Contract documents

May 4, 2022

When you are excited about starting your project, naturally you don’t want to think about a topic like termination. Nobody likes to talk about termination, and we all hope it won’t happen on a project, but it is essential to address it in an agreement so that, if it does happen, both parties are protected and receive whatever they are due.

Right of Rescission

Depending on the type of project, you may have a right, by state or federal law, to rescind the contract before the work has started. These laws provide a period of time, after signing the contract, in which the owner may decide to cancel the contract. It essentially gives you some time to reconsider whether you want to go forward. These laws typically require the contractor to provide you with notice of this right and may require use of a specific form for the notice. However, you should also research whether you have such a right.

Termination for Convenience

A termination for convenience provision in the owner/contractor agreement gives the owner the right to terminate the contract, after the work has started, without having to supply a specific reason. It does not require that the contractor has breached the contract.  Maybe the relationship between the owner and the contractor just turned out to be a bad fit, which no one wants to happen, but occasionally it does. Or, maybe the owner has experienced an unexpected life event that changes their financial situation.

You contract should specify what is due to the contractor as compensation if you decide to terminate for convenience. Typically, this would include payment for work already performed by the contractor, costs incurred by the contractor due to the termination, and possibly a termination fee that may have been negotiated in advance. The contractor may have turned down other jobs to perform yours and may not have another project in its schedule to replace the terminated project. A termination fee, negotiated in advance, helps to provide some equity for the contractor in this situation.

Keep in mind that a termination for convenience is not something that should be done without careful consideration. You will need to get another contractor to complete the work. If your contractor also provided the design and construction documents, there will likely be issues related to your continuing use of those documents.

Termination for Cause by the Owner

Most contracts will allow an owner may terminate for cause if there is a material breach of the  contract documents by the contractor. A material breach is something that goes to the essence of the contract, such as the contractor failing to provide properly skilled workers or proper materials, failing to make payments to subcontractors, or disregarding laws or other requirements of jurisdictional authorities. A material breach is substantial; not something that is a minor issue.

Your agreement should contain provisions that address the process that is required to terminate the employment of the contractor for cause. This should include a notice provision, which may allow the contractor to correct whatever reason exists for the termination. After the notice period has elapsed, the owner will typically be permitted to make alternate arrangements to complete the work. If there is a termination for cause, the owner is entitled to finish the work and the balance due to the contractor, if any, is not determined until after the work is complete and the costs of completion have been established.

Termination for Cause by the Contractor

The contractor can terminate the contract for non-payment by the owner. Your agreement should specify how many days after receipt of an invoice that you have to make the payment. If you do not pay within the allotted time, the contractor may give you notice and then terminate the Contract. The contractor can typically recover payment for work performed, including reasonable overhead and profit, costs incurred by reason of the termination, and possibly other damages.

The agreement may also specify other reasons by which the contractor may terminate the agreement, such as a work stoppage or scheduling delay that is not within the contractor’s control.

Conclusion

Everyone wants a project to be completed successfully. Termination during the course of the project is not in anyone’s best interest. But, it is important for your agreement to anticipate reasons for termination and the compensation due, if any, in these situations. Clarity in this area will at least help to make a difficult situation go more smoothly and may help you to avoid having to go into a formal dispute resolution proceeding.

Our next article will look at dispute resolution: what methods are available, the pros and cons of each method, and what may be more cost effective for you depending on the size of your project and the nature of the dispute.

Susan Van Bell, Esq. was Senior Director of Content for AIA Contract Documents for over ten years. She is currently a consultant.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.