Termination for Cause: Beware These Common Missteps

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Termination for Cause: Beware These Common Missteps

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Sayward Mazur

Few industries have more legal landmines related to terminating commercial contracts for cause than the construction industry. A project owner or contractor faced with the prospect of terminating a downstream contract needs to tread carefully because a misstep may not only fail to end one bad relationship, but it may also unexpectedly introduce a whole series of new—yet not necessarily better—relationships.

In construction contracts, the terminator usually bears the biggest risks associated with a termination misstep. And despite having the clearest contract definitions of “cause” and the most detailed provisions concerning “procedures,” many terminations turn out to be failures. They fail in their purpose, result in unnecessary delay and expense in completing a project, and cause the participants unrecoverable reputational harm.

Here are some ways these failures happen:

  • Many commonly used form contracts purport to have an ironclad procedure for declaring a termination for cause (“default”). Parties mistakenly believe that by merely following the numbers, the legal picture is completed.
  • Fundamental contract and performance analysis is often flawed.
  • Legal doctrines such as “First to Breach,” “Waiver of Breach,” or “Substantial Completion” are not fully understood or overlooked.
  • Project people polarize. Their normally good judgment becomes impaired by demonization of the “other side” and the facts reported upstairs become distorted, leading to bad decisions.
  • Alternative approaches are not explored either because the contract does not expressly address them or the company has little to no experience with them.
  • The full consequences of the rights and remedies available to both parties are not adequately understood.
  • Insufficient time and attention is paid to the engagement of the completing contractor, or the completing surety.

Any of these scenarios can easily lead to the poorly executed termination of one unsatisfactory contractual relationship becoming just the beginning of another, or even several, equally unsatisfactory ones.

Alternatives exist, but creativity and diligent follow-through are key. Schiff Hardin recently advised on and executed a termination for cause under a sizeable but unbonded AIA contract, followed by a work-around agreement under which, with all the owner’s rights to damages reserved, the contractor was permitted to complete the remaining multi-million dollar work under conditions of cost control and scheduling not available to the owner under the express terms of the contract. This resolution mitigated substantial potential costs and delays to our client’s project.

Schiff Hardin’s Construction Law Group brings to bear unparalleled experience counseling clients on termination for cause, and has innovated alternative approaches that have saved our clients not only millions of dollars, but even their projects and their very businesses. To discuss your termination for cause questions, contact Woody Mazur, Ken Roberts, Jamie Frankel, or Gary Rubin.