Termination of Construction Contracts addressed events on a project that can trigger a project Owner’s right to terminate a Contractor, but what are the options for termination and suspension, especially when considering their interplay and strategic use?

Options for termination and suspension, interplay and strategic use

Article 7 of the American Institute of Architect’s form A101-2017 Agreement Between Owner and Contractor (the Agreement) refers to Article 14 of the A201-2017 General Conditions for the terms governing termination or suspension. Beginning with the Contractor’s right to terminate work, a Contractor may do so in very limited circumstances and only after giving proper written notice. One of those circumstances is when an Owner’s failure to live up to one of its contractual obligations stops the work for 60 consecutive days. Another set of circumstances is when work has stopped for 30 consecutive days because of several specific events:

• because the Owner has failed to provide evidence that it can pay for the work;
• because a court order or act of government has halted the work;
• because the architect has not timely certified a payment application; or
• because the Owner has not timely issued payment. (Article 9.7 of the General Conditions gives the Contractor the right to stop the work if payment is not timely. Article 2 gives the Contractor the right to delay commencement of or stop the work if the Owner does not provide evidence of financing.)

The final set of circumstances is when the Owner has used its right to suspend, interrupt or delay the work so frequently that the lost days tally more than 100% of all of the days allotted for project completion or more than 120 days in any 365-day period. Note that if the Contractor or its Subcontractors are at all at fault for the problems that created the cessation of work, then the Contractor does not have the right to terminate.

When the contract at issue gives the Contractor has the right to terminate, and when the circumstances support an exercise of that right, the Contractor must still decide if it should exercise its right. Early last year, projects throughout the country were delayed for 30 days and more by various governmental stay-at-home orders. Was termination the right approach for the Contractor on each of those projects?

More commonly, an Owner fails to make payment in accordance with the terms of the Agreement. Even then, is termination the right approach for the Contractor? The circumstances of each project vary, and one can assume there are situations when the Contractor may choose not to terminate. It has the right to do that as well by waiving its right to terminate. But it should be careful when doing so. In many situations, the Contractor should issue a letter indicating that it is proceeding with the work, under protest if the situation dictates, while reserving its right to terminate. This can avoid a complete waiver of the right and it gives the Contractor the ability to use its termination right later if needed.

Quite often, Owners will remove the termination rights from the contract forms that provide them, or will use their own custom forms that do not give the Contractor a right to stop work or terminate in any stated circumstance. Even then, though, where circumstances are right, the common law may give the Contractor the right to terminate.

Typically, the common law right to terminate arises when the Owner has materially defaulted in the performance of one of its contractual obligations—typically, its obligation to pay the Contractor. In all situations where cessation and termination are at issue, but particularly when the issue arises in the absence of contractual rights, it is important that Contractors look to experienced construction counsel. It is almost always the case that a written notice is required, that the notice must be in a specific form, that the notice must be delivered to a specified individual, and that the notice must be delivered in a certain fashion. These are technical details that can derail an otherwise justified termination.

Article 14 of the General Conditions also spells out the Owner’s termination and suspension rights. The most absolute of these is the Owner’s right to suspend or terminate the work without cause. This is referred to as a termination for convenience. The only judicially-imposed limit on the exercise of that right is the Owner’s obligation to proceed in good faith. During contract negotiations, the Contractor should work to eliminate this right or temper its use by making sure that it will recover for completed work and lost profit. Even where lost profits are recoverable, it is best to negotiate for a specified percentage or dollar amount to avoid a fight over how much profit remained in the job.

The Owner also has a right under the Agreement and its General Conditions to terminate the Contractor for cause. Article 14 gives the Owner this right if the Contractor has failed to provide sufficient workers or proper materials, failed to pay Subcontractors, failed to follow codes and laws, or otherwise (like the common law provides) materially breached the terms of the Contract Documents. There is some curb on this right because the Owner must obtain the Architect’s certification of the default. It is expected that the courts will impose a good faith obligation as well. The Owner must also provide the Contractor with written notice.

The Owner’s remedies upon a default termination are powerful. It may kick the Contractor off of the site, seize all of the Contractor’s tools, equipment, machinery and materials, take over subcontracts by assignment, and finish the work as it sees fit. It is not obligated to make further payment until the work is complete and costs in excess of the contract balance are the Contractor’s responsibility. Contractors are best served by tempering some of this power by negotiating milder terms. The Contractor can tighten up the reasons for default, seek a longer notice period, and reserve the right to remove its property from the site prior to departing.

An Owner’s exercise of its termination right is a drastic remedy that is likely to lead to a long-lasting and expensive dispute. While the Owner may have the right to turn to a surety for completion, it should understand that doing so is also not an easy solution. In difficult circumstances, there are alternatives an Owner may wish to consider. Article 6 of the General Conditions gives the Owner the right to complete work “related to the Project” with its own forces or with Separate Contractors. Article 7 gives the Owner the right, through the Architect, to issue a Construction Change Directive that deletes work, with the Architect setting the value of the deletion and the Contractor left only with the right to pursue a claim if it disagrees.

The Owner and Contractor are playing chess, not checkers, when termination and suspension rights are at issue and when the contract at issue provides a structure similar to that employed by the Agreement and its General Conditions. Even on small projects, termination disputes can involve significant dollars because of the premium that must be paid to have another construction company finish the work. Contractors must negotiate favorable terms before work begins, and, whether or not they are able to do so, completely understand all of the options available. Otherwise, they can be placed in a check-mate position very early in the game.