By Bruce Jervis
If a project owner wants to terminate a contractor for default, or a contractor wants to terminate a subcontractor, the applicable contract documents usually stipulate a procedure. The process described in the termination clause is not a suggestion. It is mandatory and creates rights for the party being terminated. Ironically, the failure to follow the process can make the terminating party the one in breach of contract.
In a recent case, written notice of intended default from a project owner gave the contractor 30 days to cure deficiencies in the work. The owner ignored the right-to-cure provision and summarily terminated the contractor for default. When the owner sued the contractor’s surety, a federal appeals court ruled that the owner had breached the construction contract and could not bring a claim against the performance bond.
When a party initiates a default termination, it is safe to say the business relationship has broken down and there is not a lot of good will. Yet, acting in anger or frustration, while ignoring the terms of the contract, will make things considerably worse for the terminating party. Are decision makers in your organization always aware of the applicable contract requirements for a default? Are there practices in place that will ensure that the terminating party does not become the one in breach of contract?