Wrongful termination is a term that gets thrown around loosely. Most times, when termination is in play, tempers are high, and decisions are made impulsively. Given how severe termination is, owners, contractors, and subs should be wary of the potential consequences of wrongful termination.
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Wrongful Termination, in a Nutshell
Wrongful termination is pretty much exactly like it sounds: it refers to a termination based on improper (wrongful) grounds. If a construction contract is terminated on a basis that’s not provided by contract, that might be a wrongful termination.
When is Termination Considered Wrongful?
Typically, there are two ways for termination to occur on a construction project: termination for cause and termination for convenience. These are usually guided by termination provisions in the contract, and those provisions will often set out reasons and procedures for successfully terminating the contract.
Termination for Cause
When terminating a contract for cause, there must be some material breach of contract. However, it’s absolutely common for one side to try and terminate an agreement based on improper grounds. If that happens, wrongful termination will come into play. Even if the grounds for termination are legitimate, if proper procedure wasn’t followed, wrongful termination may still come into play (more on that in a second).
Termination for Convenience
When a contract is terminated for convenience, it’s easier to determine whether that termination was wrongful. First, if the contract doesn’t specifically allow for termination for convenience, it can’t be terminated on a whim. But, even if termination for convenience is allowed under the contract, if the termination is made in bad faith, it still may be wrongful.
Wrongful Termination Due to Procedural Requirements
Whether you’re looking to terminate someone, or whether you’ve been terminated yourself – always refer back to the contract. Termination clauses typically contain specific procedures that must be followed in order to terminate the agreement. The most prevalent being a notice of default and an opportunity to cure the defective work. Even if the termination is based on an apparent material breach, failure to follow these procedures could result in a wrongful termination.
Further Termination Talk:
- Termination for Cause | When Can Construction Contracts be Terminated for Cause?
- Termination for Convenience | Can Your Customer Terminate You Without Good Reason?
- How a Termination Clause Works in a Construction Contract
Damages Available for Wrongful Terminations
If the termination is ultimately determined to be wrongful, the terminating party will typically face some form of damages. Damages for wrongful termination can be direct damages, consequential damages, or any other damages necessary to place the non-breaching party in the position where they would have been if been appropriately executed. Let’s take a look at what sorts of remedies are available from a contractor perspective and an owner perspective.
Remedies When the Customer Terminates the Agreement
If the customer wrongfully terminates, the first thing available will be the cost work already completed. And keep in mind – retainage represents amounts that are actually owed for work already performed, so that’s on the table too. Lost profits may also be available, depending on the circumstances – particularly when the project reached substantial completion prior to termination.
Customer Remedies When The Agreement is Terminated
Conversely, when a contractor or sub wrongfully terminates the contract with their customer, several remedies are available as well. They might be able to recover the costs of completing the work. They may also recover any delay damages and potentially lost profits. Where the customer is the property owner or tenant and the building is for commercial purposes, a contractor could really find themselves in a bind. There’s also the possibility of recovering any costs related to the extended project management and administration.
As stated above, there are two general types of termination, for cause and convenience. If the construction contract contains provisions for both, it may be impossible to wrongfully terminate the contract if there’s conversion language present. Most termination for convenience provisions include a conversion clause. These will typically state something along the lines of:
“if it’s determined that a termination for default was unjustified for any reason, the termination shall be deemed a termination for convenience.”
This clause acts as a safety net of financial risk in case the termination is wrongful. The reason being that remedies under the termination for convenience don’t include lost profits, and are almost always less than termination for cause remedies.