Termination of Construction Contracts

Rightful Termination
If a construction contractor has been rightfully terminated, the contractor has no claim against the owner for damages. Under a properly drafted contract, the terminated contractor may be liable for the costs of completion after termination and other damages.[i]

Wrongful Termination

By terminating a contractor, the owner runs a considerable risk that the termination will be found "wrongful." This is a primary reason why owners want to provide contractors an opportunity to cure any default. An owner who has wrongfully terminated can be liable for requisitions and retention that should have been paid, expenses for idle labor and unused materials, and lost profit for labor and material actually supplied on the project.[ii] An owner that has wrongfully terminated a contract may not be able to recover for the costs of completing or correcting work[iii] and may be liable for lost profit on the terminated portion of the contract.[iv]

Another possible penalty to the owner for wrongful termination is that the contractor can sue the owner for unjust enrichment. If the owner has received a benefit from the contractor's services and refuses to pay for that benefit, then he has been unjustly enriched by the value of those services. The contractor may sue to recover the value of his services (quantum meruit) and the value of the materials he provided (quantum valebat). The value of the contractor's work may be greater than the contract price if the bid was low.

Both the owner and the contractor should make every effort to document the progress of the work upon termination, whether the termination is rightful or wrongful. Photographs are the easiest and most important part of this, along with a scheduling analysis. The contractor and owner should also create detailed estimates of the cost to complete the work, and each may want to hire an independent expert to view the project at an early stage. This can be very important for each side in the event of litigation.

After termination, the most common issues of disagreement are backcharges and the cost of completing the work. Contractors rarely understand how an owner could have spent so much money to complete a project. And, unfortunately, some owners abuse the situation by building a Taj Mahal at the expense of the contractor.

Termination for Convenience

The termination for convenience clause is the owner's best weapon against a claim for wrongful termination. This clause was originally created by federal agencies and appeared only in government contracts. It has become more popular, however, in private contracts.

Termination for convenience means exactly that: The owner can terminate a contractor for any reason when it is in the owner's best interest. Most clauses state that the contractor will be entitled to compensation for work done prior to termination together with earned profit. Most contracts also state that if any termination for default turns out to be wrongful, then it will automatically be deemed a termination for convenience. If this happens, the owner may be financially responsible for work completed and earned profit but will not be liable for other consequential damages or unearned profit.

There are limits to the right to terminate for convenience, primarily the implied duty to exercise the right of termination in good faith and in accordance with fair dealing. This is true even for public owners,[v] but probably even more true for private owners.[vi] For example, an owner cannot terminate a contractor just because the owner is able to get a better price elsewhere.

—James D. Fullerton, Esq., Fullerton & Knowles, P.C.

© (2012, 2020) James D. Fullerton, Fullerton & Knowles, P.C. Clifton, VA (703) 818-2600

[i] See AIA Document A401-1987 (Standard Form of Agreement between Contractor and Subcontractor), Section 7.2.1.

[ii]ADC Fairways Corp. v. Johnmark Construction, Inc., 231 Va. 312, 343 S.E.2d 90 (1986); Spotsylvania County v. Seaboard Surety Co., 243 Va. 202, 415 S.E.2d 120 (1992).

[iii] ADC Fairways Corp. v. Johnmark Construction, Inc., 231 Va. 312, 343 S.E.2d 90 (1986); Spotsylvania County v. Seaboard Surety Co., 243 Va. 202, 415 S.E.2d 120 (1992); owner did recover for costs of correcting work in Smither & Co. v. Calvin-Humphrey, 232 F.Supp. 204 (D.C.D.C. 1964).

[iv]ADC Fairways Corp. v. Johnmark Construction, Inc., 231 Va. 312, 343 S.E.2d 90 (1986) (inadequate evidence for lost profit claim); Smither & Co. v. Calvin-Humphrey, 232 F.Supp. 204 (D.C.D.C. 1964) (inadequate evidence for lost profit claim).

[v] Krygoski Constr. Co. v. United States, 94 F.3d 1537, 1541 (Fed. Cir. 1996) [The Government's authority to invoke a termination for convenience has, nonetheless, retained limits. A contracting officer may not terminate for convenience in bad faith, for example, simply to acquire a better bargain from another source. Citing Torncello v. United States, 681 F.2d 756, 772 (Ct. Cl. 1982). When tainted by bad faith or an abuse of contracting discretion, a termination for convenience causes a contract breach. Citing Allied Materials & Equip. Co. v. United States, 215 Ct. Cl. 902, 905-06 (1977)].

[vi] Questar Builders, Inc. v. CB Flooring, LLC, 410 Md. 241, 272-73 (Md. 2009) [private parties do not have the near carte-blanche power to terminate for convenience that the federal government has, but limited to exercising that discretion in good faith and in accordance with fair dealing. Party with discretion is limited to exercising that discretion in good faith and in accordance with fair dealing. Upon entering a binding contract for a specified duration, the parties thereto give up their opportunity to shop around for a better price].

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Tuesday, 13 April 2021

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