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Terminating a construction contract: With or without cause

by | Apr 20, 2021 | Construction Law

Contracts are extremely important in business affairs. Although parties to a contract have every intention of fulfilling the contractual requirements, there may be a need to terminate the contract under certain circumstances. If there is no clause in the contract allowing for early termination, the party seeking to terminate the contract may be in a very difficult, and often times costly, position. It is critical that the parties consider an early termination provision in their construction contract. If there is such a provision, it is equally important that the party seeking early termination follow the procedure included within the provision when terminating the contract. If there is no provision or if the party seeking early termination does not follow the procedure contained in the contract, significant damages may flow from the unlawful termination.

There are two basic types of termination. These are termination with cause and termination without cause. It is important to understand the basics of each type of termination to make sure you are adhering to what is stated in the contract.

Termination of a contract may include with or without causeTerminating a contract with cause

Termination with cause may occur when one party cannot uphold their end of the contract by virtue of a reason or circumstance outlined within the contract. These can include financial trouble, quality of work disputes, failure to keep up with the contractual schedule of a project, failure to pay, inability to secure products or materials, etc. If the termination is based on one of the proscribed “for cause” reasons, the party seeking early termination can terminate the contract with little or no legal recourse from the other party. Similarly, if the other party has not upheld a material component of the contract, they’ve essentially breached the contract, giving you a right to terminate the contract for cause.

Terminating a contract without cause

Termination without cause means to terminate the contract, even though there is no specific reason for doing so. This may also be referenced as termination for convenience. When a party decides they want to terminate a contract for convenience, it is important to look at the contents of the contract that was signed. To legally terminate a contract without cause, there needs to be a termination for convenience clause specifically stated. There is no grounds to terminate for convenience if this clause is not included in the contract.

A termination for convenience clause cuts both ways. While it is beneficial to have the opportunity to terminate the contract for convenience, the parties must consider what that means for them in terms of preparation and related costs. The last thing a contractor wants to see is a termination for convenience notice the day before they are set to begin a large project where they’ve already incurred substantial preparation, mobilization and related costs. The best way to avoid this potential pitfall is to include specific language concerning the time in which the termination for convenience may be made and the costs which may be recouped for early termination.

Wrongful contract termination

If you believe you must terminate a contract, it is critical that you terminate the contract in the manner most beneficial to you. If you do not have grounds to terminate the contract for cause or for convenience but terminate the contract anyway, you essentially have breached the contract. If you have breached the contract, you likely will be on the hook for penalties and damages associated with the breach.

Construction attorneys can guide you through the negotiation and termination of a contract

Planning is key. If you are in the process of entering into a contract, you should include appropriate contract termination safeguards such as a “for cause” and/or “for convenience” termination provisions. If you already have entered into a contract, it is crucial that you follow the proper protocol and procedure to effectively terminate the contract with the least cost to you. Having a knowledgeable construction contract attorney on your side is paramount in these situations. The attorneys at McDonald & Kloth, LLC can help you navigate the drafting of a construction contract as well as the termination of an existing construction contract. Call today at 262-252-9122 to schedule a consultation with an experienced attorney.