Construction projects rarely go exactly as planned. At the same time, contractors and subs are typically good at rolling with the punches. But, when a project is suffering due to a construction business failing to uphold their end of the bargain, hard choices must be made. One of the hardest choices might be moving forward with termination for cause.
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What is a Termination for Cause?
A termination for cause is when a construction business is terminated for failing to execute their contract. When a termination for cause is in play, typically, the issue giving rise to the termination is serious. Small or inconsequential missteps won’t typically result in a termination for cause. Instead, these terminations are usually reserved for substantial issues and repeated shortcomings. Plus, the terms of a contract will set out exactly how the termination will occur, as well as what events would even justify the termination.
When Is a Termination for Cause Appropriate?
Whether a termination for cause is appropriate or not will ultimately come down to the terms of the contract (more on that shortly). But, as mentioned above, every little issue won’t justify the termination of the agreement. Still, here are some common reasons for terminating a contract for cause:
- Poor Workmanship/Defective Work
- Consistent Failure to Perform According to Schedule
- Failure to Pay Subcontractors, Suppliers, or Laborers
- Use of Materials or Equipment Inferior to Contract Specifications
- Understaffing the Project
- Failure to Communicate
Note though, that a singular instance of any of the issues described above might not serve as grounds for terminating the contract. Rather, termination for cause is generally reserved for a substantial issue.
Termination Must Be Done According to the Contract
Terminating a construction contract is serious business. Construction is an extremely litigious industry these days, and no one wants to terminate an agreement only to be sued right after. That’s why it’s extremely important to do things by the book when terminating for cause.
Can the Contract be Terminated?
Many construction contracts will set out specific circumstances which justify terminating the agreement. When specific reasons are outlined which will give rise to the termination of the agreement, it’s important to determine if the current situation satisfies anything set out by the contract. Just as important, though, might be what isn’t set out as a valid reason to terminate the contract. If a contractor or owner wants to terminate an agreement due to a specific issue, but the contract doesn’t explicitly allow for termination on those grounds, terminating the deal could be tricky.
What if Termination Provisions Are Vague or Aren’t Included in the Contract?
In other cases, things may be left a little more vague – the contract may broadly reserve the right to terminate the contract for breach of the agreement. Or, the contract may be completely silent as to when termination is justified. That doesn’t mean any little grievance is grounds for termination. When the agreement is vague (or silent), it may be worthwhile to look into case law in your state or to better understand what’s customary for the construction industry in your jurisdiction. Regardless, before going through with terminating a contract for cause, it’s imperative to proceed with caution.
Notice May Be Required Before Termination (Notice of Default)
It’s also very common for a construction agreement to require notice before termination can occur. This is often referred to as a notice of default. Basically, when notice is required, the party who will be terminated must first be given notice that they’re in default of their contract. Before any termination can occur, the recipient of a notice of default would then be given the opportunity to cure the problem – and the timeframe for that cure would be set out under the contract, as well. If, after that timeframe ends, the issue could not be cured – termination might be appropriate.
When a contract requires notice before the deal can be terminated, it is critical to give the proper time and notice before termination. Even if there are perfectly valid grounds for terminating the agreement, failure to provide notice could create extensive liability for whoever is terminating the agreement.
Termination for Cause Should Be the Last Resort
Construction disputes and lawsuits spring up from any number of issues, but termination can be the most costly. If termination occurs but is later determined improper, the party who terminated the agreement may be liable for serious damages – including, potentially, lost profits. So, if possible, some other route should be taken.
Options Other Than Termination
It may go against every fiber of your being, but sometimes, deciding not to terminate the agreement might be the best course of action. There are typically some other options that should be evaluated before deciding to follow through with a termination.
Talk it Out
Talking it out won’t always be an option, but it really could be the best way to keep a project on track and to avoid bigger issues. Taking the time to communicate with a construction business that’s been struggling can help to sort things out. Sometimes, it could be a simple misunderstanding or miscommunication. But, even if there is a more serious issue, discussing the problem could serve to get that contractor or sub back on track.
Reduce the Scope of Their Work or Responsibilities
If the contract allows it, reducing a construction company’s scope of work could be a preferable alternative to taking them off the job altogether. There may be a few different ways to do this – like through supplementation, deductive change orders, or via partial termination. In some situations, directly paying another party’s subs and suppliers, purchasing materials themselves, or hiring additional laborers could help to mitigate the potential fallout – even if termination ultimately becomes necessary.
Termination for Convenience
If a construction contract allows for termination for convenience, taking that route will usually be preferable than battling it out based on termination for cause. Think about it – a termination for convenience clause allows for canceling the agreement without any reason at all. Now, terminations for convenience can’t be made in bad faith, so there are some limitations. But, compared to a termination for cause, a termination for convenience alleviates a lot of the burdens described above. If a termination for cause is on the table, it’s worth double checking to be sure that the contract can’t be terminated for convenience – especially when it looks like the dispute might really blow up.
For More on Termination for Convenience:
Regardless of whether termination is on the table, construction document management is crucial. It’s a good idea to keep extensive documentation of all contracts, change orders, daily reports, invoices, pay apps, lien waivers…the list goes on and on. But, when termination is looming, keeping thorough documentation is even more important – especially if a legal battle gets underway.
Leading up to a termination, it’s important to detail all issues serving as grounds for termination. It’s also crucial to keep a record of any notices given, as well as to document any attempts to cure an outstanding issue. Finally, all communications following the termination should be kept on file, as well.
Remember – Termination Might Not Be Cheap
Construction projects are controlled chaos – there are a ton of moving parts, and everyone’s work is interdependent. When a contract is terminated – whether that be via termination for cause or convenience – there’s usually a pretty thorough wind-down process.
Payment must still be made for any work already performed. If there are outstanding amounts owed to the terminated party’s subs and suppliers, they may need to be paid off to avoid further disputes. The costs of correcting defects, replacing materials, or regular demobilization costs could come into play, too. The most significant cost of termination, though, will typically be finding a substitute contractor or subcontractor to finish the work.