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07 February 2020

When can you terminate a construction contract for repudiation?

If the other party repudiates the contract, you will have the right to terminate it. This is a right that exists at common law, outside the contract. This article explains how it works.


What is contract repudiation?

A repudiation is where one party demonstrates (by its conduct) that it either is no longer able to substantially perform its obligations under the contract, or that it is unwilling to do so. Repudiation is more than just a mere breach. (You can read about termination for breach here.)

In technical terms, the test for repudiation is whether a party has shown, through its conduct, that either:

  • it no longer intends to be bound by the contract; or
  • it intends to fulfil the contract only in a way that is substantially inconsistent with the party’s obligations.

This test is applied objectively. A court will consider how a reasonable party would interpret the repudiating party’s conduct.  The repudiating party's actual intentions are not a relevant consideration.

Below are some examples to help put this theory in context.

Example of Contractor Repudiation

In a construction context, a classic example of repudiation by a contractor is where the contractor demobilises from the site and abandons the project, before it has reached completion.

However project abandonment is not the only situation where repudiation can occur.

In a case in Queensland (which you can read here), a contractor was found to have repudiated the contract as a result of significant defective works.

In that case, the court considered that the extent of the rectification work that was required to address the defects demonstrated an intention by the contractor to perform the works in a manner that was substantially inconsistent with its obligations under the contract.  In other words, the contractor's work was so consistently poor that it was found to have repudiated the contract.

The judge said:

It is difficult to think of a more fundamental requirement of a construction contract than that the works are to be performed in an appropriate and skilful way, with reasonable care and skill, in accordance with the plans and specifications and in accordance with relevant law.

Example of Principal repudiation

Repudiation by a principal has been found to occur where the principal removed a substantial part of the work under the contract, and then engaged a third party to perform that work.  In this case, there was no clear and express contractual provision that would have entitled the Principal to take this course. You can read this case here.

In a similar case (which you can find here), the principal simply ordered the contractor off the site (rather than purporting to remove the work), and then engaged someone ele to finish it.  Again, the principal did not have any express contractual right to take this course - and so was found to have repudiated the contract.

Wrongful termination can be repudiation

If you purport to terminate a contract where you have no right to do so, this can amount to a repudiation.

This is because (applying the same tests above) your conduct would demonstrate to a reasonable person that you no longer intend to be bound by the contract.

The consequence of wrongful termination can be serious. This is because if you repudiate the contract, the other party could elect to terminate the contract and sue you for damages.

This is why you need to tread very carefully before terminating a contract, and why we would always suggest that you seek legal advice. 

What are your rights if the other party repudiates?

If the other party repudiates the contract, you have two options. You can either:

  • accept the repudiation and elect to terminate the contract; or
  • affirm the contract and insist that the other party continue to perform.

In a practical sense, in a construction context most people will take the first option and elect to terminate the contract. 

This is because the second option, insisting that the other party perform, will often require a Court order (which is not guaranteed) and may not offer a certain outcome if the other party is unable to perform the contract in any event.

Where a contract is terminated following a repudiation, the innocent party will have the right to sue the repudiating party for damages.

If you are in a situation where you believe the other party has repudiated, you will need to make your election (whether to terminate or whether to affirm the contract) fairly quickly.

If you delay in making your election, or if you otherwise take action that shows that you intend to remain bound by the contract (despite the repudiation), you may be effectively be taken to have affirmed the contract - in which case you will no longer have the right to terminate it.  And in this scenario, if you subsequently terminate the contract anyway, you will be the party in the wrong - even though it was the other party who was originally in the wrong!

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How to terminate a construction contract for repudiation

To terminate a contract for repudiation, you must give the repudiating party notice of termination. As a matter of practice, this should always be done in writing.

Although there is no requirement to give detailed reasons for terminating, court cases suggest that (to err on the safe side) your notice should:

  • use clear and unequivocal language stating that the contract is terminated;
  • identify the ground(s) on which you rely to justify the election to terminate;
  • state the date when the termination is to take effect; and
  • be properly served on the repudiating party - ie make sure the notice is delivered to the right person at the right address. The onus will be on you to make sure they receive it.

In relation to the second suggestion above (identify your grounds for terminating), two points should be made. The first is that, if you need to justify a contract termination after the event, you can be entitled to rely on grounds for termination that you were not aware of, at the time of termination. The second point - which is a partly related point - is that when you terminate a contract, you may have multiple (valid) reasons for termination. Consequently, many termination notices will identify the ground(s) for termination, but then also add wording to the effect that the party relies on all other grounds that may justify termination, even if they are not set out in the notice.  

If the other party repudiates the contract, you do not need to give the other party an opportunity to remedy the situation before issuing your termination notice. You can simply issue the notice of termination. This is an important difference between termination for repudiation and termination for breach.

Practical considerations

If you are the innocent party, it can sometimes be difficult to establish that the other party has repudiated the contract (as opposed to merely breaching it). The issue will always turn on the specific facts involved.

To emphasise, repudiation involves more than just an ordinary breach. The conduct must show a clear intention by the other party to effectively walk away from the agreement. You will need compelling evidence to support a termination for repudiation.

Whether the conduct of the other party gives you a right to terminate for repudiation will depend on all of the circumstances, including the terms of your contract. For example, the mere fact that a contractor has left the site may not of itself demonstrate that it has abandoned the works. (For example, it may have told you that it intends to return or there may be a valid reason for it not being there.) Keep in mind that the test for repudiation is applied objectively.

If you think the other party has repudiated your contract and you are minded to take action, we would urge you to seek legal advice before you do so. This is because, if you get it wrong, you may repudiate the contract yourself.  And if that occurs, you may end up exposing yourself to a claim for damages – making an already bad situation even worse.

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About the Author

Morgan McIntosh | Associate

Morgan is a commercial lawyer whose practice is mainly focused on transactional matters in the construction space.


morgan.mcintosh@turtons.com | (02) 9229 2901

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Morgan McIntosh | Associate

Author

Morgan McIntosh | Associate

morgan.mcintosh@turtons.com

Morgan is a commercial lawyer whose practice is mainly focused on transactional matters in the construction space.


morgan.mcintosh@turtons.com | (02) 9229 2901

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