Termination
In the construction context, “termination” means to end a contract before its full performance or completion. A construction contract or subcontract might be terminated by either of the parties to the contract.
Termination of a construction contract may either be legal or wrongful, depending upon the circumstances. If the other party substantially breaches the contract, the non-breaching party is usually entitled to terminate. To be substantial, the breach must generally be of considerable importance-one which goes to the heart of the contract.
An example of a substantial breach which could permit lawful termination by the owner would be the contractor’s persistent failure to supply a sufficient number of qualified workmen to the project necessary to have the work performed in accordance with plans and specifications and with timely progress. If such failure is only occasional and does not result in seriously defective work or delays, it would be insubstantial. The distinction is frequently not clear and might therefore require the judgement of a neutral judge or arbitrator(s) if contested.
The decision whether to terminate a construction contract cannot be made lightly. Even though an owner may be entitled to terminate his general contractor, the consequences of such a termination may be adverse to that owner. For example, such termination would require the engagement of a substitute contractor usually at greater cost for completion of the work. Such additional cost may not be easily recoverable from the terminated contractor, at least without considerable legal expense.
Similarly, the contractor who terminates because of a claimed breach by the owner may encounter difficulties in recovering any monies due under the contract or may be required to defend the lawfulness of his termination at considerable legal expense and with perhaps some risk if his termination is later found to have been unjustified.
If termination by the owner is wrongful, he may be liable to the contractor for damages. Those damages would be the contract price less the reasonable cost of the completion of the unfinished work If a contractor wrongfully terminates, the owner would be entitled to recover damages which might include additional costs incurred in having others complete the contractor’s work and perhaps damages suffered on account of delays resulting from the contractor’s wrongful termination.
It is important to carefully analyze all contract provisions relating to termination. Frequently, termination rights are expressly spelled out in contract language. Usually such provisions prohibit termination without some advance notice.
Contract notice provisions should be carefully complied with since they are intended to afford the party who is accused of breaching the contract an opportunity to correct the breach before termination. If the notice provisions are not followed, the termination may be declared wrongful even though it was otherwise proper. Sometimes, however, where the breach was entirely clear and well-known to the breaching party, courts have ruled that the giving of notice would have been a useless gesture and therefore unnecessary.
A number of subcontract forms commonly in use contain termination clauses that permit the terminating contractor to take over his subcontractor’s tools, materials, equipment and supplies in order to complete the subcontractor’s work. Interesting questions may be presented if a contractor asserts the right to use valuable equipment belonging to a subcontractor who has been terminated.
Unless the parties mutually agree to terminate, chances are that the termination by either party will result in a dispute finding its way into either an arbitration proceeding or a courtroom. Success in that dispute will depend largely on the circumstances involved and the ability of the parties to prove their cases with sufficient evidence and documentation. The reasonableness of the conduct and good faith of the parties along with the terms of the contract between them will also contribute to the result.
