This is the second post in a two-part blog addressing construction contract terminations. Read our previous post on “Terminations for Convenience” here.
B. Termination for Default
Termination for default is a draconian action. It constitutes a type of forfeiture; therefore, courts scrutinize terminations for defaults carefully to ensure that the contractual provisions the parties agreed to as part of their original bargain are followed to the letter. The impact of a termination for default is a cessation of revenue by the contractor or subcontractor for the specific project. The terminated contractor or subcontractor may be accountable for reprocurement costs and other damages. Generally, because default terminations are forfeitures, Courts regard them with disfavor.
A typical termination for default clause reads as follows:
Termination for Default. If Subcontractor refuses or fails to supply enough properly-skilled workers or materials to maintain the schedule of Work, refuses or fails to make prompt payment to lower-tier subcontractors or suppliers of labor, materials or services, fails to correct, replace, or re-execute faulty or defective Work done or materials furnished, disregards the law, ordinances, rules, regulations or orders of any public authority having jurisdiction, files for bankruptcy, or is guilty of a material breach of this Subcontract, and fails to correct the default and maintain the corrected condition within not less than three (3) working days of receipt of written notice of the default, then Contractor, without prejudice to any rights or remedies otherwise available to it, shall have the right to any or all of the following remedies:
(1) Supply such numbers of workers and quantity of materials, equipment, and other facilities as Contractor deems necessary for the completion of Subcontractor’s Work, or any part thereof, which Subcontractor has failed to complete or perform after the above notice, and to charge the cost thereof to Subcontractor who shall be liable for the payment of same including reasonable overhead and profit.
(2) Contract with one or more additional subcontractors to perform such part of Subcontractor’s Work as Contractor shall determine to provide prompt completion of the Project and charge the cost thereof to Subcontractor.
(3) Withhold payment of any monies due or to become due Subcontractor pending corrective action to the extent required and to the satisfaction of Contractor.
(4) Terminate this Subcontract, use any materials, implements, equipment, appliances, or tools furnished or belonging to Subcontractor to complete Subcontractor’s Work and furnish those materials, equipment, and/or employ such workers as Contractor deems necessary to maintain the orderly progress of the Work: Subcontractor’s equipment shall only be utilized when equivalent equipment is not locally available to lease, will not be supplied by a substitute subcontractor, and when procurement of substitute equipment will delay completion of the Main Contract. All of the costs, including reasonable overhead, profit and attorneys’ fees, incurred by Contractor in arranging to and performing Subcontractor’s Work shall be charged to Subcontractor and Contractor shall have the right to deduct such expenses from monies due or to become due Subcontractor. Subcontractor shall be liable for the payment of any expenses incurred by Contractor in excess of the unpaid balance of the Subcontract Price.
In the event of any emergency, Contractor may proceed as above without notice.
Generally, a termination for default clause contains the following elements:
Definition of Default. The default provision contains certain grounds for a default termination. Most common are the failure to meet the completion date; failure to make progress; failure to make payment to subcontractors, lower-tier subcontractors, and suppliers; failure to repair or replace faulty or defective work; disregard of laws, ordinances, rules, or other regulations; filing for bankruptcy; or otherwise materially breaching a term of the contract/subcontract.
Cure Notice. The second feature of a well-written termination clause is a cure notice. Generally, the contractor/subcontractor is given a period of time (3 to 5 working days) to cure the default after being provided with written notice of the event giving rise to the termination. A properly-crafted termination letter includes the specific bases for the default, the specific cure demanded of the contractor or subcontractor, and complies with the cure notice duration in the contract to the letter.
Default Remedies. The third feature of the well-written default provision is that the default remedies are set forth with particularity. Among the default remedies are augmentation of the contractor/subcontractor’s work through engagement of other workers or subcontractors, subcontractor’s withholding of money, and ultimately the termination and takeover of the contractor’s work.
Although not expressly stated in the standard default clause, closely-related concepts of contractor anticipatory repudiation or abandonment provide additional grounds for default termination. If a subcontractor or contractor leaves the project without any intention of returning, that constitutes an “abandonment,” which allows the owner/general contractor to take over the contractor’s/subcontractor’s work. To show that the contractor or subcontractor has abandoned the project, you must demonstrate an affirmative, unequivocal, and unconditional declaration of intent not to perform or some other unequivocal, definite demonstration of intent not to return.
The existence of a technical default by the contractor/subcontractor does not necessarily mean that a default termination is proper. Wrongful termination is itself a breach of contract. It relieves the contractor/subcontractor’s liability for preceding breaches and discharges the surety of any obligation under its performance bond. The owner or general contractor bears the burden of proof with respect to whether the termination for default was justified regardless. A default termination is a drastic remedy that should be imposed only for good grounds on solid evidence.
Comments: Termination is a tricky area of the law of contracts. Contractors and subcontractors are well advised to involve legal counsel before undertaking a contract termination, as the facts and circumstances of construction defaults vary widely and are oftentimes both factually and legally complex. Given the potentially harsh results, including the consequences of the default termination and the death sentence that the default termination suggests, it is prudent to contact an experienced construction lawyer at the first sign of trouble, and certainly before taking the extreme action of terminating a construction contract.
 Associated General Contractors of Washington Subcontract Form (2009).