Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?
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).
Pursuant to the CTL, a construction contract may be terminated by:
(i) mutual consent;
(ii) court order; or
(iii) an employer in circumstances where the agreed designs cannot be completed without additional materials which increase the estimated contract price and the employer cannot afford such an increase.
Parties are at liberty to negotiate further termination grounds including the right to terminate for convenience.
Whilst the concept of force majeure is recognised under Omani law, Omani law does not provide a specific definition of what may constitute a force majeure event. However, pursuant to the CTL a contract may be terminated due to a force majeure event.
The Omani courts have held that a force majeure event would be any event that prevents a party from performing his obligations under the contract for reasons outside of his control and which were not reasonably foreseeable. The courts have considered natural disasters as force majeure events but have not accepted the performance of a contract having become uneconomic due to a force majeure event.
Construction contracts cannot be terminated for convenience, unless the parties have agreed to this in the contract. Under AB 92/ABT 93, 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 AB 92/ABT 93, 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 demonstrate reasonable endeavors for the purpose of furthering work as much as possible.
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.
The parties can agree to terminate the contract for the justified causes established in such contract and subsidiary, according to the Civil Code or the relevant applicable regulation.
The parties can terminate for convenience but such decision cannot be unilateral.
The contract can also be terminated by force majeure but in case of controversy regarding weather there is or not force majeure, the Courts will the ones deciding it.
There are no restrictions on termination and parties may contractually agree (based on the principles of freedom of contract) to terminate a contract, including for convenience or due to force majeure event. This is based on the principles of freedom of contract as explained above, especially in relation to privately funded construction contracts.
What is regulated under the prevailing regulations is that a termination clause must at least contain: (i) the form of termination which covers the termination as [mutually] agreed between the parties or unilateral termination; and (ii) the rights and obligations of the service user and the service provider as the consequences from termination of the construction works contract.
For construction contracts funded by APBN, the Ministry of PWPH standard form contract (which may be used as a reference), which contains a clause for termination due to convenience.
In the case of government contracts, the Government can terminate for breach without the intervention of a court or arbitration, while contractors have to sue the government to terminate for breach of government; Likewise the Government can terminate for convenience in the case of public order reasons.
In the case of government contracts, the private Owner can terminate for breach and for convenience if parties expressly agree on it in the contract.
Mutually agreed terminations are permitted. As for force majeure, legislation contemplates this figure as a ground for the contract termination, or to re-establish contractual conditions.
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 exceeded by a disproportionate amount through no fault of the customer. However, such withdrawal is very restrictively admitted by Swiss courts. Extraordinary circumstances (such as force majeure) entitle the parties first to adapt the price ; 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 can’t be reasonably required.
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.
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 dictate 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.
Most contracts provide for the same types of termination you would expect to see in a FIDIC based contract – termination for either parties’ default and termination for convenience.
Article 892 of the Civil Code provides that a Muqawala can only be terminated upon:
(a) completion of the work agreed;
(b) cancellation of the contract by consent; or
(c) an order of the court.
It is not well settled what is required to constitute “cancellation by consent”. Most contracts take the approach that a contractual right to terminate (consented to by the parties by virtue of having executed the contract) is sufficient to constitute consent. Contracts commonly expressly state that the parties agree that an order from the court is not required when terminating under the contractual provisions on termination.
Most contracts also contain force majeure type clauses. A number of provisions of the Civil Code address force majeure type events.
Article 893 of the Civil Code identifies a specific right in relation to extraneous causes which could affect Muqawala contracts, providing:
“If any cause arises preventing the performance of the contract of the completion of the performance thereof, either of the contracting parties may require that the contracted be cancelled or terminated as the case may be”.
The general right to seek relief where performance of a contract is compromised by a force majeure event is covered by Article 273 of the Civil Code:
“In contracts binding upon both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled.”
Unlike FIDIC, both of these provisions provide for cancellation or termination of the contract, as opposed to being “excused from performance” and being entitled to seek time and cost relief (FIDIC Red Book 1999 Sub-Clauses 19.2 and 19.4).
Relevantly, Article 287 of the Civil Code also states that a party shall not be bound to make good loss that arises as a result of an “extraneous cause” in which a person “plays no part” (e.g. a natural disaster or unavoidable accident or force majeure), unless there is an agreement to the contrary.
Article 249 also provides that it is permissible for a judge to reduce oppressive obligations to a reasonable level where “exceptional circumstances of a public nature which could not have been foreseen” mean that performance of an obligation becomes oppressive.
Under a construction contract governed by the Standard Building Contract Terms (VOB/B) the customer can terminate the contract any time until completion of the work even in the absence of any breach of contract on the contractor’s side. However, if he does so, he has to pay the contractual remuneration to the contractor minus expenses saved.
Both parties can terminate the contract if the other side 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.
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.
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.
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 agreements (based on the freedom to contract) or on any special provision regulating this particular type of contract. 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 agree, 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).
Government contracts can be terminated for convenience. If a private sector contract is terminated in breach of contract, compensation is limited to work performed up until termination, but not for lost opportunity. Force majeure is recognized as a defence under Saudi Arabian law where unforeseen the circumstances have made contractual performance considerably more onerous that could be envisaged at the time of making the contract.
As a general rule, the right to terminate a contract arises where there is a fundamental breach. (See: Section 40 of Contracts Act 1950)
In addition, parties may incorporate specific provisions in respect of termination of the contract. The standard forms of construction contract adopted in Malaysia often has a termination clause, e.g. Clauses 51 to 55 of PWD Form 203A (Rev. 2007), and Clauses 60 to 64 PWD Form DB (Rev 1/2010). These clauses are also termed as “Determination Clause” in certain standard forms of contract – e.g. Clauses 25 and 26 PAM Contract 2006 and Clause 44 JKR Sarawak Form of Contract (2006).
These provisions are strictly construed and the procedures laid out must be strictly followed. Failure to strictly comply with the termination procedures set out in the contract could render the termination invalid and/or wrongful. In turn, this could in itself result in an unintended repudiatory breach of the contract. (See: Fajar Menyensing v Angsana ; DC Contractor v University Pertahanan Malaysia )
There is no common law doctrine of force majeure in Malaysia. However, it is not uncommon to find force majeure clauses in standard forms of construction contracts adopted in Malaysia. For example, under Clause 57 of PWD Form 203A (Rev. 2007), if either party considers a force majeure event to be of such severity or to be continuing for such period of time that it effectively frustrates the original intention of the Contract, then Parties may agree to a mutual termination. (See also: Clause 19 of Conditions of Contract, FIDIC Yellow Book)