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.

 

“You’re Fired. Get Off My Property”

Have you heard those words from an owner? Last week I got a call from a contractor who had been told exactly that. He still had tools and equipment on the job. He was owed money. His crew and subs expected to be paid. Now what?

A contractor terminated for good cause could be liable for both the extra cost of finishing the job and the cost of fixing everything the owner didn’t like about the original work.

What would you do?

First, understand there is only one cheap, quick solution in a case like this: a heavy dose of common sense. An owner who orders a contractor off the job has grievances, either real or imagined. Offer to resolve every one of those issues. Then make that offer in writing. Save a copy for your file. An owner who refuses your offer to continue work on the owner’s terms has breached the contract. If the case ends up in court, you’re the one who acted reasonably. Documents in your file will prove that.

If common sense doesn’t help, the law has answers. An owner who orders a contractor off the job without good cause has committed a breach of contract. The contractor is entitled to payment for work completed plus lost profit. But an owner's breach of contract is excused if the contractor was the first to commit a material breach of the agreement. A material breach is a question of fact, usually decided by a jury.

The courts could take years to decide who committed the first material breach. Legal fees in a case like that will be many thousands.

Better Choices

Arbitrate. If your contract requires arbitration, do exactly what your contract requires. If you have agreed to arbitrate, no court will hear the dispute. Mobile mediators and arbitrators are available in nearly every major city. Some will meet on the job site and provide a written decision in a matter of days. That decision is fully enforceable, just like a judgment in court.

Record a lien on the property. Lien rights are entirely separate from contract rights. A recorded lien gives you the right to foreclose. But watch four points: (1) Where a license is required, unlicensed contractors don’t have lien rights. (2) If the construction site is the primary residence of the owner, there are no lien rights if the owner didn’t get the Federal 3-day right to cancel form. (3) Your lien must be recorded promptly after work stops. (4) You have a limited time to bring a foreclosure suit after recording a lien. Wait too long and your lien rights are gone.

Look to your contract. Many construction contracts give either the owner or the contractor or both the right to terminate – either for cause or without cause. If your contract has a termination clause, contract terms will explain who has to do what after termination.

A good contract is your best protection against an unreasonable owner. The best contract drafting tool I know is Construction Contract Writer. The trial version is free.