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Ending the contract and handling breaches

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By , construction economist

Information verified on 8 min read

What you will learn Five ways a construction contract can go off the rails, the price of each one under the Law of Obligations Act, how the client's own delay affects the bill, the procedure for defects and fundamental breach, and the limits of a contractual penalty.

When a construction project does not go to plan, the client usually looks for someone to blame. It is more useful to ask what each possible way out will cost, because the Law of Obligations Act (võlaõigusseadus, VÕS) already sets a calculable price for most of them. A client who knows the price of each way out before the conflict negotiates better than one who argues about it later in court.

The price of each way out

The client can leave a construction contract on several legal grounds, and each of them has a different financial consequence. For the parties to a contract for work, the VÕS uses the terms tellija (the client) and töövõtja (the contractor) (§ 635(1)); in practice people also speak of the peatöövõtja (the main contractor), but that term does not appear in the Act. The table below brings together the main cases.

Situation Legal basis What the client pays Where to read more
The client terminates the contract without cause VÕS § 655(1) the agreed fee, less the contractor's savings and what the contractor gained or could have gained by using its workforce elsewhere the article on the right to terminate
The client terminates the contract because a non-binding estimate is substantially exceeded VÕS § 639(3) nothing above the estimate the article on the right to terminate
The contractor commits a fundamental breach (defects are not repaired) VÕS § 647, § 655(2) the § 655 compensation rule does not apply; the client may withdraw from the contract the article on defects
The client itself is late with a decision, material or instruction VÕS § 652 the contractor's loss; in the case of a fundamental breach, the fee for the work done and the expenses the article on client delay
The contractor is late and the contract contains a contractual penalty VÕS § 158, § 162 the contractor pays the client, but a court may reduce an unreasonably high penalty the article on contractual penalties

The table leads to a first practical rule: choose the legal basis before sending the notice, not afterwards. The same event, for example a project that has dragged on, can lead to very different bills depending on whether the client terminates under § 655 or withdraws because of the contractor's fundamental breach. In the second case the client does not have to pay the compensation under § 655, but must prove that the breach exists.

Terminating at any time is not free

The client may terminate a contract for work at any time (VÕS § 655(1)), but this is a way out, not a saving. The contractor keeps its right to the agreed fee, less what it saved because of the termination or earned elsewhere. In substance, the client pays for the work done plus the price of the part not done to the extent that the contractor neither saved it nor earned it elsewhere; on top of that comes the price of a new contractor hired to finish the building.

The position is different if the reason for termination is a substantial overrun of a non-binding estimate: under § 639(3) the client does not have to pay a fee above the estimate. Here, eelarve (estimate) means the estimated cost of the work agreed in the contract within the meaning of VÕS § 639, not the company's internal calculation.

The client can also increase the bill itself

A breach is not only the contractor's problem. If the client has to do something, for example supply material or an instruction or cooperate in some other way, and is late in doing so, the contractor may claim compensation for the loss caused by the delay (VÕS § 652(1)). If the delay is also a fundamental breach of contract, the contractor may terminate the contract and claim a fee corresponding to the work done and the expenses not covered by the fee (subsection 2). A late decision therefore costs money even when no contractor on site does anything wrong.

Defects and fundamental breach

When there is a defect, the client's first obligation is a prompt inspection and notice, not a financial claim. A client acting in a professional or business capacity must inspect the work without delay (VÕS § 643) and give notice of any non-conformity with the terms of the contract within a reasonable time and with sufficient precision (§ 644). The contractor bears the cost of repair (§ 646(4)); if it does not repair within a reasonable time, the client may remedy the defect itself or have it remedied and claim compensation for reasonable expenses (§ 646(5)). If the repair fails or is refused without good reason, this is a fundamental breach and the client may withdraw from the contract (§ 647).

Contractual penalty: a protection that can shrink

A leppetrahv (contractual penalty) is a sum agreed in the contract that the party in breach pays (VÕS § 158), but its amount is not final. At the debtor's request, a court may reduce an unreasonably high contractual penalty to a reasonable amount; this right cannot be excluded by contract, and a reduction can no longer be claimed once the penalty has been paid (§ 162). A penalty that is too high therefore does not protect the budget any better: it becomes the subject of a dispute or finds its way into the tender prices.

A contingency does not replace a calculation

The price of a way out belongs in the final cost forecast, not under a general contingency line. The size of the contingency and how it is used are covered in a separate article on contingency and unforeseen costs; what matters here is only that the compensation for termination or the extra cost of a new contractor must be calculated separately, before the decision is taken.

The articles in this branch

  • The article on the client's right to terminate at any time covers how the compensation under VÕS § 655 is calculated, how it differs from termination because of an overrun of the estimate, and termination by the hankija (the contracting authority) under § 124 of the Public Procurement Act.
  • The article on delay caused by the client covers the consequences under VÕS § 652 and § 653 and how a decision schedule and a written trail reduce the client's risk.
  • The article on defects, repair and fundamental breach covers the notice periods, the cost of repair, withdrawal and the limitation of claims.
  • The article on contractual penalties and their limits covers the link between the penalty and the client's actual loss, the cap and the rules on reduction by a court.

This article describes the legal rules as at the date of checking and is intended for professional orientation. It does not replace legal advice or a review of the specific case.

Frequently asked questions

Yes, VÕS § 655(1) allows the client to terminate a contract for work at any time. The contractor then keeps its right to the agreed fee, less its savings and what it earned elsewhere.

If the client terminates the contract because of the contractor's breach of contract, the § 655 compensation rule does not apply (§ 655(2)). The client must, however, be able to prove the breach, which is why a written trail is decisive.

If the contractor does not remedy the defect within a reasonable time, the client may remedy it itself or have it remedied and claim compensation for reasonable expenses (VÕS § 646(5)). Before doing so, the client must give notice of the defect in time.

Not necessarily. At the debtor's request, a court may reduce an unreasonably high contractual penalty (VÕS § 162(1)), and that right cannot be excluded by contract.

Explore the articles in this guide

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