Peter Lamont - Solicitor
Termination clauses
A termination clause is typically a large bone of contention between the contracting parties in any negotiation and often during the performance of the contract.
Termination may be a suitable remedy if you no longer require the goods or services, however, in many contracts the goods and services are needed immediately and may be unique or too costly to source elsewhere.
Termination may not be an option if the contractor is the only party who is able to provide the goods and services or to provide the goods or services for a reasonable price and within a reasonable time frame.
Even if another party has the technical and management capability and capacity to complete the contract, cost escalations and delay will almost be inevitable if a contractor is replaced during the performance of the contract.
Another factor to consider is whether, if you decide to complete the contract yourself or engage a third party, you have the capacity to do so.
While termination is undoubtedly the single most powerful contractual right, it may, if utilised for the wrong reason place you in a worse position.
Termination for breach should also be seen as a last resort. Once it is used, it means that the contract has failed and it is also legally very risky.
In the absence of any special contractual provisions, the right to terminate arises only on serious or what can be defined as a substantial breach. Case law on what amounts to a serious breach provides little guidance. The legal risk arises from the fact that wrongful termination of the contract is itself a serious breach which then provides the other party with a right to terminate and seek damages.
It is, of course, possible (and it is usually the case) that parties to a contract specify what particular breaches justify termination. In addition, it is also common to put a procedure into the contract for termination such as a show cause procedure or a procedure under which the defaulting party is given an opportunity to rectify the breach. If there is such a procedure in the contract, care must be taken to ensure that it is closely followed.
There is a particular problem of enforceability of clauses where government, in particular, may be seeking to bring about some extraneous purpose, for example, industry development, anti-discrimination or environmental protection. To terminate on the basis of a breach of an extraneous purpose obligation is a high risk strategy, as such obligations may not be regarded by the court as sufficiently serious so as to justify termination in the absence of an express clause.
Termination for convenience
Termination for convenience is a remedy that has increasingly found favour in both the public and private sector. It is worthwhile noting that its origins rest in the doctrine of executive necessity (a government based doctrine)
The courts have long recognised that despite the binding nature of contracts, the capacity of government to govern should not be fettered. There are special needs of government which may mean that either a government contract is not binding or that government must be allowed to break a contract because it cannot inhibit the business of governing. The government may be able to break an otherwise perfectly valid and enforceable contract because it is necessary to do so for acceptable governmental reasons (such as a change of policy). Naturally this doctrine has found its way into typical Principal/Contractor relationships with either party seeking to use this get out of jail free clause to maximum advantage.
Hopgood Ganim recommendations
1. Plain english drafting will keep everybody on the same page and should be used wherever possible;
2. Come and see us long before commencement of your project so we can assist you in adopting a best for project attitude.
3. Always weigh up ALL possible outcomes of exercising your rights to terminate, it may not be the most commercial option for you.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.