Deciding to terminate a subcontractor is not a decision that should be taken lightly. There are a lot of risks and costs associated with termination, even if the termination is warranted. In addition to that, there are almost always notices and procedures that are included in a termination clause that must be strictly adhered to. Failure to follow these procedures can be incredibly costly. And that’s exactly what happened in a case out of Connecticut.
Termination clauses
Just about every construction contract contains some sort of termination clause. These will typically include timing mechanisms, notice requirements, and potentially an opportunity for the contractor to repair their work. It’s important to adhere to these requirements strictly. Failing to do so can result in wrongful or improper termination, and could be an expensive mistake.
A recent Connecticut Court of Appeals case exemplifies how costly this can be.
Terminating a Subcontractor | What are the Risks, Costs, and Procedures?
Early changes lead to disputes
The case in question is Semac Electric, Co. v. Skanksa U.S.A. Building, Inc.
Project Snapshot
- Project: Stamford Medical Center
- General Contractor: Skanska U.S.A. Building, Inc. (Skanska)
- Subcontractor: Semac Electric, Co. (Semac)
Stamford Medical Center hired Skanska as the general contractor to oversee their expansion and renovation. Skanska hired Semac as a subcontractor to perform all of the electrical work associated with the project. While still within the early stages of the project, there were around 38 different change orders to deal with.
Sub threatened to stop work so the GC terminated them
In response to all of these change orders, Semac sent a Notice of Cardinal Change to Skanska. This notice stated that there had been cardinal changes that unreasonably altered the character of the work and unduly increased its costs. Furthermore, if Skanska couldn’t find an equitable solution, that Semac would cease work and seek compensation for work performed through that date.
Skanska informed Semac that its refusal to proceed constituted a default under the contract. And the next day, Skanska terminated Semac effective immediately. Furthermore, it would also seize Semac’s tools, materials, and equipment under the default termination provisions of the contract. Skanska subsequently hired others to finish the electrical work on the project.
Improper termination is a breach of contract
Semac claimed that the changes were so extensive that they constituted a “cardinal change,” which amounted to a repudiation of the contract. As a result, they argued, this justified the suspension of work. They filed suit claiming breach of contract for the cardinal changes and wrongful termination. Skanska denied all of the allegations and filed a countersuit for breach of contract. They argued that Semac failed to complete the work under the contract. They were seeking over $26M in costs for hiring replacement subs and suppliers.
The court found ultimately found that both parties had breached their contract. They stated that the changes didn’t alter the basic character of the contract, and abandonment wasn’t justified. Furthermore, Skanska also breached the terms of the contract due to failure to provide the required 48-hour notice and opportunity to cure. Both parties appealed.
Termination requires notice according to contract
As far as Semac’s claims were concerned, the appeals court upheld the lower court decision. The court reasoned that on projects of this magnitude, minor delays, changes, and strain are routine. Semac should have anticipated change orders due to the extent of the contract.
The court also still found Skanska to be in breach of contract for wrongful termination. They attempted to argue multiple different reasons why Semac wasn’t entitled to the full 48-hour notice. Particularly since Semac had breached the contract first and abandoned the project. They also claimed that there was no indication that they planned on returning to the project, even if provided the 48-hour notice.
This argument didn’t persuade the court at all. Skanska was bound by the contract terms. They were required to follow an expressly written procedure, and failed to do so.
Follow termination provisions closely
At the end of the day, a 24-hour difference when sending notice of termination cost Skanska over $26M in recoverable replacement costs. This is exactly why those in the construction not only need to read and understand their contracts, but follow the notice and other procedural requirements as closely as possible. This is true no matter the circumstances. If there are notice or cure provisions, make it happen, even if you don’t think the contractor will do so.