It is important to understand what conditions permit a contractor to walk away from their construction contract, and under what conditions their customers may. While the specific grounds for terminating a construction contract vary depending on the specific terms of the contract and the applicable legal principles, this article covers the most common basis for termination.
Termination of a Construction Contract for Cause
A Construction Contract can be terminated for default or nonperformance. This is known as termination for cause.
Most construction contracts have a specific termination for cause clause. These clauses are important because they define what constitutes a default under the construction contract. These clauses often also set forth a procedure for resolving any default before termination. These provisions act as a tool for both sides to utilize, to address, and act on perceived failures by the other party. A strong termination for default clause will require that the grounds for termination be in writing and that they be delivered to a specific address or individual. If so designated, notice can be given electronically. Notice provisions should be strictly adhered to avoid liability for improper termination.
What If There Is No Specific Termination for Cause Provision Is The Construction Contract?
A construction contract can still be terminated for cause even if there is not a specific default provision governing this process. Absent a specific provision, a contract may be terminated when one party materially breaches the contract.
What Constitutes of Material Breach Of Contract?
What constitutes a material breach will depend on the circumstances but generally, to be considered material, the breach must be substantial or significant enough to justify treating the contract as terminated (Boston LLC v. Juarez (2016) 245 Cal.App.4th 75.) The determination of materiality is typically a question for the trier of fact, who must consider all the facts and circumstances shown in evidence (Schellinger Brothers v. Cotter (2016) 2 Cal.App.5th 984. Factors to be considered include the extent to which the injured party will obtain the substantial benefit anticipated, the adequacy of compensation in damages, the extent of partial performance or preparations for performance, the hardship on the party failing to perform, the behavior of the party failing to perform (whether willful, negligent, or innocent), and the uncertainty of future performance (Sackett v. Spindler (1967) 248 Cal.App.2d 220. A breach is material if it significantly affects the contract’s purpose or the injured party’s expectations under the contract Brown v. Grimes (2011) 192 Cal.App.4th 265. Timing of the breach can also be relevant; a breach at the outset may justify termination, whereas a similar breach later in performance may be deemed insubstantial (Whitney Inv. Co. v. Westview Development Co. (1969) 273 Cal.App.2d 594.
Termination of a Construction Contract for Convenience
Some construction contracts provide one or both parties with the option to terminate the contract for convenience without providing a specific reason for the termination. Owners will often insist on a termination for convenience clause. These clauses effectively permit one or both parties to terminate the contract for their own convenience. These provisions, when exercised, can be frustrating to the non-terminating party because they effectively provide the terminating party with a way out of the agreement with little recourse. However, such provisions can be made fair if they require the non-terminating party to be compensated adequately for costs and/or loss of profit incurred as a consequence of the termination for convenience. These clauses also sometimes appear in subcontracts, most often the purpose in that context is to allow the general contract to terminate subcontracts when the owner exercises a termination for convince. However, subcontractors must be wary as in some contexts higher tier subcontractors rely on these provisions to bid shop.