I’ve Been Terminated on a Construction Project – What Does This Mean?
A contractor fears few events on a project more than receiving a notice of termination. Receipt of the dreaded notice may arrive expectedly or as a surprise. Either way, termination does not always mean that the contractor must bear responsibility for the owner’s costs to complete the project. Instead, the owner may bear responsibility if it incorrectly terminates the contractor.
Courts recognize three types of termination: termination for cause, termination for convenience, and wrongful termination. Frequently, “standard form” construction contracts, such as those published by the AIA, identify events of default that can result in termination for cause. Generally, the owner may terminate for cause if the contractor: (1) repeatedly failed to supply enough skilled workers or proper materials; (2) failed to pay subcontractors; (3) repeatedly disregarded laws; or (4) was otherwise in substantial breach of the contract. Many contracts require notice and an opportunity to cure the default before termination for cause. If the contractor timely cures, then the owner cannot terminate for cause. If properly terminated, the contractor may be liable for the owner’s costs to complete the project.
Unlike a termination for cause, a termination for convenience may occur in the absence of a breach. However, the owner can terminate for convenience only if allowed under the contract. Termination for convenience provisions are commonly found in construction contracts and standard in AIA contracts. As long as the owner follows the procedure contained in the contract, it may exercise the right to terminate for convenience. In many states, the only limitation is that the termination cannot be made in “bad faith.” What constitutes bad faith tends to be fact-specific. In a termination for convenience, the contractor has no liability to the owner. Instead, the contractor may typically recover its outstanding costs, plus overhead and profit for work it performed, unless the contract expressly limits a contractor’s damages after the termination.
Lastly, if an owner had no basis to terminate for cause and did not exercise its contractual rights to terminate for convenience, then the owner breached the contract and the termination was wrongful. In that case, the contractor can recover its outstanding contract balance, as well as its expected profit on the project.
There is a caveat to the rule that an improper termination for cause constitutes wrongful termination. Sometimes the contract will include language expressly providing that an improper termination for cause gets converted into termination for convenience. This language is enforceable but is the exception rather than the rule. Generally, where there exists no cause to terminate, the termination is wrongful.
If terminated, contractors should always attempt to show that there was no cause to terminate. This process begins prior to termination. Specifically, at the owner’s first suggestion that cause exists to terminate, the contractor should state its disagreement in writing. The contractor should also prepare documentation to rebut any contention that cause exists to terminate and to support any legal defenses, such as waiver by the owner of the schedule deadlines, impossibility of performance, or substantial completion (the project was substantially complete at the termination). Further, if the owner is correct that there is cause, the contractor should cure its default prior to the owner sending the notice to terminate. This enables the contractor to prepare a defense upon the notice to terminate and allows the contractor to avoid liability for the owner’s completion costs.
The difference between termination for cause, termination for convenience, and wrongful termination can be the difference between having to pay the owner or recovering from the owner. Knowing how to proceed is of critical importance. The attorneys at Cohen Seglias are here to provide you with the legal advice to guide you through this process.
