Bailing Out of a Bad Contract

Most of what you read here is about drafting good contracts, not about bailing out of bad deals. But bad deals happen – such as to a Florida contractor I advised last week. “How do I get out of this contract?”

I’ll count the ways.

First, understand the measure of damages, what you stand to lose by simply walking off the job. That's material breach of contract. You’ll be liable for the difference between your contract price and what it cost the owner to have another contractor finish the job. But that’s just the beginning. The owner can claim attorney fees (for bringing suit) and file a grievance with the state license board. If you lose the suit for damages and don’t pay, the owner can make a claim against your license bond. If the bonding company pays off, they’ll come after you to recover their loss.

That’s the worst case. But it doesn’t have to happen.

Obviously, the key words here are material breach of contract. The first to commit a material breach will be liable for damages. See my blog post on breach of construction contract. 

Any act by the owner that smacks of material breach can release your contract obligations.

If the Owner Didn’t Breach?

All is not lost. A surprise in the job can open the contract to re-negotiation. Surprises (changed conditions) come in hundreds of flavors. See my blog post.

Contractors are not insurance companies. No contract requires that you overcome every conceivable challenge (changed condition) on site.

Another example: Suppose you discover the owner is slow-pay or short on cash. What then? No contractor has to keep working when an owner has stopped paying.

What if you under-bid the job and can’t possibly perform at the price quoted? Again, all is not lost. I have a friend who did exactly that – on a contract with a government agency. At bid opening, his price was many thousands lower than the next lowest bidder. Turns out, his estimate had omitted finishing the entire second floor. My friend’s company completed the job anyhow – and ended up in bankruptcy. I don’t recommend that.

If you under-bid a job and want out, your legal counsel will advise on the doctrine of mistake. Courts will “reform” (re-write) a contract for some types of mistakes:

• An error in calculation, especially if the mistake is obvious.
• An error so serious that enforcement would be irrational.
• Where the contractor relied on some fact the owner knew wasn’t true.
• When both contractor and owner assumed something fundamental about the job that wasn’t true.

The most common mistake is omitting something from the estimate. On private jobs, it’s easy to shift that risk to the owner. Make your estimate define the job. Anything not included in your estimate is not part of the job. Construction Contract Writer offers good options.

Another way out: write into the contract a termination clause – either for cause or for no cause at all. My recommendations are here.  Construction Contract Writer makes that easy. The trial version is free.

Contract Termination Your Way

Earlier this month I got a question from a construction contractor negotiating a deal with the owner’s attorney. The attorney wanted a termination clause in the agreement. The contractor wanted the job but didn’t want to give his client the right to back out of the deal once work started.

“Why even have a contract if the owner can terminate the job any time he wants?”

Good question. But there’s a good answer. First, a few basics.

There are two types of termination in construction contracts. Type one is termination for cause. For example, repeated failure to correct defects could be grounds to terminate for cause. That’s not what the attorney in this case wanted. He wanted the right to terminate at any time for “convenience of the owner.” That means for any reason at all – or even no reason at all. I know that sounds horrible to most contractors. But stay with me.

Termination for convenience clauses are very common on larger jobs. Public works contracts usually give government the right to terminate for convenience. After all, governments are political organizations supported by taxpayers. Politicians come and go. Taxpayers can be fickle. A new mayor or governor or agency head may have different priorities. Governments need some legal way to revoke commitments made by deposed politicians.

Even contracts for larger private projects commonly give owners the right to terminate at will. For example, Section 14.4 of A.I.A. contract form 101 allows an owner “terminate the contract for convenience and without cause.” Again, you can think of many reasons why an owner might have to terminate. Maybe a lender defaulted on a loan commitment. Or maybe rock discovered on site makes the cost of work prohibitive.

Make Termination Work for You

So, let’s assume your contract will include a clause allowing termination for convenience of the owner. Now what? That’s easy. It’s time to do some contract drafting. On termination, you collect:

• For all work completed, including labor, material, overhead and profit.
• Overhead and profit on the portion of the job not yet completed.
• For all charges imposed by subs, suppliers and others that result from termination.

Then, be sure your contract includes protective language. Termination for convenience:

• Must be in writing and must show an effective date.
• Constitutes a waiver of any breach by the contractor.
• Is acceptance of work done to that date.
• Relieves the contractor of further responsibility under the agreement.
• Requires payment in full within 30 days after contractor submits an invoice.
• Any partial termination must describe the work being terminated.
• Changes in the job require a change order, not a partial termination.

With those clauses in your agreement, what contractor wouldn’t be willing to turn the job over to others? I’m not suggesting that, of course. Contractors thrive on building a reputation for professional work and a list of satisfied clients. But if the job turns sour, it’s better to walk away with a good financial settlement.

Where can you get help with contract drafting like this? That’s easy. Construction Contract Writer covers all the bases: Have a look at the trial version. It’s free. Then you decide what fits best in your agreements. Termination by either the owner or the contractor and either for cause or for convenience. It’s your call.