How to maximise termination rights in Australian construction contracts

Most Australian construction contracts include a provision which will allow the Employer to terminate for any reason, this is known as ‘termination for convenience’. The contractor will normally be paid for the work carried out so far, security will be returned and the parties’ relationship will be over.

But if the contractor is in breach of the contract at the time of termination then damages can be taken into account. If elements of the work are defective then the cost of correcting defects may also be taken into account. But contractors might argue that defects can't be identified if the work is incomplete because it is up to the contractor how it carries out the work most efficiently, which might include doing the work using an intensive linear process and then going back to pick up defects. This is the concept of temporary disconformity but is an accepted concept outside of Australia.

The contractor might cease to turn up to the site, which is not always a clear cut fundamental breach, depending on what has happened. If this situation persists at the date of termination for convenience then arguably the damage which flows from such a breach will be the additional cost of procuring someone else to complete the works.

Many Australian contracts also contain a process where significant breaches are notified in a ‘show cause’ notice which ostensibly gives the contractor an opportunity to remedy the breach. These types of clauses can be crafted to force the parties to communicate so that problems can be ironed out. However, where a party has not been performing for some time and has no intention of remedying performance, they merely extend the period before which the non-performer can be replaced. They often include more onerous terms against the contractor.

If one of the parties acts in a manner which shows an intention to no longer be bound by the contract, that behaviour can amount to a repudiatory breach. The other party can accept a repudiatory breach which brings the contract to an end. Breaching a fundamental term of the contract can also amount to a repudiation: some contracts actually agree what fundamental terms are. It is common for a party to assert that conduct, such as not turning up on site, amounts to repudiation which is then accepted.

There then ensues an argument that it was actually the acceptance which amounted to the indication that the party no longer considered itself bound by the contract and that was the repudiation which is then accepted by the other party. Think carefully before purporting to accept a repudiation but, if you do and you properly end the contract, you are entitled to recover damages in the amount of the difference between what it would have cost to complete the works absent the breach and what it actually costs to procure completion of the works. This is subject to the normal duty to mitigate damages. Beware here because, if you suffer fools too long, you can inadvertently affirm the contract by not doing anything about the breach, so you lose the right to terminate.

Right now, we are seeing scores of contractors entering voluntary administration and other types of external administration. The Corporations Act 2001 (Cth) prevents the enforcement of rights which accrue by reason of the administration or the possibility of it. This means that any contractual clauses, also known as ipso facto clauses, which provide that termination or other rights accrue because of an insolvency event have lost a great deal of their practical effect. Many legacy contracts will have a contractual provision dealing with insolvency. 

The contractual termination rights arising on an insolvency event should be drafted in sufficiently broad terms to include voluntary administration, liquidation, appointment of receivers or other controllers appointed over the whole or substantially the whole of the company’s property, in respect of schemes of arrangement, because a company has come or is under a small business restructuring and the entry into a deed of company arrangement.

It is critical that contracts are reviewed to ensure the greatest flexibility to terminate or modify the operation of a contract should an insolvency event arise. Termination of contracts should also be approached based on a failure to perform the contract, rather than purely the financial position of a counterparty.