Termination of Contract

• Author: Carol J. Patterson - Ross J. Altman - Stephen A. Hess - Allen Overcash
• Pages: 497-528

ChAPtEr

497

16.01 INTRODUCTION

A termination of contract occurs when the owner tells the contractor “you’re

red,” or the contractor tells the owner, “I quit.” The issues surrounding ter-

mination, however, are rarely that straightforward. Termination of contract is a

remedy available for particular causes and defaults. Those causes and defaults

may be identied in the contract itself, or may be those causes and defaults for

which termination of contract is a remedy under the common law.

Whether a party has the right to terminate a contract is not always clear.

Even when a cause or default supporting termination can be identied,

that does not end the inquiry. Construction projects are complicated, and it is

unusual for one party to be exclusively responsible for a default or other prob-

lems that may occur on a project. How the law responds to such situations

cannot often be predicted. Moreover, even when the facts support the legal

right to terminate a contract, the adverse consequences of doing so may out-

weigh the practical benet. As a result, termination is a drastic measure, and

generally undertaken only under extreme circumstances.

Termination of Contract

niChoLAs D. siEGFriED AnD John h. tArLow

16

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CONSTRUCTION LAW

498

Indeed, reported case law is replete with lengthy discussion and analysis of

numerous questions arising from contract terminations, such as the following:

❒Did a party have the right to terminate the contract?

❒Did the terminating party follow the often complex termination provi-

sions of the contract?

❒Should the allegedly non-performing party have the right to x the

problem before termination becomes effective?

❒What is the difference between termination for cause and termination

for convenience?

❒What happens if a party wrongfully terminates a contract?

❒If the termination was wrongful, what damages or other remedies are

available to the party whose performance was wrongfully terminated?

As discussed in an earlier chapter, a construction project involves a net-

work of many separate contracts. Any one of those contracts might be subject

to termination, depending on the pertinent facts. For purposes of illustrating

the principal issues involved in contract termination, as well as explaining

some of the complicating factors that arise, this chapter considers termina-

tion primarily in the context of a construction contract between an owner and

prime contractor, and addresses termination by focusing on four key topics.

First, Section 16.02 reviews the basic legal concepts of termination of a

contract as established by the common law. Second, Section 16.03 explains the

manner in which modern construction contract forms, such as those created

by the American Institute of Architects, ConsensusDocs, and the Engineers

Joint Contract Documents Committee, establish rules and procedures through

which owners and contractors deal with termination. Section 16.04 discusses

issues that commonly arise in connection with the termination of construction

contracts. Finally, Section 16.05 covers the topic of an owner’s termination for

convenience.

16.02 RIGHT TO TERMINATE UNDER THE COMMON LAW

Not all breaches of construction contracts are equal. It has been noted that

any contractually authorized breach by either party for which the contract

provides administrative redress cannot constitute a common-law breach of

contract . . . such as those addressing changes, suspension of the work, mis-

representation of site conditions, and termination for convenience. . . . [Such

contract provisions convert] what otherwise would constitute traditional

common-law breaches into a contractual right.1

1.

PhiliP l. Bruner & Patrick J. O’cOnnOr, Jr., Bruner & O’cOnnOr On cOnstructiOn law

§ 18:2

(West Group 2002) [hereinafter

Bruner & O’cOnnOr

].

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Termination of Contract 499

Under the common law, a party’s right to terminate a contract for cause

is based on the concept of a “material breach” that is not excused, cured,

or waived. A breach of a contract is material only if the breach is substan-

tial enough that it “reasonably compels a clear inference of unwillingness or

inability of one party to meet substantially the contractual future performance

expectations of the other party, and of the need for the other party to mitigate

its damages.”2 Stated differently, “[a] ‘material breach’ [is] any breach that

materially impairs the interest of the non-breaching party in the future per-

formance of a contract.”3 If a party has materially breached the construction

contract, the non-breaching party may have grounds to terminate.

A party’s failure to perform may arise from a variety of circumstances.

An owner’s breach may encompass a number of failures, such as not provid-

ing the contractor with access to the site, not responding adequately to the

contractor’s requests for information, or failing to make payments in a timely

manner, to name just a few. Breach by the contractor may include, by way of

example, not completing the work in accordance with the drawings and spec-

ications, not completing the entire scope of work in accordance with time

requirements of the contract, not fullling warranty obligations, or not paying

subcontractors and suppliers timely.

While all of the events described in the preceding paragraph are examples

of breaches of contract, the difculty and the risk to each party in deciding

whether to terminate the contract on the basis of such breaches lies in part

in assessing whether the breach is material. For example, if the contractor is

one day late in completing some task on the project, is that breach signicant

enough to warrant a termination of the contract? If the contractor fails to com-

plete a portion of the work in accordance with the drawings and specications,

is the deviation so important as to constitute a material breach of contract?

Distinguishing a material breach from an immaterial breach is no easy task,

and is especially difcult in the context of a complex construction dispute:

We note parenthetically and at the outset that, except in the middle of a bat-

tleeld, nowhere must men coordinate the movement of other men and all

materials in the midst of such chaos and with such limited certainty of pres-

ent facts and future occurrences as in a huge construction project such as

the building of this 100 million dollar hospital. Even the most painstaking

planning frequently turns out to be mere conjecture and accommodation to

changes must necessarily be of the rough, quick and ad hoc sort, analogous

to ever-changing commands on the battleeld. Further, it is a difcult task

for a court to be able to examine testimony and evidence in the quiet of a

courtroom several years later concerning such confusion and then extract from

2. Id. § 18:4.

3. Id. § 18:1.

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