Termination of Contract and Conditions for Termination
One event which can arise in contract performance management is an extreme non-performance by either contracting parties which may necessitate or lead to termination of the contract.
Termination of contracts can be partial termination or entire contract termination. Cancellation of a portion of work is called partial termination while entire contract means an indivisible contract i.e. a contract in which the obligations of the two parties are interdependent, and consequently non fulfilment of significant obligations by one party makes it very difficult or impossible for the other party to continue with the contract.
Contracts invariably have a termination clause incorporated. This clause ensures that either or both parties have the right to terminate the contract under certain circumstances. The termination clause describes the following:
- Breach of contract events that trigger the right to terminate the contract.
- Methods of giving notice of the exercise of the termination right.
- Whether the breaching party must be given an opportunity to cure the breach before the other party can terminate the contract.
We will briefly discuss conditions in which a contract can be terminated as under:
- Natural course of events: This is a trivial condition wherein the contract work has been completed, entire contract performance has been met, final acceptance has taken place, the work has been paid for, and contract closure has taken place.
- Breach of contract: A breach of contract takes place when a party fails to deliver on their contractual promises by failing to perform their obligations completely.
- Mutual agreement: Contracts may be terminated by mutual agreement where the contract itself provides for the event (for instance upon 3 months notice); by the parties conduct; or where the parties enter into a separate agreement to terminate the earlier agreement (for example, a compromise agreement where there has been a dispute in respect to the earlier agreement).
- Frustration: Frustration is a basis upon which parties may be excused from their obligations to perform as a result of events arising after the contract has been entered.
- Termination for convenience: Many construction contracts also include a clause that allows the owner to terminate the contractor?s remaining work on the project at the owner?s convenience. Such a termination is not due to any fault on the part of the contractor.
Termination for convenience clauses are intended to provide the owner with the option to terminate the remaining balance of the contract for work for a reason other than the contractor?s default - for example, owner being unable to obtain additional financing to complete the work.
In addition to terminating the contract for cause or convenience, an owner can also delete all or a portion of the balance of the remaining scope of work. Should the owner make such a deletion at any time before or during performance of the contract, the contractor must review the contract to determine what his or her rights and obligations may be.
If the contract is terminated for convenience, the contractor will not earn the profit that was anticipated when the contract was executed. If the contract is terminated, the amount paid to the contractor may not recapture the contractor?s home office overhead that was allocated to the contract. While on the face of it, this may appear unfair to the contractor, in every contract there is an implied covenant of good faith and fair dealing.