If you’re a construction professional, there will be times when you may need to terminate a contracted relationship. Perhaps you (or the other party) ran into financial difficulties or a dispute arose over the quality of the work. Other common reasons for early contract termination include:
- Failure to adhere to the project schedule
- Failure to pay contractors, subcontractors, and material suppliers
Contracts can generally be terminated for cause or for convenience. Let’s take a closer look at the differences between the two and which circumstances are appropriate for each one.
Termination for Cause
Terminating a contract for cause can only occur if one party cannot complete their contractual obligations. A project owner could take this step if you aren’t able to deliver quality work during the specified time frame. If you are a contractor or subcontractor, you could also terminate a contract for cause if the owner doesn’t pay your invoices on time.
Termination for cause is a difficult outcome because it can jeopardize the completion of the project and harm the contractor’s professional reputation. In addition:
- When a contractor is terminated for cause, the owner is no longer obligated to pay them and they may be liable for costs incurred by the owner in completing the work.
- The owner can seize the contractor’s equipment and materials for use in completing the contractor.
- If the contractor posted performance and payment bonds, they will remain liable to reimburse the surety for financial loss. They can also suffer damage to their credit rating and bonding capacity.
Therefore, all parties should attempt to reach an acceptable resolution before they pursue this outcome.
Termination for Convenience
A termination for convenience takes place when no breach has occurred. It enables everyone involved in the project to amicably end the relationship without causing professional or financial harm to anyone. These clauses originally appeared in federal procurement contracts, but today they are also common in private contracts.
For example, an owner may seek to terminate a contract for convenience if they cannot obtain additional financing to finish the project. The key is that there needs to be an appropriate clause in the contract. Otherwise, the contractor would be entitled to the value of the work they completed plus any profit they would have earned on the contract balance.
Depending on the contract language, termination for convenience results in the following outcomes:
- The contractor gets paid for the work they completed and may recover reasonable termination expenses such as demobilization costs and penalties for ending other contracts, such as supply agreements.
- The owner no longer has to make ongoing payments and is typically not required to pay the contractor anticipatory profits or damages arising from a cancelled job.
Contact a Construction Law Attorney
Termination of a construction contract can be risky, which is why both project owners and contractors should seek advice from an experienced construction law attorney. At Rosen Law, LLC, we negotiate all types of construction contract and counsel parties who want to terminate their relationship for cause or convenience. We will review your rights, obligations, and options and recommend the most appropriate course of action. To schedule a consultation or get more information, please contact us today.