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Termination Claims

Breaking up is hard to do. Often, the contract sets very specific conditions that must be met to terminate. When those conditions are not met, large claims can result.

Wrongful Termination. 

If two parties enter into a contract with a specific schedule to perform a specific scope of work, the parties have agreed that the contractor has the right to perform that entire scope of work, unless there is a proper termination. Accordingly, for instance, a general contractor cannot simply fire a subcontractor unless the contract provides the right to do so, either through a termination for default or termination for convenience provision. More on these provisions here

A surprising amount of owners and general contractors do not realize this and terminate contractors without contractual authority. In that situation, the wrongfully terminated contractor has a claim for breach of contract. The terminated contractor would be entitled to the profits it expected to receive on the remainder of the contract. Usually this is proven through evidence of the profit margin the contractor received on the project prior to termination. Profit margins on other projects are also admissible to demonstrate the expected profit. Expert witnesses can also provide testimony regarding the average profit for the industry. These margins often have no relationship to the "overhead and profit" line item in the contractor's bid or the contract, and that is okay. 

Some owners and contractors recognize that contracts cannot be terminated at will and still want to make a change, often seeking a lower price. If there is no cause and no termination for convenience provision, they get creative. Seasoned contractors recognize a setup when they see one. Contractors should become leery when they start receiving formal written complaints that contradict performance and prior attitudes. Pay close attention to the cure requirements and make sure there is no reason for termination. Paper the file with objections to the complaints. Then aggressively challenge the termination. Often, this resistance leads to abandonment of the termination by creating downside risk that might outweigh the cost savings achieved by switching contractors. When it does not, the contractor has created helpful evidence for the wrongful termination claim.

Walking off a Job.

While an owner or general contractor can face liability for wrongfully terminating a contract, so too can the contractor who terminates by walking off the project. If there is no termination for convenience provision allowing a contractor to leave the project at will (almost certainly not in the contract), the contractor needs cause to terminate. The contractor must also follow the notice and cure provisions of the contract.

It is also important to note that a lot of contracts require the contractor to remain on the project even if there is a payment dispute. For instance, if there is a dispute about entitlement to a change order, the contract often requires the contractor to submit the proposed change order, continue working, and then pursue payment through the dispute resolution provisions of the contract. This is a trap that ensnares many unwary contractors. Even if the right to a change order is undeniable, the contractor cannot terminate when it is denied.

If a contractor is found to have walked off a project without cause, the ramifications can be devastating. The owner and/or general contractor will hire a replacement contractor. That contractor typically recognizes the situation and presents an inflated bid. The contractor who terminated the contract without cause is liable for the increased project costs. For example, if the original contract price was $100,000, the terminating contractor received $50,000, the replacement contractor charged and received $75,000 for a total cost of $125,000, the terminating contractor could be liable for the $25,000 cost increase.

The bottom line is this: It is unwise to walk off a job unless the contractor is certain that cause exists and the contractual conditions precedent have been satisfied.

Constructive Termination.

Sometimes the question of whether a contractor has been terminated is easy to answer. For instance, a letter, email or text might state that the contractor has been fired, the contract has been terminated, or "pack up your sh*t and get off my jobsite." Often, it is more subtle. A contractor might find that the general contractor gave parts of the scope of work to other contractors, claiming that the project is behind schedule. Or, a general contractor might "leapfrog" the subcontractor, directly hiring subs and suppliers, squeezing out the subcontractor. The termination might be in whole or in part and never explicitly acknowledged. But if that termination is in violation of the contract, the above-described remedies are available.

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