Be Careful How You Terminate: Terminating for Convenience May Limit Your Future Rights
Many construction contracts contain a termination clause that allows a contractor to be terminated either for convenience or for cause. Termination for convenience and termination for cause clauses have been discussed previously on the blog here, here, and here. The distinction between a termination for convenience or for cause is an important one.
If a contractor is terminated for convenience, the rights of the party who has terminated the contractor for convenience could be limited in the future. This is specifically true as to any defects in the terminated contractor’s work that are discovered after the termination for convenience.
This issue was addressed in an Oregon Court of Appeals case where a general contractor attempted to recover costs incurred in correcting a terminated subcontractor’s work after the subcontractor was terminated for convenience. Shelter Prods. v. Steel Wood Constr., Inc., 257 Or. App 382 (2013). In that case, the subcontractor sued the general contractor for its termination expenses. The general contractor asserted an offset/backcharge claim for damages incurred by the general contractor in correcting the subcontractor’s defective work. The general contractor had incurred the costs after it had terminated the subcontractor. The general contractor did not notify the subcontractor that its work was defective and did not give the subcontractor an opportunity to cure before the repairs were completed.
The subcontractor argued that the general contractor could not assert a claim for offset after the subcontractor had been terminated for convenience by the general contractor. The Oregon Court of Appeals agreed, and held that “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 defect.” 257 Or. App at 402. The Court distinguished the termination for cause clause, which specifically stated that the subcontractor would still be responsible for defective work.
Although Washington courts have not specifically addressed this issue, a series of panels of the Armed Services Board of Contract Appeals reached the same result as the Oregon Court of Appeals. New York Shipbuilding Co., ASBCA 15443, 73-1 BCA 9852, 14, 46 (1972) (“[T]he termination for convenience precludes the Government from recovering the amounts paid for correcting the alleged deficiencies, even if the existence of such deficiencies were proved and the Government’s cost of correcting them were established.”); J.D. Shotwell Co., ASBCA No. 8961, 65-2 BCA (CCH) ¶ 5243, 24,691-92 (Nov. 30, 1965) (Termination for convenience under the Termination for Convenience of the Government clause extinguishes the Government’s right to correction of deficiencies and charge against contractor).
Although it appears this issue has not been addressed by courts in Washington, the takeaway from these cases is that it is important to consider the potential downside before a contractor is terminated for convenience. The decision whether to terminate for convenience is often made quickly and without a complete picture of all the issues involved. Before you terminate for convenience, you should consider whether there is any deficient work that should be addressed before termination.