Main Considerations While Terminating a Contract or Subcontract
Executive Summary
Contract or subcontract termination is one of the most sensitive actions an organization can take. Whether driven by non-performance, delay, financial default, force majeure, or loss of trust, a termination executed incorrectly can lead to multi-million-dollar disputes, arbitration, allegations of wrongful termination, or loss of contractual entitlements.
This article highlights the essential considerations that Employers, Contractors, and Subcontractors must evaluate before issuing a termination notice. It covers contract clauses, procedural steps, evidence, cure periods, risk management, post-termination obligations, and dispute-avoidance strategies. Organizations that follow these principles significantly reduce exposure and maintain stronger negotiating positions.
Full Article
1. Introduction
Termination is the legal “break point” of a contractual relationship. It affects rights, liabilities, performance security, payments, warranties, and dispute pathways. For EPC Contractors and Subcontractors, a poorly handled termination can destroy the validity of claims, trigger counterclaims, or expose the company to heavy damages.
Therefore, termination should never be impulsive; it must be structured, documented, and contractually justified.
2. Check the Contract: Your Rights Begin There
Before initiating termination, review the following provisions:
2.1 Termination Clauses (Cause and Convenience)
Contracts typically include:
- Termination for Cause – due to breach, delay, insolvency, defective work, safety violations, etc.
- Termination for Convenience – the employer may terminate without fault but must compensate the contractor.
- Subcontract Flow-Down Clauses – ensure subcontract obligations mirror main contract requirements.
2.2 Notice Requirements
Most contracts require:
- Written notice
- Reference to specific clauses
- Communication to designated recipients
Failure to comply may render the termination invalid.
2.3 Cure Period or Notice to Remedy
Many contracts require the terminating party to:
- Notify the other party of the breach
- Provide a specific number of days to correct it
- Proceed to termination only if the breach continues
Skipping this step often leads to claims of wrongful termination.
2.4 Payment and Security Provisions
Before termination, evaluate:
- Unpaid certified amounts
- Retention money
- Performance guarantees
- Advance payment guarantees
- Rights to call or release bonds
Improper encashment or withholding leads to disputes.
3. Document Everything: Evidence Determines Outcomes
Successful termination depends heavily on the strength of your records, including:
- Site instructions
- Letters and emails
- Minutes of meetings
- Inspection reports
- Non-conformance records
- Notices of delay
- Progress photographs
- Payment records
Well-organized documentation protects your position during negotiation, mediation, or arbitration.
4. Conduct a Risk Assessment Before Termination
Key questions to ask:
4.1 Is termination commercially wise?
Sometimes:
- A negotiated reduction
- Variation
- Replacement of a single team
- or timeline extension
is more cost-effective.
4.2 Will termination cause additional delay?
Replacing a contractor may extend project timelines.
4.3 How strong is your evidence?
If evidence is weak, termination becomes risky.
4.4 What are the consequences for existing guarantees?
Banks and insurers often dispute demands for encashment.
4.5 Does termination activate dispute clauses?
Some contracts shift to:
- Dispute boards
- Mediation
- Arbitration (e.g., ICC, LCIA, UNCITRAL)
5. Drafting the Termination Notice Properly
A termination notice must be:
- Precise
- Refer to contractual clauses
- Identify breaches clearly
- Provide dates, events, and previous notices
- Avoid emotional or subjective language
- Delivered through contractually agreed channels (courier, email, portal, etc.)
A defective termination letter is often the starting point of the dispute.
6. Managing the Post-Termination Phase
6.1 Handover and Site Takeover
Document:
- Physical site condition
- Materials on site
- Work completed
- Equipment, tools
- Staff demobilization
6.2 Settlement of Accounts
Determine:
- Work done up to termination
- Deductions
- Re-measurements
- Cost of completing remaining works
6.3 Calling or Releasing Guarantees
Ensure all actions are legally justified and supported by contract clauses.
6.4 Avoiding Retaliatory Claims
Expect counterclaims involving:
- Lost profits
- Wrongful termination
- Damages
- Delay costs
Evidence is again critical.
7. Dispute Resolution Options
If the termination triggers conflict, use:
- Negotiation
- Mediation
- Dispute Board referral
- Arbitration (depending on contract)
Early mediation often resolves termination disputes cost-effectively.
8. Best Practices to Reduce Termination Risk
- Maintain accurate communication logs
- Issue notices timely
- Avoid verbal agreements
- Keep a contract management system
- Train project managers on contractual rights
- Seek legal/contractual advice before terminating
Conclusion
Termination is not merely an administrative act; it is a legally binding step with long-term financial and commercial consequences. Performing it correctly preserves your rights, reduces liability, and strengthens your position in any resulting dispute. For EPC Contractors, Subcontractors, and Employers, careful planning, compliance with contractual requirements, and robust documentation are essential to avoid costly claims and litigation.