This is a question being asked in the light of both Covid and the war in Ukraine, which have caused significant cost increases in both materials and labour and delays, The short answer is that termination is unlikely to be an option if either party has made what has become a bad bargain and the contract itself does not provide for such a remedy in the relevant circumstances. It is also a risky strategy because if the terminating party gets it wrong and unlawfully terminates, it will run the risk of a claim being made against it for breach of contract. The damages claimed will include the additional and higher costs of completing the work, as well as other costs and expenses incurred caused by the wrongful termination. Any party contemplating termination of its engagement under a contract should carefully consider and/or seek legal advice on its precise terms; the circumstances giving rise to termination being considered and the consequences of termination if that step is taken.
Depending on the precise circumstances, the following may be relevant to any party contemplating termination:
- Does the contract have an express force majeure clause (sometimes said to deal with acts of God), that precisely covers the post contract event giving rise to the delay(s) and/or price increase(s) concerned bearing in mind that such clauses are very strictly interpreted by the courts. Events known about before the contract was entered into will not count. The courts will be reluctant to conclude that force majeure applies and will consider if the event in question materially undermines the commercial objective of the contract. Does it?
- Are sanctions against Russian companies or individuals by the UK or other governments relevant? If so, does the contract deal with illegality in this circumstance and give rise to a right to termination? Illegality might also be a defence to any claim for non-performance by the other party.
- Is there an express sanctions clause that relieves the supplying party of their contractual obligations? Does it apply? Such clauses were unusual in domestic contracts before the war in Ukraine but may now become more common. They are sometimes found in international contracts.
- After the contract was entered into has performance become frustrated, that is, impossible or radically different to what was objectively intended due to unforeseen circumstances which defeat the commercial purpose of the contract? This is a high legal threshold to prove and inconvenience hardship, or financial loss will not be sufficient.
- Does the contract provide alternative remedies for shortages/delays/price increases (for example clauses allowing for substitutions/variations/extensions of time) and can those clauses be utilised? Most standard form contracts or specifications cater for these matters and therefore a court is unlikely to be sympathetic to arguments that termination is appropriate when the contract terms cover the situation.
- Early discussion of potential supply and price problems and how they may be addressed with the other parties involved in a project may be a more productive approach. Although developers and their funders may be reluctant to agree to any price increases not covered by the contract, it may be preferable to compromise in the interests of completing the project rather than risking quality being affected and the possibility of insolvency if agreement is not reached. Contractor and supply chain insolvency prior to completion will inevitably cause its own price increase and delays.
The above points relate to contracts already entered. If either party requires a get out of jail option for termination in contracts currently being negotiated then that is something to be agreed for inclusion in the contract terms, either for specified circumstances (which will have to be carefully drafted) or by including a clause for termination at will/without cause. A termination at will clause is currently unusual in English construction contracts. However, prudent contractors asked to agree such a provision are likely to price the risk of early termination in their contract sum.
- Termination of a contract is unlikely purely on the basis one party has made a ‘bad bargain’ and the contract itself does not provide for that termination expressly.
- An unlawful termination can have other consequences.
- Bespoke clauses can be negotiated for new contracts.