End termination?

In the construction industry, terminating a contract may be an economically ultra-hazardous activity!

In every contract the law implies an obligation that the parties do nothing to prevent or impede the other party’s ability to perform. This is very logical since one should not be allowed to expect performance from someone whose performance he has hindered.

It therefore follows that a party to a contract cannot terminate the other party or cancel the contract without just cause-unless the contract itself permits termination without justification.

The justification for terminating a contract is usually the failure to perform or breach by the other party. Courts usually require that contract breaches which will legally allow termination must be substantial breaches-ones which go to the essence of the contract.

For example, if a subcontractor gets behind in his work but is making reasonable efforts to maintain progress, termination may not be legally justified. However, if the subcontractor callously and perpetually fails to project with a sufficient number of skilled workers, the contractor who has given ample notice and warning and provided the subcontractor an opportunity to “clean up his act’, will probably be legally justified in terminating the subcontractor.

Some courts have ruled that termination because of a belief that the other party will not or cannot perform in the future is rarely justifiable unless it can be shown that, at the time of termination, it was virtually impossible for the terminated party to complete performance.

The risk of unlawful termination in terms of damages which may be awarded in court (or by arbitration) can be severe. The general measure of damages for unlawful termination is the remaining balance due on the contract price less the direct cost savings to the terminated party resulting from his not being required to complete his performance. In essence this would amount to the profit and overhead which he would have earned had he been able to complete his contract.

The damages recoverable may be reduced by overhead or profit earned if the terminated party had been able to obtain other work to fill in the time when he would have otherwise been performing the terminated contract. The terminated party would be required by law to make reasonable efforts to obtain other work and thus mitigate his damages.

From the other perspective, a party who terminates his contract by refusing to complete would likewise risk being held to have wrongfully terminated his contract. If so, the damages assessable against him would be the expenses incurred by the other party to have the contract completed. In the construction industry, it is well-known that the cost of completing the work of a subcontractor who was terminated is substantially more than it would cost the terminating subcontractor to complete.

A word to the wise: Wrongful termination can be expensive. Do not terminate your contract until you have made a very careful analysis of

( 1) TERMINATE the facts and circumstances,

(2) your specific contract provisions relating to default and termination,

(3) the risks and costs involved,

(4) the other party’s financial circumstances,

(5) your legal rights and obligations, and

(6) the practical aspects involved.

Also, make sure that you have afforded the other party an opportunity to perform and that you have given him ample warning and whatever notice is required by your contract or by local law.

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