Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?
A party is entitled to terminate the contract if the other party has 'substantially breached' its contractual obligations, or if it is evident that such substantial breach will occur. This is in accordance with the NS contracts and also general Norwegian contract law.
In a situation of substantial breach, the breaching party must be notified and given a reasonable deadline to rectify its breach before the non-breaching party is entitled to terminate the contract.
According to the NS contracts, a party may also be entitled to terminate the contract if the other party goes bankrupt or insolvent, and it is not proven that the party will fulfil its contractual obligations.
The employer is entitled to cancel all or part of the contract work in accordance with the NS contract agreed upon. In case of cancellation, the contractor is entitled to compensation for the financial loss he suffers as a consequence of the cancellation.
A party is not entitled to terminate the contract (directly) based on a force majeure event, according to the NS contracts. Both parties are entitled to claim additional time based on a force majeure event, but not compensation for additional costs incurred as a result of the event.
There are no statutory restrictions on termination. The parties are free to agree their termination provisions in construction contracts.
There is no general rule under Swedish statutory law dealing with the right of a purchaser of goods or services to reduce the agreed scope using the concept of “termination for convenience” or similar in relation to commercial contracts, and such rights generally need to be expressed in the contract to apply. If not, the original contract scope is binding. The dominant standard forms (AB 04 and ABT 06) include customary variation provisions but do not include any right for the employer to terminate the contract for convenience. In principle, the employer can use his variation rights under these forms to omit all the remaining works, but will then have to reimburse the contractor for certain losses and costs as set out in the forms.
If the contract between the parties is silent on the matter, there are no default rules on force majeure specifically applicable to construction contracts. However, there are general principles of contract law that can give rise to relief in the event of force majeure. Generally, force majeure events are defined as external events that were unforeseeable to the parties at the time the contract was made and which cannot be prevented by reasonable means. Further, for an event to constitute a force majeure, the event must make the performance of the contract wholly or partially impossible, at least in an economical sense. In case of a force majeure event, the affected contractual obligation is likely to become subject to modification in accordance with section 36 of the Swedish Contracts Act, which is a clause that can be used to modify or set aside contract terms that are deemed to be unconscionable in the circumstances. The parties are free to agree the definition of force majeure and the consequences of any such event in their contract.
A party has a general common law right to terminate a contract where the other party has caused a fundamental breach or has repudiated the contract. In addition to these common law rights, Hong Kong construction contracts often include express additional termination rights relating to specified events, and Hong Kong law recognises such express provisions as enforceable.
The wording of the contract will dictates whether the parties can terminate for convenience and for force majeure. In respect of the latter, under the Standard Form of Building Contract (2006 Edition), the employer or contractor is able to terminate the employment of the contractor where the carrying out of the whole, or substantially the whole of the Works, has been suspended for a continuous period of 120 days or more as a result of force majeure incidents that are covered by insurance.
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.
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/surety/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.
There are no special restrictions on termination that are unknown to the rules used in the comparative legal systems. Still, a most basic rule in respect to termination in line with Law on Contracts and Tort is the following one: With bilateral contracts, if one party fails to perform its obligation, the other party may request performance of the obligation - unless something else has been determined - or, under the terms specified in relevant articles of the Law on Contracts and Tort, may repudiate the contract by simple statement, should rescission of contract be not effected on the grounds of law, and in any case, such party shall be entitled to damages.
The latter provides a hurdle to the otherwise allowed termination for convenience, as the opposing party is entitled to damages also when a contract is terminated without proper grounds, i.e. just based on the convenience of just one contractual party.
The terms specified in relevant articles of the Law on Contracts and Tort on termination do cover mainly the following aspects thereof:
- Rights of one party after the other party fails to perform its obligation;
- Rights where performance within a time limit is an essential element of
- Rights where performance within a time limit is not an essential element of
- Repudiation of a contract without leaving a subsequent time limit;
- Repudiation of a contract prior to expira¬tion of the time limit;
- Repudiation of a contract with consecutive obligations.
Furthermore, after a contract is repudiated, both parties shall be released from their obligations, except the obligation of compensating for subsequent loss. A party performing a contract entirely or partially shall be entitled to restitution of that what he has given. Should both parties be entitled to claim restitution of what has been given, mutual restitution shall be liquidated under the rules of performance of bilateral contracts. Each party shall owe to the other compensation for benefits enjoyed for the time being from that what he is obliged to restitute, that is to compensate. A party paying back money shall be obliged to pay interest on arrears from the day of receiving the payment.