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Critical Construction Clauses: Termination for Cause

As a follow-up to the previous article Critical Construction Clauses: Termination for Convenience, this focuses on the effects of another means of contract termination, termination for cause by the owner in a construction project in Maryland.

A right of termination for cause is standard in public and private construction projects, permitting a party to terminate a contract as a result of the lower-tiered contractor’s actual breach of the contract. While an owner or higher-tiered contractor would have a common law right to terminate a contract in the event of a lower-tiered contractor’s breach, most parties to any construction contract prefer to spell out the standards in more detail as well as the damages and other liabilities involved.

The key aspect of any termination for cause provision is the specific ground for exercising it. Examples of such of grounds, as used in form documents developed by AIA (American Institute of Architects) and ConsensusDOCS include:

  • Repeatedly refusing or failing to supply enough properly skilled workers or proper materials;
  • Failing to make payment to subcontractors for materials or labor in accordance with the provisions of the subcontract agreement;
  • Repeatedly disregarding applicable laws, or lawful orders of a public authority;
  • Substantially breaching the contract documents;
  • Work stoppage exceeding 30 days, if the stoppage was not caused by the terminating party; and,
  • Adoption of any termination for cause provisions which flow-down from the prime contract.

Relying on a well-drafted termination for cause provision, rather than a common law right, also can ensure reasonable notice procedures of default and pending termination, with the other party having the right to an opportunity to cure, thereby resolving the dispute. Typically, upon receipt of written notice that grounds for termination exists, the breaching party has between three to seven days to cure the alleged default. Failure to do so will allow for a termination for cause under the construction contract. Any such notice and cure feature should specify whether the notice period will be calculated in calendar days or business days. This distinction plays a critical role when the cure period is for only three days and notice arrives on a Friday afternoon. In these situations, the contractor should have until Monday to cure the default.

Typically, a terminating party would be entitled to any additional costs to complete the project beyond the negotiated amount. For example, if the parties agreed that the subcontractor would complete the electrical scope of work in exchange for payment of $1 million and, after termination for cause, the general contractor pays a total of $1.2 million to complete the electrical scope of work, the damages would be $200,000.00. Obviously, other factors must be considered in determining damages, but this is an example of the basic calculation.

Defenses to a termination for cause provisions include: 1) that the terminated party was not in actual default; and 2) the terminating party failed to follow the procedures required in the termination for cause provision. In the event the termination for cause is found to be without merit, the provision typically states that the termination will be deemed a termination for convenience. In these situations, the terminated party would be entitled to payment for work performed and materials furnished up to the point of termination.

For more information please contact Michael Siri at 410-583-2400 or siri@bowie-jensen.com.

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