The client's right to terminate at any time, and what it costs

The section is headed "The client's right of termination", and its first subsection is short. VÕS § 655(1), in an unofficial translation: "The client may terminate a contract for work at any time. If the client has terminated the contract for work, the contractor has the right to claim the agreed fee, less what the contractor saved as a result of the termination of the contract or acquired, or could reasonably have acquired, by using its workforce otherwise."

The second subsection limits the scope of the provision. Under § 655(2), the first subsection does not apply where the client terminates the contract because the contractor has breached it. In that case this is not a free termination but a remedy arising from the breach, with different consequences.

Three conclusions follow from the provision, and they matter financially for the client:

The Supreme Court's case-law review on contracts for work (2022) refers to the client's right of termination through several decisions (3-2-1-79-16, 3-2-1-171-15, 3-2-1-59-13 and 3-2-1-64-11). The review restates the calculation rule in § 655(1) (2-13-40856/124, para 11; 3-2-1-171-15, para 15) and the exception in subsection 2 (3-2-1-59-13, para 14), but gives no more detailed guidance on calculating the savings. No calculation rules more precise than the text of the Act itself can therefore be derived from published case-law. The client should work from the wording of the provision and document its own calculation.

The amount of the compensation can be estimated before terminating, once the contract and the state of the work are known. The calculation has three parts, which follow the logic of the provision.

1. Work done. This is the part of the contract price corresponding to the work done by the time of termination. Some of it has usually already been paid through interim invoices; the rest is owed.

2. The price of the part not done, less savings. The costs the contractor will no longer bear are deducted from the price of the work not done: materials it does not have to buy, subcontractors whose contracts end, site costs that stop. What it has already ordered and cannot return is not a saving. What remains is mainly the margin on the part not done and the costs the contractor cannot avoid.

3. Other use of the workforce. If the contractor moves its workers to another site, or could reasonably have done so, that income is also deducted.

It is sensible for the client to ask the contractor for information on these three blocks: orders and whether they can be cancelled, the status of subcontracts, the plan for redeploying the workforce. The Act does not say which documents the contractor must provide, but without them neither party can check the calculation.

The following example is entirely fictitious and only shows how the calculation is structured.

The claim of €170,000 consists of the work done (€150,000) and the remainder for the part not done (250,000 − 215,000 − 15,000 = €20,000). For the client, however, this is not the whole price. To finish the building, a new contractor has to be hired, whose price for a half-finished site is rarely the same as the price of the part not done under the original contract, and on top of that come delay and a possible dispute over the quality of the work done. A decision to terminate therefore requires two calculations: the compensation to the old contractor and the cost of the remaining work with the new one.

The same wish to end the contract can rest on three different provisions, and their financial consequences differ considerably. Before sending the notice of termination, the client should decide which basis it relies on and state it in writing.

The overrun basis is narrow but favourable to the client. VÕS § 639(3): "If the client terminates the contract because the estimate is exceeded, the client is not required to pay the fee exceeding the estimate." Here, eelarve (estimate) means the estimated cost of the work agreed in the contract within the meaning of § 639, which may be binding or non-binding on the contractor; where nothing has been agreed, it is presumed to be binding (§ 639(1)). For notice of the overrun and its three conditions, see the article on a substantial overrun of the estimate and the duty to notify. According to the Supreme Court's case-law review, the client must be able to choose between accepting the overrun and terminating the contract; this is a trend in published decisions, not a statutory provision.

The fundamental breach basis requires evidence. If the client relies on the contractor's fundamental breach but cannot prove it, the reason why § 655(2) would apply in its favour also falls away, and the question of compensation remains open. The trail of the breach must therefore exist before the notice of termination: notices, deadlines and construction records. The procedure for defects, repair and withdrawal is covered in this branch's article on defects and fundamental breach.

Delay and contractual penalties are a separate question. If the reason for ending the contract is the contractor's delay, the contract may contain a contractual penalty, and claiming it has to be coordinated with the termination. The amount of the penalty and the limits of reduction by a court are covered in the article on contractual penalties and their limits.

The Act provides the framework, but a construction contract often contains its own termination terms. Before signing, and again before terminating, it is worth looking for at least four things in the contract.

• Notice period. Does the contract require notice of termination and, if so, how long? During the notice period the work usually continues and has to be paid for.
• A fixed sum or percentage. If the contract sets a fixed sum, or a percentage of the part not done, payable on termination, it has to be compared with the calculation under § 655. A contract term can be either more favourable or more costly for the client.
• Handover of work and materials. Who gets materials that have been ordered but not installed, in what state the site and the construction records are handed over, and who prepares the certificate of work done.
• Subcontracts. Does the client have the right to take over the subcontracts? If so, this may reduce both the compensation and the delay in finding a new contractor.

These terms decide the real price of the way out as much as the Act does. Assessing how the wording of the contract relates to the Act in a specific case is a matter for legal advice; the aim here is for the client to know what to look for.

A public-sector client, the hankija (the contracting authority), is also bound by the Public Procurement Act (riigihangete seadus, RHS) where a public contract is concerned. Under RHS § 124(1)(1), the contracting authority may, among other things, terminate or withdraw from a public contract if the contract has been modified in a way that § 123 does not permit. This protects the contracting authority where a modification of the contract has gone beyond the statutory limits; the limits themselves are covered in this guide's public procurement branch.

On the date of checking, the version of the Public Procurement Act in force is one whose validity ends on 31 October 2026. Until 31 October 2026 the current rules apply; on 1 November 2026 an amendment to the Act enters into force. The amending Act (RT I, 03.07.2026, 3) does not change § 124, so the contracting authority's right to terminate stays the same after 1 November 2026.

Termination is simple in law and complicated in money. The practical order is as follows: determine the basis (§ 655, § 639(3) or § 647), calculate the compensation block by block, estimate the cost of the remaining work with a new contractor, read the contract's termination terms, and only then send a written notice naming the basis. Preparing and updating the final cost forecast is covered in the budgeting guide's article on tracking costs during construction; a decision to terminate is one scenario of that forecast, which should be compared with the scenario of continuing.