Remedies Vary for Wrongful Termination of a Construction Contract

Sufficient justification of the termination of a construction contract must exist or the terminating party may be liable for damages arising out of the wrongful termination. The results of any such termination typically are governed by termination clauses, or in their absence, Maryland statute.

On occasion, owners or general contractors will terminate a construction contract, alleging the lower-tiered contractor has failed to meet its contractual obligations on a project. The basis for termination will range from failure to perform, or arrange to have performed, any duties under the contract, to the refusal to pay subcontractors or materialmen. The damages may vary, depending on the contractual language regarding termination and the subcontractor’s ability to prove the existence of lost profits as a result of the termination.

Most construction contracts contain provisions dealing with termination of a construction project. Typically referenced as “Termination for Cause” and “Termination for Convenience”, these provisions provide guidance in the event that a construction contract has been terminated.

The Termination for Cause clause provides addresses when a contract can be terminated for a cause, such as non-performance or other breach, and how much, if any, should be paid in damages when that happens. A “Termination for Convenience” allows a party to terminate a contract regardless of whether some breach has occurred or is imminent but requires that the non-terminating party be properly compensated for the work performed and materials furnished to date, which normally excludes compensation for profits and overhead for work not yet performed and materials not yet furnished.

Contracts containing both provisions will frequently convert any wrongful termination for cause into a termination for convenience. Thus, the exclusive remedies for a wrongful termination would be the same remedies for a termination for convenience.

When the contract fails to address termination, the remedy must be fashioned from existing law and cases related to the same. In Maryland, a subcontractor may be entitled to the costs expended prior to the termination, as well as, anticipated profits the contractor would have earned on the entire project. In order to receive anticipated profits arising out of the termination of a construction project in Maryland, the terminated party must be able to prove that the loss was a result of the termination, the other party had foreseen that a loss of profits would be a probable result of a breach, and the lost profits can be proved with certainty.

In summary, the construction contract usually provides guidance on the available remedies for a termination. In the event the contract is silent, however, Maryland allows the payment of costs and potentially the payment of lost profits for a terminated contract.

For more information please contact Michael W. Siri at 410-583-2400 or