ConstructionPro Week, Volume: 2 - Issue: 31 - 08/02/2013

Does Convenience Termination Preclude Set-Offs for Deficient Work?

By Bruce Jervis

 

There are two ways to terminate a construction contract. A contract can be terminated for cause -- a termination for default. Or, a contract can be terminated without cause -- a termination for convenience. With a termination for default, the contractor is considered in breach of contract and held responsible for the cost of deficient or incomplete work. With a termination for convenience, the contractor recovers all reasonable costs incurred prior to the effective date of termination.

 

This leads to a question: Can one terminate a contract for convenience and take a set-off for deficient work? An Oregon court recently answered in the negative.

 

A prime contractor, unhappy with the pace of a subcontractor’s work, elected to terminate the subcontract for convenience and then withheld funds for correcting defective work. The Oregon court said this was impermissible. If the contractor wanted to assert set-offs, it should have terminated the subcontract for default. This would have provided the sub with an opportunity to cure or correct deficiencies. That opportunity was not available when the subcontractor was ordered to suspend operations under the termination for convenience clause.

 

This is the second such ruling we have reported in recent weeks. Not necessarily a trend, but noteworthy. Are project owners, or contractors, that terminate for convenience while asserting set-offs trying to have it both ways? They avoid the jeopardy of a wrongful termination allegation while availing themselves of the remedies that come with a termination for cause. But is it accurate to say that a termination for convenience provides no opportunity to cure defects? Most clauses make termination effective after advance written notice. I welcome your comments.

 

COMMENTS

Many years ago I represented a contractor that terminated a sub for convenience and then tried to offset the sub's claims and outstanding contract balance with the costs to repair defective workmanship. The court, like the ones you noted, rejected the attempted offsets, effectively ruling that there was an election of remedies (termination for convenience vs. termination for cause). The contractor might be having it both ways if it terminated the sub for convenience and then affirmatively sued the sub for damages to recover the costs of the defective work. However, it may be a different story if it is simply a matter of offsetting moneys due and payable to the sub for work that was not properly performed. It all depends on the terms of the termination for convenience clause. If the clause entitled the sub to be paid for "all work properly performed" through the date of termination, then the contractor may have a compelling argument for the offset (though not necessarily a subsequent affirmative claim), but it may be more difficult to seek an offset if the clause simply read that the sub was entitle to be paid for "all work performed" through the date of termination.
Posted by: Michael Zicherman - Friday, August 02, 2013 12:05 PM


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Posted by: Wekey - Thursday, May 01, 2014 12:40 AM


 









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