Types of Contract Termination
Give few example of premature contract termination cause and precaution to avoid such instances.
Termination of construction contract happens when a valid and enforceable legally binding agreement is brought to an end either by becoming unmanageable as a result of unpredictable conditions at the time the contract was made or through one’s action or both the parties’ actions (Stannard & Capper, 2014). The termination at common law carried out by repudiating in a narrow sense where the repudiating party refuses to carry out the formal agreement or through a defective performance where the performance of a party utterly defective as to go to the commencements of the contract.
There are two broad categories of contract cancelation: project cancellation for cause and project cancellation for convenience. A termination of a cause can merely occur if one of the parties fails completely to live up to their contractual obligations (Sergeant & Wieliczko, 2014). For instance, a contractor can terminate their contract for the cause since the employer failed to honor valuation order within the duration agreed during the contracting. Similarly, the client can as well terminate a contract for cause if the contractor diligently and precisely fails to carry out the work in keeping with the timeline stated in the appendix of contract. The following are some of the commonly stated reasons for contract termination for cause: contractors failing to pay labors, vendors, suppliers, and sub-contractors; contractors failing to meet the project or diligently perform the duty. Besides, contract termination for cause may be due to poor workmanship resulting in defective or ineffective performance, both parties failing to abide by the laws and regulation, and failure to consistently follow risk management techniques (Greenhalgh, 2016).
However, a termination for convenience is a scenario where a contract is terminated when there is no contract breach made by the other party. This kind of termination is only legal when it is expressly written in the contract (Sergeant & Wieliczko, 2014). A termination for convenience clause tends to be fixed in contracts since it enables both parties to end their duties in a way that does not lead to litigation or harm of either party. According to Chappell & Joint Contracts Tribunal (2014), termination for convenience allows the contractor to collect any payments for completed work, as well as the employer having the ability to avoid paying damages for terminating a project. Therefore, under the cancelation for convenience, the employer can cancel the progress of a project for any reasons like political issues.
General Causes of Premature Contract Termination
A contracted project is a legally binding arrangement between 2 or more people. Therefore, on the occasion of terminating a contract, its legality must be determined first (Sergeant & Wieliczko, 2014). A court of law cannot recognize an agreement unless there are mutual acceptance and consideration. The parties who are contracting can prematurely end a progressing project when it does not fulfil specific legal proceedings.
A law court will only look at the legally binding duties of a person that does not capability. For instance, people with 18 years and above or those who are mentally incompetent will be considered to the capacity of contracting. Such kind of contractual responsibilities of a minor and court does not recognize it as a contract; however, contractual arrangements implemented by a grown up to a kid are enforceable in the court of law (Seeley, 1993). Noticeably, one is insane if he or she does not have the capability of understanding the contract. For example, in the construction industry, the capacity of both the contractor and the employer are determined at the tender stage, known as prequalification (Seeley, 1993). A contract can be prematurely terminated when it comes to the knowledge of one of the parties that the other party lacks the capacity to perform the task. The implementation of a legally binding agreement can be exempted under the concept of impossibility. Forms of concepts that are not possible witness by the court comprises of natural phenomena, and death..
If both the parties contracting are misguided about the evidences linking to a contracted project, the bidding agreement can be avoidable. This comes into effect if the fault is about a fundamental part of the agreement, and the blunder has substantial impacts on the agreement conditions (Marson, 2013). A falsification is a untrue statement of the circumstance that convinces somebody to approve the the tender. It requires lacks of wrongdoing intentions. Therefore, even though the falsification is not a sham, the agreement is voidable when an guiltless person entirely depended on the evidence that came to be to be untrue (Marson, 2013).
A breach normally comes up when an individual does not execute any provision of the legal agreement without a legal justification. Noticeably, an agreement cannot be cancelled just due to the fact that one has breached the convention. This is subject to whether the breaking of the agreement was substantial or inconsequential, where the courts will observe various aspects such as the performance of the contract or the negligent conduct of the party who breached the contract (Ashworth & Perera, 2018). If there are considerable undertakings, then the breach fails to be factual. A factual contract breaching allows the affected person to cancel undertakings of the contract. There are several circumstances for breach of contract: irregular payments to the contractor, unnecessary delay in construction, the poor performance of the contractor, not maintaining performance bond, and sub-contract part or whole of work without inspections of engineer (Seeley, 1993).
Lack of Capacity and Inability to Perform
Whenever there is impinging action that the project teams have not rationally foresaw and the objective of the agreement has been entirely ruined, the persons in contract will be a discharge of their duties (McKendrick, 2014). This phenomenon causes damage so much to the extent that the legal agreement is either not possible to execute or does not provide its viable objective. Besides, a consideration denotes to an object or a service of price offered by both the persons to the agreement that convinces them to get into an agreement. It should have a quantitatively estimated price (McKendrick, 2012).
Nowadays dispute is one of the major causes of construction contract termination. The most common categories of disputes in the contractual relationship are relations and individuals’ fight, economic issues (claims and payments) , standards of workmanship, and time-related disputes (Levin & Levin, 1998).
Any construction structure must be designed and constructed in accordance with the existing policies and regulations formulated by recognized institutions such as parliament which enacts laws (“Termination Clauses,” n.d.). The intervention of laws such as local authority’s regulations sometimes results in the impossibility of project performance. A construction contract can also be terminated as a result of professional negligence, for instance, neglecting survey of land at the pre-design stage.
Most construction projects are very big regarding the capital outlay, employment opportunities and social welfare that they impact. Consequently, any premature termination of a construction project adversely affects the parties involved, citizens and even the government. This paper identifies three broad categories of effects of contract termination: impacts on the organization, impacts on the professionals, and impacts on the economic growth.
When a contract has been terminated, the organization adversely suffers concerning her reputation and image. The project team members will equally suffer reputation and image damage when a contract is terminated. Therefore, the termination of a project has a negative impact on the labor productivity, the firm’s reputation, and the stock value of the company.
The perception of professionals about a project within the organization is very important. As a result of the corporate resources being limited, construction contracts are viewed to be draining scarce capitals tend to weakened self-confidence (“Termination,” n.d.). A large percentage of project teams do like applying their expertise and resources to unproductive or failing projects. Similarly, canceled contracts lead the entire workforce to question the management skills of the senior managers which in turn lowers the productivity and level of obligations to the body. Furthermore, contract termination leads to the poor relations among the professionals, entire workforce and organizations.
Mutual Mistake and Misrepresentation
The construction industry is a key economic driver in every country. For instance, in Australia, the construction industry is contributing to approximately eleven percent (11%) to the Gross Domestic Product (GDP) of the nation (“Gross domestic product (GDP),” 2014). As a result of this fact, the construction industry is a key player of the economic development hence any form of interference with the industry such as project cancellation will ultimately affect the country’s economy (Hampson, 2014). It is very important to improve the capacity and ability of construction industry in most developing nations. Nevertheless, premature contract termination has a negative impact on the economic growth of the country through the reduction of construction capacity and capability. Besides. project cancellation causes financial loss to the organization.
This paper recommends various approaches towards mitigating premature contracts terminations in the construction industry which causes the critical financial situation to both the contractor and client. The following are some of the suggested mitigation techniques to avert future premature contract termination in the industry. All the records of the project should be regularly and properly maintained and clear contract documentation to be established (Todt, Weiss, & Hoegl, 2017). Through proper and constant maintenance of the documents, some unnecessary disputes and claims that may result in cancellation of a project may be avoided. Besides, disputes should be solved amicably or through mediation instead of going through litigation.
Moreover, the provisions of the contract should be keenly followed, and prevent elementary contract breaches. Through strict adherence to the requirements of the contract, unnecessary conflicts and misunderstanding of each other can be circumvented (Todt, Weiss, & Hoegl, 2017). Similarly, the project teams should get best effort to minimize influences of external parties. Consequently, new distractive ideas, that can possibly change the contracting party’s views, will not come up in the construction process.
Finally, both contractors and the clients should be aware of their financial capacity. This will sidestep bankruptcy in the course of construction process which is currently is frequent scenario contractors and employers face forcing premature termination. Besides, the employer should conduct a detailed preliminary market survey before investing in the construction project mainly to minimize risk.
Conclusion
Premature contract termination is primarily done in three distinct ways as contractor’s default, client’s default and for the client’s convenience. Construction projects are unique and complex hence they have an inherent risk. The key players in the construction industry such as contractors and clients should embrace appropriate techniques in dealing with contract termination which recently is becoming frequent. Therefore, before adopting the recommended mitigation approaches, the causes of project cancellation must first be appreciated
References
Ashworth, A., & Perera, S. (2018). Contractual procedures in the construction industry.
Chappell, D., & Joint Contracts Tribunal. (2014). The JCT standard building contract 2011: (an explanation and guide for busy practitioners and students).
Greenhalgh, B. (2016). Introduction to Construction Contract Management. Milton: Taylor and Francis.
Gross domestic product (GDP). (2014). Domestic product. doi:10.1787/dc2f7aec-en
Hampson, K. (2014). R & D investment and impact in the global construction industry.
Levin, P., & Levin, P. (1998). Construction contract claims, changes & dispute resolution. Reston, VA: ASCE Press.
Marson, J. (2013). 9. Contracts, Contractual Capacity, Mistake, Misrepresentation, and Duress. Business Law, 160-181. doi:10.1093/he/9780199671830.003.0009
McKendrick, E. (2012). Breach of Contract and Termination. Contract Law: Text, Cases, and Materials, 753-811. doi:10.1093/he/9780199699384.003.0022
McKendrick, E. (2014). 21. Frustration and Force Majeure. Contract Law, 696-746. doi:10.1093/he/9780198701989.003.0021
Seeley, I. H. (1993). Contractual Arrangements. Civil Engineering Contract Administration and Control, 1-35. doi:10.1007/978-1-349-13275-1_1
Sergeant, M., & Wieliczko, M. (2014). Construction contract variations. Abingdon, Oxon: Informa Law from Routledge, an imprint of the Taylor and Francis.
Stannard, J., & Capper, D. (2014). Termination for Breach of Contract. Oxford: Oxford University Press, USA.
Termination Clauses. (n.d.). Drafting International Contracts, 565-596. doi:10.1163/ej.9789004176799.i-654.64
Termination. (n.d.). The NEC 3 Engineering and Construction Contract, 300-314. doi:10.1002/9780470758496.ch18
Todt, G., Weiss, M., & Hoegl, M. (2017). Mitigating Negative Side Effects of Innovation Project Terminations: The Role of Resilience and Social Support. Journal of Product Innovation Management. doi:10.1111/jpim.12426
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