December 5, 2022
So far as part of this article series we have explored the various avenues parties can take to terminate a contract. In this final part, we will look at when parties mutually agree to terminate a contract as well as discuss how the ‘termination for convenience’ clause operates in some contracts.
Terminating a contract through agreement is when both parties mutually agree to end the contract and relinquish each other from performing their contractual obligations. Generally, when both parties agree to terminate a contract, a deed of release is prepared which confirms and finalises the termination of the contract. A deed of release is separate from the contract and is typically used when parties wish to resolve a dispute or end a contract.
The deed of release should specify what exactly is being released. This may include that the parties agree to release each other from all claims, demands, debts, actions and proceedings of any kind that they currently have or may have in the future arising in connection with the contract that the deed relates to. However, this does not release a contractor or builder from its statutory obligations and warranties for the work it has already completed.
Depending on the particulars of your situation, the deed of release may also include specific terms and obligations. For building and construction contracts this may include:
- any monies to be owed to a party;
- any work that is to be completed or not completed; and
- the transfer of any documents such as plans, reports or certificates.
It is recommended that parties enter into a deed of release if they have agreed to terminate a contract to prevent any disputes arising from incorrectly terminating a contract.
Termination for Convenience
Some building and construction contracts may include a termination for convenience clause which allows a party to unilaterally end a contract at its discretion. This clause usually entitles only one party to exercise this right, commonly the principal or head contractor. The clause does not require the party terminating the contract to provide any particular reason for the termination or establish that the other party breached its contractual obligations. Generally, clauses such as these are more common in large government contracts where flexibility on projects may be desired due to funding reasons and uncertain economic changes.
In construction contracts, a termination for convenience clause will usually provide that the principal is to pay the contractor:
- the amount which would have been payable had the contract not been terminated and had the contractor been able to make a payment claim on the date of termination;
- cost of materials, goods or equipment reasonably ordered by the contractor for the works, but only if they will become the principal’s property;
- costs reasonably incurred by the contractor for removing temporary works and construction plant; and
- costs incurred for the contractor to return to their place of engagement.
A termination for convenience clause can be beneficial for a principal and provide many advantages however, it is important to note that when exercising the right to terminate for convenience, the principal may have an obligation to act in good faith. Although the Australian High Court has not come to a conclusive decision on this matter, the duty to act in good faith may be implied, especially in construction contracts. This means that parties should act reasonably and fairly when exercising its rights under the contract.
Lamont Project and Construction Lawyers have extensive experience with building and construction contracts and industry knowledge on how to properly terminate a contract to assist both Principals and Contractors in the industry. If you would like to discuss any of the matters raised in the above article as it relates to your specific circumstance, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Vanessa George
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