations extensively burdensome (388 GCC).
The principal/customer may withdraw from a contractor agreement at any time (before the work is completed) provided he pays for work already done and indemnifies the contractor in full (loss of gain indemnity). The principal/customer may also withdraw from the contract before or after completion if an estimate agreed with the contractor is significantly and disproportionately exceeded without fault of the customer. However, this right of withdrawal is granted only with reservation by Swiss courts. Extraordinary circumstances (such as force majeure) entitle the parties first to adapt the price or the timeline; termination is possible in such cases only if the court rules so, i.e. when, even with a price adaptation, the execution of the contract cannot be reasonably requested.
An owner or general contractor can generally “terminate” a contract, subject to the language in the parties’ contract. The same rights are generally not afforded to a contractor or subcontractor (although either can “abandon” a contract upon breach by the owner or general contractor). There are two types of terminations: (1) terminations for convenience, and (2) terminations for default. Termination for convenience allows the owner/general contractor to stop the work for mostly any reason without having to pay for anticipated profit or unperformed work. In contracts, a termination for default allows the owner/general contractor to procure alternative performance at the contractor/sureties/subcontractors’ expense.
A termination for convenience (“TforC”) clause affords the owner or general contractor the flexibility to alter its course, and eliminate unnecessary expenditures without repudiating its performance or materially breaching the contract. If the contract does not contain a TforC clause, the owner/general contractor can still terminate but would likely have exposure for breach of contract. The federal government on the other hand has the ability to terminate for convenience even if the contract does not expressly provide for it.
As far as limitations, an owner/general contractor cannot exercise a TforC clause in bad faith or when abusing its discretion. Courts have found that where a contractor is terminated for reasons unrelated to the performance of the contract, the termination was a pretext for breaching the contract and the contractor would be entitled to its lost anticipated profits. In the federal contracts, the government may have to demonstrate some “changed circumstances” as a precondition to terminating the contract for convenience. The court may also apply a heightened scrutiny when private TforC clauses are employed to terminate a contractual relationship.
A termination for default (“TforD”) clause is exercised by the owner/general contractor when the downstream party fails to fulfill some material element of the contract. Typical examples include: failure to meet the completion date; failure to make progress; failure to make payment to subcontractors, lower-tier subcontractors, and suppliers; failure to repair or replace faulty or defective work; disregard of laws, ordinances, rules, or other regulations; filing for bankruptcy; or otherwise materially breaching a term of the contract/subcontract.
TforD clauses allow the owner/general contractor to procure alternative performance at the contractor/sureties/subcontractors’ expense. Such clauses act as forfeitures and are therefore heavily scrutinized by Courts. Written termination notices must identify the grounds for default, provide the contractor/subcontractor with a period of time to “cure” the default, and provide the default remedies.
Contracts may also be terminated for frustration of purpose when circumstances that are not the fault of either party render it is impossible to continue with the contract. The contract will come to an end without any party being considered to be in breach. A typical frustration of purpose provision is a force majeure clause, which frequently addresses “acts of god” such as adverse weather. However, force majeure clauses typically do not result in terminations of the contract (although they can), but rather qualify as a relevant event that allows for an extension of time for the contractor.
Both parties are able to rescind the contract prior to handing over if the other party has defaulted in performing. In addition to this general right of rescission, the Austrian legal system provides for a special right of rescission where the client fails to discharge its duties of cooperation. This right of rescission is seen as a form of termination. In addition, the client under a construction agreement is entitled to cancel performance of portions of the works at any time. This right to cancel the contract in part is not regarded as unlawful. The consequence of such cancellation is that the client is obliged to demand the agreed contract price minus the savings arising from the cancellation. The contractor must thus not be placed in a worse position than it would have occupied if it had been given the opportunity to perform the contract. Thus, in commercial respects, the contractor must be compensated for its lost earnings as a result of the cancellation.
Freedom of contract is recognized and there are very few restrictions on the parties’ rights to terminate. Contracts frequently provide for several grounds for termination, including the right to terminate for convenience. In addition, there is a common law right to terminate if the other party commits a repudiatory breach of contract, i.e. a breach so severe that it demonstrates an intention of the party in breach not to be bound by the terms of the contract.
Force Majeure Clause is an expression used to describe a situation in which a party to a contract is excused from his responsibilities in whole, or he can suspend or ask to extent his responsibilities because of a particular event or a series of events in his life beyond his control. This concept is recognized in Cyprus.
Termination of private contracts is governed by Chapter II, Title V, Book I, of the Special Part of BCC. In general, the private contracts can be terminated for three (3) different reasons:
(i) negligent non-performance, in which event the contract may be unilaterally or mutually terminated. The defaulting party shall be liable for damages caused to the other party, pursuant to Article 475 of BCC;
(ii) voluntary non-negligent non-performance, in which event the contract may be unilaterally or mutually terminated, especially by convenience of one or both parties. Being unilateral the termination for convenience, it will only take effect after the end of a period compatible with the amortization of any substantial investments that the other party has reasonably done in order to perform the contract (Article 473 of BCC); and
(iii) involuntary, non-negligent non-performance, in which event the contract is lawfully terminated, especially in case of force majeure events. If the force majeure event occurs during any extension of time imputable to the "contractor", the latter may not invoke such event for avoidance of responsibilities related to the non-performance of the contract.
Public construction contracts, in turn, may not be terminated for convenience of the contractor. Termination due to non-performance of obligations attributed to the Public Administration, as well as to force majeure events, must be operated only through specific lawsuits.
A construction contract will rarely have a provision for automatic termination; one would need to be expressly agreed and it would likely be the subject of extensive negotiation. The contract will usually set out clear grounds for termination. The contract typically provides for the Employer to be entitled to terminate for default or insolvency of the Contractor. In the case of the Contractor, it is typically for insolvency of the Employer or non-payment within a specified period.
If the contract does not have express contractual termination rights, or the express contractual termination rights do not apply, then a party may have grounds to terminate a contract at law. The principal reason for terminating at common law arises in the case of a repudiatory breach of contract (where one party refuses to perform all or substantially all of its obligations under a contract).
Parties are free to agree a right to terminate in the event of force majeure. There is no statutory definition of force majeure. Force majeure is an expression sometimes used in contracts to describe events that are beyond the control of either party and which have the effect of causing damage, delay, disruption, or financial detriment to one or more of the parties to the contract. Force majeure events are usually defined in the contract to include matters such as acts of God, fire, flood, explosion, riot, war, or rebellion beyond the control or influence of the parties which have a significant effect on the ability of the party to perform its obligations.
For public contracts, the Government is able to terminate the contract without a judicial final sentence in specific cases such as contractor breaches to the contract, or public order issues. On the other hand, contractors have to sue the contractual entity for breach of contract. It its important to mention that since May 2018, by an obligatory judicial criteria, every issue derived from an administrative contract have to be solved by the Federal Tribunal of Administrative Justice (a legality tribunal) including but not limited the interpretation of the contract, its execution etc. Before May 2018, those faculties were carried by the common tribunals.
In the case of private contracts, the Owner can terminate the contract for breach of the contractor if the parties agreed it expressly. It is important to notify the termination of the contract appropriately.
Freedom of contract is upheld and there are very few restrictions on the parties’ rights to terminate. Contracts commonly provide for numerous grounds for termination, including the right to terminate for convenience. In addition, there is a common law right to terminate if the other party commits a repudiatory breach of contract, i.e. a breach so severe that it demonstrates an intention of the party in breach not to be bound by the terms of the contract.
Force majeure is not a concept recognised in English law. The contract must provide expressly for termination for force majeure, including a clear definition of the categories of event that will constitute force majeure and its consequences. Although there is a related concept in English law, frustration, parties should beware of relying on it in place of a clear force majeure clause as it is rarely held to have occurred.
In contracts for the construction of buildings, the agreed termination of the contract is possible, as well as force majeure.
In the contracts for the execution of public infrastructures, it is possible to terminate the contract by agreement (Article 211.c) of the Public Sector Contracts Law) and due to force majeure (Article 239 of the Law on Contracts of the Public Sector).
The parties may terminate the contract in cases when the Code of Obligation or their contract allows it. Termination of construction contracts is normally retrospective, but in certain cases (defined in the High Court precedents) where such a retrospective effect would yield unreasonable results, the courts typically hold the view that such termination will have prospective effects. The Code of Obligations allows the employer to terminate for convenience in which case the employer must pay for the works performed until the date of termination and indemnify the contractor for the damages it incurred. If performance becomes impossible, the parties will be relieved from their obligations except for the liability of the party that has negligence in occurrence of such an impossibility. In addition, construction contracts customarily contain force majeure clauses allowing termination in cases not strictly covered within the civil law doctrine of “impossibility” but, nevertheless, impede performance.
Parties may terminate contracts by mutual agreement. Cancellation provisions are usually included in the contract and typically set out:
(a) the circumstances in which the parties may terminate the contract, and
(b) a mechanism which provides the steps to be followed to give effect to a cancellation clause.
Force majeure clauses are usually included in construction contracts and govern an event or occurrence which makes contractual performance impossible. South Africa’s common law recognises the principal of supervening impossibility. An event or occurrence which makes contractual performance impossible, but is not necessarily contracted for, is categorised under the common law principle of supervening impossibility. There are particular conditions which must be satisfied for the event to qualify as a supervening impossibility. These include that:
(a) performance must be objectively impossible;
(b) the impossibility must be unavoidable by a reasonable person; and
(c) the event must not have been caused by either party.
Extreme difficulty, inconvenience and / or economic hardship do not constitute impossibility.
In addition, there is a common law right to terminate a contract if the other party commits a repudiatory breach. Most commonly under a construction contract, this would be an act or omission by one of the parties which demonstrates an intention of that party to no longer be bound by the terms of the contract.
The parties are free to provide and regulate termination rights in the contractor agreement.
Termination for fault clauses are very common in contractor agreements. Termination for convenience can be provided in the agreement as well (generally for the benefit of the project owner), but usually these clauses provide for the payment of a compensation by the project owner to the other party.
Termination for force majeure or unforeseen circumstances (imprévision) is also provided by French law. Provisions aiming to limit or exclude these cases are usual in contractor agreements.
Swedish contract law generally permits the legal ground to terminate a contract if any of the parties commits a fundamental or substantial breach of contract. Termination for convenience is in general not allowed.
Furthermore, the General Conditions AB 04 and ABT 06 stipulate eleven specific grounds for the employer and nine specific grounds for the contractor, according to which the contract can be terminated. These usually emanate from a lack of fulfilment of the parties’ obligations according to the construction contract, but also the occurrence of other significant inconveniences, such as bankruptcy or force majeure-like incidents.
Construction contracts cannot be terminated for convenience, unless the parties have agreed to this in the contract. Under the AB Standards, the employer is entitled to reduce the scope of work, but must then compensate the contractor for lost profits and other losses.
The AB Standards do not mention termination due to force majeure, but in accordance with general principles of contract law, force majeure can, in some cases, give rise to relief.
Under the AB Standards, termination for default is restricted to cases of severe breach, such as material delay that causes considerable inconvenience to the employer, quality of work that gives the employer reason to believe that the contractor will not be able to complete the work without material defects, and material delay caused by an employer who does not make reasonable efforts to expedite the work to the fullest possible extent.
When assessing whether a contract can be terminated or not, importance is not only attached to the severity of the breach is, but also to the consequences of the breach. For example, it is easier to terminate a construction contract if the work has not commenced than if the construction work is at an advanced stage.
In order to terminate a construction contract for default, the party terminating the contract must have notified the other party of the breach prior to termination and provided the other party with reasonable time to try to rectify the breach.
Without previous notice, a termination will usually be deemed unwarranted.
In addition to the above cases of breach of contract, the AB Standards also include provisions allowing a party to terminate a construction contract due to bankruptcy, suspension of payments, etc.
However, in some of these situations mandatory provisions in the Danish Bankruptcy Act may prevent termination of the contract.
- Parties may freely agree upon the terms of termination in their contracts. The level of detail in which the parties set out the grounds for termination in a contract will differ from case to case. The court will uphold most termination provisions, provided that they are equitable and not contrary to public policy. Therefore, in general, parties are free to agree on terms that allow the employer to terminate for convenience or that allow either party to terminate in the case of a prolonged force majeure situation.
- In addition to any agreed terms for termination, the Civil Act also stipulates the circumstances where a party may terminate a contract. In general, where there is a delay in the performance of a contractual obligation which is not cured or which cannot be cured, the non-breaching party may terminate the contract.
- In case of a construction contract the subject-matter of which is a building or any other structure on land, defects in the work do not give rise to a right of termination once the building or structure has been completed. In such cases, the contractor will only be liable for damages arising from the defects.
- The Civil Act provides that if, through no fault of the parties, it has become impossible for the contractor to perform its work, the contractor will not be liable for a failure to perform the obligation in question and the employer will be excused from its obligation to make payment for the remaining work which has not been completed. In such a situation, the contractor will not be liable for damages arising from such a failure to perform. However, under Korean law, such impossibility does not necessarily give rise to a right of termination. In light of this, as well as the possibility of differences between situations of impossibility and situations that qualify as the more familiar contractual force majeure, it is advisable that parties expressly agree on a right to terminate in the case of prolonged force majeure situations, where such a right is desirable.