Knowledge Corner

There may come a time during the course of a construction project when a contractor’s relationship is terminated. There are a number reasons this may occur such as:

• The contractor’s financial trouble
• Disputes regarding the quality of the work
• Failing to adhere to the contract documents, or project schedule
• Failing to pay trade contractors and material suppliers    

Termination for Cause

This occurs when one party cannot totally complete its contractual obligations. The contractor may terminate the contract due to the owner’s failure to pay. On the other hand, the typical scenario is the owner terminating the contractor for some, if not all, the reasons listed above. Termination for cause is an onerous provision which may have the potential of putting the contractor out of business. If it appears termination is imminent, the contractor should attempt, as much as possible, to come to a compatible resolution with the owner.    

Termination for Convenience

This is when neither party breaches the contract, but the relationship is terminated. Simply put, this allows the parties to amicably sever their relationship. This clause is usually written in the contract and allows both parties to end their contractual relationship without the need of costly litigation. The contractor is permitted to be paid for completed work, as well as reasonable profits and other costs. The owner is no longer required to make payments to the contractor, including anticipatory profits.         

Differences between Termination for Cause and for Convenience

There are significant differences between the termination provisions. Should the contractor be terminated for cause, the owner is no longer legally required to make payments to the contractor. In addition, the owner is permitted to use the contractor’s equipment—which was on the project site at the time of termination—to complete the project. The contractor can be liable to the owner for costs the owner may incur in completing the project which exceed the original or adjusted contract price. 

This is especially important if the contractor has posted Performance and Payment Bonds. If the contractor causes its surety to incur a loss due to a termination for cause, the contractor will remain corporately and personally liable to reimburse its surety for the loss. A termination for cause will more than likely have a severe impact on the contractor’s business. It may preclude it from procuring future work from that owner, as well as have an adverse effect on obtaining future bonding.

If you are not sure how your contract is written and need more information regarding contract terminations, call TSIB today at 201-267-7500! You may also learn more about construction contracts in our Contractual Risk Transfer eBook.

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