Any contract rests on the agreement of the parties. It is their agreement that binds them. Therefore, by their agreement, they may be discharged.
After a discharging of a contract, the obligations of the parties under the contract do not exist. However, an action for breach of contract is still available after the contract has been discharged.
A contract can be discharged in four ways. These are:
(i) Discharge by agreement
(ii) Discharge by performance
(iii) Discharge by breach
(iv) Discharge by frustration
Discharge by agreement
The parties can agree to discharge the contract. This operates where the obligations under the contract have not yet been performed, and the parties agree to waive contractual performance.
Discharge by performance
Another way of discharging a contract is by performance. Most contracts are discharged in this way. As the parties perform their contractual obligations, then the contract will come to an end.
Discharge by breach
A contract can be discharged by a breach of the contract. After a breach of a contract, the obligations of the contract also may terminate. This situation may arise if either one party or both parties have failed to perform any obligation as expected under the contract.
Discharge by frustration
A contract is frustrated where an event that occurs after contracting renders performance of the obligations under the contract impossible, illegal, or radically different. Where a contract is deemed to have been frustrated, the obligations under the contract no longer need to be performed. And then the contract is considered discharged.
Termination of a Construction Contract
As per ICTAD/SBD/01 – Clause 59 in Sri Lanka
According to Clause 59.1, the client or the contractor may terminate the contract if the other party causes a fundamental breach of the contract. In Clause 59.2 shows some examples of fundamental breaches of a contract. Those are as follows.
a) The contractor stops work for more than 28 days without any valid reason or any stoppage order from the consultant.
b) When the client or the contractor is bankrupt.
c) If the client does not release payment due to the contractor within 91 days from the submission of the payment statement by the contractor.
d) When the contractor is not maintaining the performance certificate in live condition.
e) If the contractor does not complete the construction within the number of days for which the maximum amount of liquidated damages can be paid.
f) When the consultant order to suspend the construction work and not withdrawn the order. When this happens, as per clause 64.4, if the stoppage continues for more than 84 days, the contractor may request from the consultant permission to proceed. If the consultant does not permit to start work within 28 days from the request, the contractor may treat suspension either as an omission, or if the suspension is for whole work, then submit his notice of termination.
g) If the contractor engages in corrupt or fraudulent practices, in competing or when executing the contract.
However, according to Clause 59.3, the consultant can decide whether the breach is fundamental or not for any cause other than in the above list of causes.
Termination of a contract for convenience
According to Clause 59.4, other than the above causes, the client may terminate the contract for convenience. That means the client may terminate even where the contractor has done nothing wrong. This situation may arise due to various reasons. It may be due to the client’s financial inability to proceed. Or else it may be the inability to obtain necessary government approvals to proceed, etc. Anyhow, the contractor has an entitlement to negotiate a settlement for a reasonable recovery of cost and losses suffered.
Clause 59.5 tells after receiving the termination order from the client, the contractor to stop work immediately, make the site safe and secure and leave as soon as possible.
The property at the site after termination
As per clause 61.1, if the termination was due to contractor’s fault, all materials, plants, equipment, temporary works and works carried out so far are deemed to be the property of the client. Retained contractor’s equipment will be released to the contractor only after the payment of all debt due to the client from the contractor. However, during that period the client may use that equipment.
Payments after termination
There are two situations to consider.
One situation is the termination of the contract by the client because of a fundamental breach by the contractor. The other situation is the termination of the contract for the convenience of the client or the fundamental breach by the client.
In the first situation, after termination, the consultant can issue a payment certificate for the work done so far and the materials ordered. However, the client can deduct the remaining amount of advance payment and percentage applied to the value of the uncompleted works from the payment. If the amount due to the client is more than the amount due to the contractor, then the contractor is in debt to the client for that amount.
In the second situation, the consultant can issue a payment certificate for the work done so far and the materials ordered. However, the contractor can claim reasonable cost for removal of equipment and return of contractor’s personnel employed for the work. Additionally, if there are any cost due to the contractor for protecting and securing the work after termination may also be added. However, the remaining amount of the advance payment must be deducted as in the earlier situation. Additionally, the contractor can claim for any loss of profit or damage sustained as a result of the termination