By Steve Rizer
Can termination of a construction project for convenience be converted to a termination for default? This is one of several questions that Sherman & Howard LLC attorney Stephen Hess fielded during the “Q&A” portion of a webinar that WPL Publishing held last week. During the webinar, entitled “Termination of a Troubled Construction Project,” he addressed a target audience of contractors, subcontractors, consultants, construction managers, architects, engineers, public and private owners, and construction law attorneys.
In response to the question, Hess said, “The answer is, ‘No.’ A termination for default can be converted to a termination for convenience” but not vice versa. With a termination for convenience, “you can try to recover damages, but legally the mechanism would not be to convert it to a termination for default and then say, ‘Oh, I subsequently found some mistakes, so now I’m going to treat it as a termination for default.’”
Alternatively, Hess explained, “the owner would start with the termination for convenience, terminate the contract, and then, if it uncovers problems, it would say, ‘Notwithstanding the fact that I terminated for convenience, I’m still allowed to recover damages for two kinds of default. I’m not terminating for default, but I’m recovering damages for two kinds of contract rights. One is defective work before I took over the contract that I couldn’t have known anything about. So, when I terminated for convenience, I didn’t realize there were structural problems. I’m allowed to sue for those.’ Some courts permit that [while] others don’t.”
In the second scenario, “when you terminate for convenience, you may have an argument as an owner that the warranties stay with the project,” Hess said. “So, if work is completed and accepted on an administration building, for example, in a huge water-treatment facility but then the civil construction doesn’t go well and the owner says, ‘We’re terminating the contract [and] we’re accepting the building [and] we’re going to find someone else to finish the civil side of the project’ and then it turns out that there are problems with the administration building, the owner might have an argument that there’s a warranty that is covered notwithstanding the termination for convenience. That gets a little sticky because most terminations -- well, all of them -- come before substantial completion as a practical matter, and most warranties don’t start running until substantial completion.”
Hess noted, “So, both of those are difficult claims to make. You’re entitled to recover for latent defects, and you’re entitled to recover for warranties. In some states, they’re easier than others, but that’s how an owner who terminates for convenience would protect himself. It isn’t exactly a termination for default or conversion to termination for default, but it’s similar in that the termination for convenience is followed by just a good ol’ suit for some kind of damages.”
During the webinar, Hess also discussed the basic legal principles of terminating a construction project, the economic consequences of termination decisions, modeling the economics of termination, investigating the model’s assumptions, and contractor-subcontractor termination.
A recording of the 90-minute webinar can be purchased via the following link: http://constructionpronet.com/Products/1058.aspx.
