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Construction Dispute Resolution Methods for Prime Contractors
Articles

Understanding Termination for Default in Construction Contracts

June 27, 2023

Causes, Procedures, and Implications of Termination for Default Basics

The ideal way for construction contracts to end is with both parties satisfactorily completing their obligations under the contract. So, what happens when this is not the case? Standard construction contract forms between an owner and a contractor define remedies to protect the performing party from the nonperforming party.  

  • Owner remedies often include, but are not limited to, the ability to suspend, supplement, reduce scope, trigger dispute resolution or terminate the contractor for default.  
  • Contractor remedies generally include the ability to issue change orders, time extensions, trigger dispute resolution, stop work under certain conditions, or terminate the owner for default.  

Termination for default is the most severe remedy that each party has against the other. In this post, we explore: 

  • the causal factors that may meet the threshold for termination for default
  • procedural requirements and provisions to prevent termination for default
  • the costs and complexities behind pursuing termination for default
  • how to proceed if there is no other option. 

Termination for Default: The Threshold is High   

Minor violations of the contract by one party do not give the performing party grounds to terminate for default.  

Possible breaches by a contractor that may lead to a termination for default include  

  • frequent refusal or failure to supply enough properly skilled workers or proper materials,  
  • failure to make payments to subcontractors for materials or labor in accordance with the respective agreements between the contractor and subcontractors, nonperformance,  
  • failure to show reasonable progress,  
  • failure to perform under the contract, material breaches of a provision within the contract documents, or frequent disregard of applicable laws statutes, ordinances, rules and regulations, codes, or lawful orders of a public authority.  

Possible breaches by an owner that may lead to a termination for default include  

  • causing unreasonable delays,  
  • failing to make prescribed payments to the contractor,  
  • failure or delay in performance, failure to provide access, failure to coordinate work, or  
  • financial insolvency. 

Procedural Requirements and Contractual Provisions May Help Limit Termination by Default  

Standard contract forms—such as those offered by AIA, ConsensusDocs, and EJCDC—identify precise circumstances that warrant a termination for default. In addition, these contract forms prescribe the exact procedure for a proper termination for default.  

A termination for default pursuant to express provisions is possible only when the terminating party has complied with its own obligations, which include the procedural requirements. For instance, most construction contracts with termination clauses contain notice requirements prior to a termination for default, which is intended to give the nonperforming party a chance to cure its default. A failure to give proper notice may invalidate the termination and expose the terminating party to possible damages.  

Contractual provisions regarding termination may also include other procedural requirements for resolving claims in addition to issuing a notice to cure.  

The Costs and Complexities Behind Pursuing Termination for Default: Proceed with Caution  

The owner is entitled to damage remedies if it rightfully terminates the contractor for default or if the contractor wrongfully stops work. Likewise, the contractor is entitled to damage remedies if it rightfully terminates the owner for default or if the contractor is wrongfully terminated by the owner. Damage remedies for owners or contractors are often delineated within the termination provisions of the contract and are dependent on the stage of the project at the time of termination.  

It is common for a termination for default to be contested by the terminated party and it is also common for the accompanying damages to be in the millions. A party that is considering a termination for default should ensure that termination is clearly warranted under the contract and that proper procedure is followed. Additionally, the terminating party should consider consultation with a qualified construction attorney prior to taking such action.  

If you need assistance in reviewing contractual breaches by an owner or contractor and associated damages, please contact Grant Hoey at ghoey@vertexeng.com

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