Breaking Up Is Hard To Do: Terminating a Defaulting Contractor without Getting in Trouble06/08/2014 | Summer 2014 Newsletter
If you are in real estate or construction, or even if you have had a contractor do work in your home or apartment, you may have encountered a situation where you need to terminate a contractor or subcontractor who has not performed properly.
These end-game situations often turn messy: the contractor stops showing up or reduces its workforce; the owner stops or slows payment; complaints are made; new promises are made and broken. It is not a fun time.
Not infrequently, one of the parties has become so totally fed up that he/she acts impulsively, either marching off the job (the contractor), or dashing off a termination letter and/or simply barring further access (the owner).
Sometimes these precipitous actions can backfire, and an ill-timed termination of a defaulting contractor can actually constitute a breach by the owner. It all depends on the terms of the contract.
It is not unusual for a construction contract to contain a “cure period” before termination can be implemented. Sometimes, the termination provision does not explicitly provide a right to cure, but nevertheless requires that there be a notice period before the termination becomes effective, e.g., “Owner may terminate this Contract for cause on five days’ written notice to Contractor.” If the owner terminates the contractor without affording the five days’ written notice is the termination effective? Perhaps not.
In New York, the courts require strict compliance with contractual termination provisions. Where the parties have agreed to a termination procedure, the clause will be enforced as written. Doing so permits the contractor to finish unperformed work and to cure its unsatisfactory performance before being charged with the cost of completion. And where the owner fails to follow the contractually-agreed procedure, the termination can be held invalid, thus excusing even a defaulting contractor from some of the consequences of its actions.
There is one exception to this “strict enforcement” rule, and that is where giving the required notice would be a “futile act.” This is a limited exception, which generally applies only where the contractor has unequivocally abandoned the work. Where the contractor refuses to return, or conditions its willingness to return with a high-handed demand for additional payments, this may constitute a “constructive abandonment” such as would permit an owner to be excused from the futile act of giving additional notice of his intention to terminate the contractor.
It’s a messy business and the risks are high. A “wrongful termination” may subject the owner to damages for the contractor’s lost profits and deprive it of its right to recover its costs to complete the work. But a good contract and some clear-minded planning may keep a bad situation from getting worse.
About the author: Randy Heller is a partner at Gallet Dreyer & Berkey LLP. His practice focuses on construction law and litigation, representing contractors and owners in construction related matters. Mr. Heller has been named a Super Lawyer by the New York Times Magazine as one of the top attorneys in construction law in the New York metropolitan area, and by New York magazine as one of the Best Lawyers of New York. Mr. Heller can be reached at firstname.lastname@example.org.