Many contracts specify that an owner may terminate a contractor, and many subcontracts specify that a contractor may terminate a subcontractor, either for cause (i.e., for breach) or for “convenience” (i.e., without breach). Generally there are different remedies associated with each type of termination, with convenience terminations providing for more favorable benefits to the terminated party. And there could be one unintended benefit: protection against backcharges for defective work.
Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382, 307 P.3d 449 (2013), explains the logic. A general contractor (Catamount) terminated one of its subcontractors (Steelwood) under a clause in their subcontract that read “The Contractor may, upon seven (7) days written notice to the Subcontractor, without cause and without prejudice to any other right or remedy, terminate this Subcontract, in whole or in part, for its convenience . . . The obligations of the Subcontractor shall continue as to portions of the work already performed and as to bona fide obligations assumed by Subcontractor prior to the date of termination. Subcontractor shall be entitled to be paid the full cost of all work properly done by Subcontractor to the date of termination not previously paid for, less sums already received by Subcontractor on account of the portion of the work performed.”
When Catamount refused to pay Steelwood’s last materials invoice, Steelwood sued -- and Catamount counterclaimed for alleged defective work. The trial court disallowed the setoff, and the appeals court agreed, ruling that “the text of the termination for convenience clause, in context, does not under the circumstances of this case permit Catamount to both terminate Steelwood without cause and subsequently proceed against Steelwood as if it had terminated the agreement for cause. . . [W]e are persuaded, at least in the absence of an opportunity to correct allegedly defective work, that, where a party has terminated a contract for convenience, that party may not then counterclaim for the cost of curing any alleged default.”
Depriving a terminated contractor of an opportunity to cure defects was likewise the basis for rejecting defective workmanship claims in TRG Construction, Inc. v. Water & Sewer Authority, 70 A.3d 1164, 1167-68 (D.C. 2013) (“Upon terminating a contract for convenience, the government loses whatever right it has to hold the contractor responsible for correcting deficiencies in the work included in the terminated portion of the contract”), and in Paragon Restoration Group, Inc. v. Cambridge Square Condominiums, 42 A.D.3d 905, 839 N.Y.S.2d 658 (2007) (“[w]here [defendant] elects to terminate for convenience . . ., whether with or without cause, it cannot counterclaim for the cost of curing any alleged default’”) (quoting Tishman Constr. Corp. v City of New York, 228 A.D.2d 292, 293 (1996)).
This last comment may be overbroad, since defaults come in many forms aside from poor workmanship, some of which may not be curable by the terminated party. Old Colony Construction, LLC v. Town of Southington, 316 Conn. 202, 113 A.3d 406 (2015), for example, held that liquidated damages could be recovered from a contractor who was terminated for convenience. But if a contractor’s right to cure is vitiated by a termination for convenience, uncured defects in its work may well leave the owner with no recourse.
This is not to say that every termination for convenience clause is so worded as to leave the terminating party without a remedy for defective work. Parties are free to craft language preserving that right. But this much is reasonably certain: if the contract afforded the terminated party with an opportunity to correct deficiencies -- Section 12.2.1 of the popular AIA form A201 General Conditions is an example -- termination for convenience is more likely to preclude recovery for uncured defects. An owner who terminates for convenience in the face of significant defective work may end up regretting it -- at least if it hasn't retained enough of the contract price to cover needed repairs. (This segues into the question of what payments are due to the contractor upon termination for convenience -- a subject for a future blog.)
Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382, 307 P.3d 449 (2013), explains the logic. A general contractor (Catamount) terminated one of its subcontractors (Steelwood) under a clause in their subcontract that read “The Contractor may, upon seven (7) days written notice to the Subcontractor, without cause and without prejudice to any other right or remedy, terminate this Subcontract, in whole or in part, for its convenience . . . The obligations of the Subcontractor shall continue as to portions of the work already performed and as to bona fide obligations assumed by Subcontractor prior to the date of termination. Subcontractor shall be entitled to be paid the full cost of all work properly done by Subcontractor to the date of termination not previously paid for, less sums already received by Subcontractor on account of the portion of the work performed.”
When Catamount refused to pay Steelwood’s last materials invoice, Steelwood sued -- and Catamount counterclaimed for alleged defective work. The trial court disallowed the setoff, and the appeals court agreed, ruling that “the text of the termination for convenience clause, in context, does not under the circumstances of this case permit Catamount to both terminate Steelwood without cause and subsequently proceed against Steelwood as if it had terminated the agreement for cause. . . [W]e are persuaded, at least in the absence of an opportunity to correct allegedly defective work, that, where a party has terminated a contract for convenience, that party may not then counterclaim for the cost of curing any alleged default.”
Depriving a terminated contractor of an opportunity to cure defects was likewise the basis for rejecting defective workmanship claims in TRG Construction, Inc. v. Water & Sewer Authority, 70 A.3d 1164, 1167-68 (D.C. 2013) (“Upon terminating a contract for convenience, the government loses whatever right it has to hold the contractor responsible for correcting deficiencies in the work included in the terminated portion of the contract”), and in Paragon Restoration Group, Inc. v. Cambridge Square Condominiums, 42 A.D.3d 905, 839 N.Y.S.2d 658 (2007) (“[w]here [defendant] elects to terminate for convenience . . ., whether with or without cause, it cannot counterclaim for the cost of curing any alleged default’”) (quoting Tishman Constr. Corp. v City of New York, 228 A.D.2d 292, 293 (1996)).
This last comment may be overbroad, since defaults come in many forms aside from poor workmanship, some of which may not be curable by the terminated party. Old Colony Construction, LLC v. Town of Southington, 316 Conn. 202, 113 A.3d 406 (2015), for example, held that liquidated damages could be recovered from a contractor who was terminated for convenience. But if a contractor’s right to cure is vitiated by a termination for convenience, uncured defects in its work may well leave the owner with no recourse.
This is not to say that every termination for convenience clause is so worded as to leave the terminating party without a remedy for defective work. Parties are free to craft language preserving that right. But this much is reasonably certain: if the contract afforded the terminated party with an opportunity to correct deficiencies -- Section 12.2.1 of the popular AIA form A201 General Conditions is an example -- termination for convenience is more likely to preclude recovery for uncured defects. An owner who terminates for convenience in the face of significant defective work may end up regretting it -- at least if it hasn't retained enough of the contract price to cover needed repairs. (This segues into the question of what payments are due to the contractor upon termination for convenience -- a subject for a future blog.)
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