The Determinating Factor

What is termination?

Although not specifically defined in the contract, termination refers to the end of the contractual agreement between the contractor and the subcontractor upon either the contractor or the subcontractor’s election.

When is a contract generally terminated?

Terminating a contract is a very extreme remedy and often an absolute last resort. Once a party has elected to terminate a contract there is usually no turning back – it is the end of the road as we know it and it generally signifies the end of a contract, sometimes with severe consequences if the correct steps have not been followed in relation to the termination process. 

Top tip: A party should always exercise the option of termination with extreme caution, with due authority and only after a suitably qualified person has thoroughly checked the related documentation to ensure there are no mistakes and the correct procedure has been followed.

What happens if the correct procedure is not followed?

If the correct termination procedure is not strictly adhered to, a party’s erroneous attempt to terminate the contract may constitute a repudiation (being an act or declaration that the party does not intend to perform their contractual duties in terms of the contract). 

When may a contract be terminated?

A contract may be terminated:

·       As a result of the fulfillment of the parties’ contractual obligations;

·       In some instances, by the efflux of time; 

·       By agreement between the parties; or

·       By one of the parties exercising their contractual right to cancel the contract.

What are the factors which are considered when a contract is terminated?

A contractor can terminate a contract in the following instances:

• The Employer is not happy with the Subcontractor’s performance and wants the Contractor to terminate; 
• The Subcontractor is behind on the programme and is not working with due skill and care;
• The Subcontractor’s work is defective; and 
• The Subcontractor is sending a minimal workforce to site and not performing.

Top tip: If you are not happy with your subcontractor’s performance or the quality of its work, you should always first give notice to your subcontractor of its default and provide it with an adequate opportunity to remedy the default within a certain period (usually within 5 working days) failing which, you must give notice of your intention to terminate the contract before terminating. You should not simply terminate the contract without notice to the subcontractor as you will fall foul of the termination process.

NB! Notices of termination are ‘deemed’ to be delivered the day after they were transmitted, not on the day that such notices were transmitted. 

What happens after a contract has been terminated?

The following steps need to be followed upon termination of the contract:

-        The principal-agent shall compile a report on the status of the portion of the works executed by the subcontractor and shall issue the report to the employer, contractor, and the subcontractor;

-        The principal-agent shall timeously commence and complete a final account;

-        The subcontractor shall not be relieved of any of his liabilities concerning that portion of the works executed by the subcontractor;

-        The employer or the contractor may employ other parties to safeguard the works, complete the outstanding works, and to rectify defects in the portion of the works that the subcontractor executed; 

-        The contractor may recover expense and/or loss caused by the subcontractor’s default from the date of termination;

-        The contractor shall be entitled to recover damages related to the termination from the subcontractor; and

-        The contractor shall determine the delay to practical completion of the works which the termination caused and the subcontractor shall be liable to the contractor for damages for such delay.

When terminating a contract, the contractor will more than likely face resistance from the subcontractor in the following instances, inter alia:

·       A refusal to accept the termination and the allegation that the contractor has repudiated and in turn the subcontractor terminates the contract;

·       A denial that the subcontractor was at fault and any delay or defect was as a result of the contractor; or

·       A dispute regarding any loss and expense or damages claim.

Top tip: The best way for a contractor to defeat the subcontractor’s resistance and for a contractor to prove its case is through adequate record keeping by way of keeping daily diaries, taking detailed meeting minutes which have been signed off by all attendees; regular photographs taken of the progress of works on site; proper programme updates; and copies of correspondence exchanged between the contractor and its subcontractors. 

When may a contract not be terminated?

Neither party may terminate a contract because of the other party’s breach if they themselves are in material breach at the time. A material breach is one that would normally entitle the other party to terminate a contract.