Termination of Contracts

Published: 2019-12-13 14:30:00
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Termination means bringing a contract to an end before the completion of its performance. The terms of the contract or the law related to that contract determine how that contract can be terminated. Therefore parties that from the contract may have the right to terminate it under the applicable law or what is stipulated in a particular contract concerning its termination. Termination, therefore, discharges the parties that form the contract from the obligations that have not been performed at the time of termination. The basis of termination determines the contractors entitlement to payment of the work already done up to the time of bringing the contract to an end. The reasons behind termination also define the responsibility of the contractor in regards to increased costs that need to bring the contract to a completion (Graff, and Stewart 2015). Termination of contracts can be done in some ways which are provided for in the common law and the specifications and schedules of contracts. In this, the focus is on termination for default and that for convenience.

A termination for convenience is bringing the contract to and end by the party to the contract without cause. Termination for convenience clauses are meant to give contracts flexibility and are given less judicial considerations. The basis of clause that allows the termination for convenience is to give the parties involved in long-term contracts flexibility to respond to the unforeseen circumstances that may arise in the course of the performance. The termination for convenience clauses gives power to a party to bring the contract to and end not regarding whether the another party is in breach. The government requires the clause of termination for convenience to be included in every contract that involves the state. The major implication of this termination clause is to relieve the state of any liability that may arise as a result of its non-performance and the refund of profits (Engelbeck, 2002).

The origin of such termination is traced in the contracted attached to the state and common law executive necessity doctrine. The doctrine gives allowance to the government to terminate the contract without making payments of the damages. The principle considers where termination of a contract is done to safeguard the interests of the public. An example of this situations is where the termination is done in cases of war. The clauses that allow this kind of termination reflects on the necessity of the government to be flexible in the contractual relationships, especially in the procurement contracts. The termination for convenience clause is also in the application in private sector especially in contracts that involve construction works. The exercise of the power of termination clause possesses a significant probability for loss to the contractors who may have invested a lot of resources in the performance of the contract. The contractors, therefore, may have to increase the price of the contract to take into consideration the risk of termination. It is, however, difficult to estimate or calculate the risks associated with such termination (Loveranes, 2012).

Even though a contract has the provision of termination for convenience, the contractor may recover the damages by proving that the other party invoked the clause for termination, therefore acted in bad faith. The situations that amount to bad faith include, where the party that initiated the termination acted maliciously towards the contractor or had no intentions of honoring the contract at the time they signed it. Although termination for convenience creates flexibility, there are limitations to exercising it which may amount to a breach of the contract. In the particular provision stipulated in this clause, if the owner ends the contract for convenience, the following amount should be paid to the owner, the cost of performed work, demobilization and termination costs and premiums of unperformed work. In the clause of no specific, the contractor is compensated for costs incurred up to the date of termination of the contract and also the margin of the work before ending of the contract. Duty lies with the contractor to prove the damages they are to be compensated (Graff, and Stewart 2015).The owner of the contract cannot recover the damages from the contractor related to the defective work done or the cost to complete the work by other parties after termination. The contractor is therefore relieved from incurring further obligations related to the contact.

Termination for default is where a party ends the contract using the terms that are expressed in the contract on the basis that the another party has failed in the performance of the obligations that are material to that particular contract. Under this clause of termination, the owner is supposed to provide a notice written to the contractor. The owner must demonstrate that the contractor had an obligation to perform in that particular contract. Furthermore, it should be evident that there was a failure of performance of the obligation on the side of the contractor. There was a list provided to cure the default; the contractor did not make efforts to cure the default and provision of a written notice by the owner for termination (Graff, and Stewart 2015). The owner has the right to make a declaration of termination of the contract for default if the contractor does not make progress thereby endangering the performance of the contract. This kind of termination is a way of the government to deal the non-performance of the contractor as stipulated in the specifications of the contract and schedule (Engelbeck, 2002).

In case the contract is terminated for default the owner is entitled to recover the damages that arose because of non-performance of the material obligation of the contract. The damages include the procurement costs, delay, and unliquidated payments among others. The contractor may also be evaluated for poor performance and lack of responsibility that may hinder him from obtaining contractual work in future. Both the owner and contractor can terminate the contract under this clause of termination for default. Some of the common circumstances that can lead to the termination by the owner include failure to supply materials or skilled workers, failure of the contractor to advance payments to the subcontractors in accordance with the agreement, persistent disregard of the provisions of the law in the course of performance and gross violation of the terms of the contracts stipulated in the contract documents. The contractor on the other can exercise this clause of termination by default to bring the contract to an end due to failure on the side of the owner. Some of the reasons for termination by the contractor include failure of the owner to make payments or issue the certificate of payment, owners financial incapability among other reasons. The other issues they may lead to the contractor ending the contract include a declaration of an emergency situation by the government or when the state instructs the stopping of the ongoing work for particular reasons. (Brumback, 2011).

References

Brumbak Melissa D. (2011).Termination Clauses under Standard form construction Contracts.

Engelbeck Marshall (2002). Acquisition Management: 382-386

Graff Ann B., Stewart Ryan P (2015). Termination. Model Jury Instructions: Construction Litigation, 2nd Ed.

Loveranes Ruth (2012). Termination for Convenience clause.

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