Wrongful Termination in Construction: How to Respond and What Can You Claim?

A construction contract cannot usually be terminated simply because the employer is dissatisfied with the contractor. The employer must have a proper contractual or legal ground for termination and, where the contract requires notices, cure periods or a particular method of service, those procedures must be followed.

Even if the termination is wrongful, proving that point is only half the case. The contractor must still prove what it actually lost because of the termination. Malaysian cases show that a contractor can establish wrongful termination and still recover only limited damages because the financial claim was not properly supported.

Start with the termination clause

The first document to read is the construction contract.

Most standard forms identify specific events that allow the employer to terminate the contractor's employment, such as abandonment, failure to proceed regularly and diligently, prolonged suspension or failure to comply with contractual instructions.

The contract will usually also prescribe a procedure before termination can occur.

The Federal Court in Catajaya Sdn Bhd v Shoppoint Sdn Bhd & Ors [2021] 2 MLRA 46 confirmed that contractual termination provisions are interpreted strictly. Where the agreement requires notice of a breach and gives the defaulting party time to remedy it, those requirements must be followed.

This matters because termination has serious consequences. It removes the contractor from the project and may expose it to completion costs, LAD, rectification claims and calls on performance security.

The employer should therefore be able to identify both the contractual ground relied upon and the steps it took before terminating.

Was a proper notice of default issued?

Many construction contracts use a two-stage process.

The employer must first serve a notice identifying the contractor's default and give the contractor a period in which to remedy it. Only if the default continues after that period can the employer move to termination.

Under clause 25 of the PAM Contract 2006, for example, the process commonly involves a notice of default followed by a separate termination notice if the relevant default continues.

The first notice should identify the actual breach clearly. A vague statement that the contractor is "in default" may not be enough where the contract requires the specific default to be stated.

The cure period must also be allowed to expire.

In Kembang Serantau Sdn Bhd v YBK Usahasama Sdn Bhd [2020] 2 MLRA 679, the Court of Appeal dealt with a termination issued before the contractual 14-day period had properly run. The termination was held invalid, wrongful and unlawful.

An employer may have legitimate complaints about performance, but that does not permit it to shorten a cure period that the parties expressly agreed upon.

Was the notice served correctly?

This is easy to overlook.

Construction contracts often state exactly how formal notices must be served. The clause may require registered post, recorded delivery, delivery to a specified address or another prescribed method.

In Fajar Menyensing Sdn Bhd v Angsana Sdn Bhd [1998] 6 MLJ 80, the contract required the relevant notices to be sent by registered post or recorded delivery. They were instead delivered by hand.

The court held that the prescribed procedure was mandatory and that the failure to use the agreed method of service was fatal to the termination.

For a contractor receiving a termination notice, the service clause should therefore be checked immediately. The issue is not merely whether someone eventually saw the letter, but whether the contractual method for exercising the termination right was followed.

Was there actually a serious enough breach?

Procedure is only one part of the enquiry.

The employer must also establish the default relied upon.

A contractor being behind programme does not automatically mean it has failed to proceed regularly and diligently. The causes of delay still need to be considered.

Late drawings, variations, delayed access, non-payment, interference by other contractors or unresolved EOT applications may all affect the position.

The same applies where most of the work has already been completed. A relatively minor outstanding item may justify a claim for rectification or damages without necessarily justifying termination of the entire contract.

The correct question is whether the breach falls within the termination provision or is sufficiently serious under general contract law to justify bringing the contractual relationship to an end.

Was the employer itself responsible for the problem?

An employer should not be able to create the very problem it later relies upon to terminate the contractor.

For example, if the contractor's progress was materially affected because the employer failed to make contractual payments, provide access or issue necessary information, those matters should be examined before accepting an allegation that the contractor simply failed to perform.

This becomes particularly important where the termination is based on delay.

The contractor should review its EOT applications, payment records, drawing registers, site instructions and correspondence to determine whether the alleged default was caused or contributed to by the employer.

A termination based on a completion date that had already been extended, or was no longer operative because time had become at large, may also be vulnerable.

Did the employer already choose to continue the contract?

A party that knows about a breach may sometimes choose to continue with the contract rather than terminate it.

This is known as affirmation.

For example, the employer may continue instructing work, grant further extensions, accept performance or allow rectification to continue after becoming aware of the alleged breach.

That conduct can affect whether the employer is later entitled to terminate for the same breach.

However, affirmation does not necessarily protect the contractor forever. A later or repeated breach may create a new right to terminate.

The issue is therefore highly dependent on what the employer did after becoming aware of the default and what particular breach the later termination relied upon.

Can the employer give a new reason after termination?

The termination letter matters because it records the basis on which the employer chose to end the contract.

An employer will face difficulty if it terminates for one reason and only later, during litigation, attempts to justify the termination on a completely different basis.

For the contractor, this means the termination notice should be compared against the employer's later allegations.

If the notice relies on delay, for example, but the defence later says the true reason was defective work or commercial dissatisfaction, that inconsistency may become important.

What should you do immediately after receiving a termination notice?

Do not react by immediately abandoning the site or removing everything.

First, review the termination clause, default notices, cure period and service requirements. Establish whether the procedure was properly followed.

Then send a written response reserving your rights and recording why you say the termination is invalid, if that is your position.

At the same time, preserve the project evidence. This should include progress photographs, site diaries, programmes, EOT applications, meeting minutes, payment certificates, variation records, material records, correspondence and records of the work completed as at termination.

A joint measurement of completed work, materials and equipment on site should be sought where possible.

This evidence is important because the dispute will usually involve two separate questions: was the termination wrongful, and how much money is owed as a result?

What can a contractor claim after wrongful termination?

The available claims depend on the contract and facts, but several categories commonly arise.

Payment for work already completed

The contractor may claim amounts properly due for work carried out before termination, subject to valuation, defects, valid set-offs and the payment provisions of the contract.

Outstanding variations may also be claimed where the contractual entitlement can be established.

Loss of profit on the unfinished work

Wrongful termination can deprive the contractor of the profit it expected to earn by completing the remaining works.

That loss may be recoverable, but it must be proven.

A simple percentage applied to the uncompleted contract value is not automatically enough. The court will want to understand the revenue the contractor would have received and the costs it would have incurred in completing that work.

Wasted expenditure

Instead of claiming expected profit, a contractor may in an appropriate case claim expenditure that was wasted because the contract was wrongfully brought to an end.

The contractor must be careful not to recover both expectation loss and reliance loss for the same breach.

The Court of Appeal in Delpuri Harl Corp JV Sdn Bhd v Perbadanan Kemajuan Negeri Selangor [2014] MLRAU 314 confirmed that a claimant must choose between claiming loss of profit and wasted expenditure rather than recovering both for the same loss.

Wrongfully withheld sums

Depending on the case, the contractor may also seek the return of retention money, wrongfully deducted LAD or sums obtained through an improper call on a performance bond.

Each item still needs its own contractual and evidential basis.

Proving loss of profit is often the hardest part

This is where many wrongful termination claims become weaker.

In Delpuri Harl, the contractor established that the termination was wrongful but failed to prove its claimed financial loss properly. The Court of Appeal ultimately awarded RM100,000 in nominal damages rather than the much larger loss claimed.

The lesson is important.

Winning on liability does not prove quantum.

A contractor claiming loss of profit should preserve project accounts, tender build-ups, budgets, subcontract costs, material costs, labour estimates, actual margins achieved before termination and evidence showing what it would have cost to complete the remaining works.

The Federal Court in Pancaran Prima Sdn Bhd v Iswarabena Sdn Bhd & Another Appeal [2020] 6 MLRA 124 accepted that an experienced arbitrator could draw on construction-industry knowledge concerning profit margins in assessing loss. However, contractors should not treat any percentage as an automatic legal entitlement. The safest claim remains one supported by the project's actual financial records.

Frequently Asked Questions

Does a technical mistake in the termination notice make the termination invalid?

Potentially, yes. Where the contract makes the particular notice, cure period or service method part of the termination procedure, failure to comply can invalidate the termination.

Can an employer terminate because the project is late?

Potentially, but the employer must consider the contract, EOT position, causes of delay and any required notices before relying on delay as a termination ground.

Can I claim all the profit I would have earned?

You may be able to claim lost profit, but the amount must be proven. The court will not simply assume that the balance of the contract sum would have become profit.

Should I leave the site immediately after termination?

Comply with lawful site-access requirements, but preserve your rights and evidence carefully. Do not destroy, remove or interfere with property without checking the contractual position.

Final takeaway

A construction termination should be reviewed from both the procedural and substantive angles.

The employer must have a proper basis to terminate and must comply with the contractual machinery, including the correct notices, cure periods and service requirements. A termination can fail even where there were genuine problems with the contractor's performance if the agreed procedure was not followed.

For the contractor, proving wrongful termination is only the first part of the case. The financial records supporting work done, variations, loss of profit and other losses are equally important.

A contractor that preserves those records immediately after termination will be in a much stronger position than one that waits until litigation has begun to reconstruct the project finances.

Speak to JPP LAW

Justin, Poh & Partners, also known as JPP LAW, assists employers, main contractors, subcontractors and consultants with construction termination disputes, extension of time claims, LAD, payment disputes, CIPAA adjudication, arbitration and construction litigation in Malaysia.

If a construction contract has been terminated and you need to assess whether the termination was valid or what amounts may be recoverable, you may contact us to review the contract, notices, project records and financial evidence.

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Disclaimer: This article is for general information only and does not constitute legal advice. Construction termination disputes depend heavily on the contractual termination clause, notices served, causes of delay, conduct of the parties and evidence of the losses claimed.