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.
