The last thing a contractor is likely to think about when signing a sought-after contract is getting fired. But companies should carefully review the termination language of any agreement they sign because the contract could end up being terminated during the course of the project. If termination happens, whether for cause or for convenience, a contractor doesn’t want to be scrambling to figure out what rights and obligations it has.
Termination for Cause
As its name implies, termination for cause means the contract is being terminated for a particular reason—hopefully one that is specified in the contract. Prior to entering into a contract, and bearing in mind the burden of proving a default is on the one claiming it, contractors should review the agreement’s provisions and understand under what scenario they could be fired.
One issue to consider is the manner in which termination is to be effectuated. Is it required to be in writing, or will a verbal announcement suffice? Does the terminating party have to provide notice to the other party, and does such notice require an opportunity to cure as well? How much notice is required, and how is notice to be provided? Keep in mind the requirement to give notice may be overcome if it would be futile (e.g., if a contractor is so far behind schedule it could not catch up to the schedule even if given the required notice and opportunity to cure).
Any termination for cause provision should specify the causes, events or conditions under which the contract can be terminated. Such causes and conditions may include deficient work, the contractor’s failure to pay subcontractors, and delays in work or a lack of adequate progress. All should be specifically spelled out.
The parties’ rights and obligations upon termination also should be addressed. They need to clarify, in advance, what happens to the materials and equipment onsite in the event of a termination. The status of permits upon termination—in particular, whether they need to be released or transferred—should be covered as well. In doing so, the parties can balance the interests of the party being terminated and the need to get the project completed in a timely and cost-effective manner.
Termination for Convenience
A termination for convenience, often used by government owners, also is commonly incorporated into private contracts. This type of termination allows an owner to terminate a contract without much liability. There is generally no obligation to a contractor for lost profits arising as a result of such termination.
Be careful when entering into a contract that contains an unlimited termination for convenience clause. This unqualified right to terminate the contract leaves contractors little recourse. Be sure the contract addresses the circumstances giving rise to such a termination, the existence of condition precedents to termination, and the amount of compensation to which the firm would be entitled.
While the range of discretion for invoking a termination for convenience is likely to be broader than that which would allow an owner to invoke a termination for cause, a contractor facing the risk of a termination for convenience should argue for the inclusion of the procedural safeguards (e.g., requiring the owner to comply with certain condition precedents prior to termination and, ideally, providing an opportunity to cure).
Whether termination is for cause or convenience, it is never pleasant or inexpensive. Carefully scrutinize the specific language under which a contract may be terminated before entering into it, and negotiate the rights and obligations that should survive termination.