Despite being bound by contracts, circumstances can change between owners and contractors during a construction project.
The result might be that the owner may either need or wish to “change horses mid-stream.”
There are basically two types of contract terminations. One is for default, the other is for convenience. Both carry risks and consequences.
When an owner terminates a construction contract for default, it is usually when, “the contractor fails to prosecute the work properly or comply with the requirements of the contract to a substantial degree,” write Paul Ivanoff and Ethan McCarthy of Osler Hoskin & Harcourt LLP.
That might also involve failure “to correct its (contractor) default within the applicable timeframe.”
Termination for default can work the other way as well. When the contractor seeks termination, it’s often for financial reasons. For example, it can occur when an owner fails to pay amounts due when certified by the project consultant or as awarded by an arbitrator.
Either way, Ivanoff and McCarthy suggest the party taking the action “must first ensure that they have a complete understanding of their contractual rights before proceeding down such a path.”
Termination for convenience is another matter.
“A termination for convenience right is most often reserved for owners and is rarely a remedy available to contractors,” say Ivanoff and McCarthy.
Typically, it is used when the owner’s needs have changed or when another contractor is required to complete work.
Even so, they advise great care be taken before using this tool due to potential project disruption. Termination of the first contractor can slow work progress while a replacement contractor is sought. Even more time can be lost as the replacement gets up to speed onsite. Such time pressures to complete projects in the midst of an active market might reduce the owner’s bargaining power.
Ivanoff and McCarthy outline other considerations for owners.
“Termination for default carries with it the risk that a court or arbitrator may find that an owner wrongfully terminated the contract, which could expose the owner to claims by the contractor for damages suffered as a result of the termination. There may be debates when an owner moves to enforce existing warranties in the original contract, given possible disputes over which contractor was responsible for which portion of the work”
Although the standard CCDC-2 contract does not include any rights for termination for convenience, there’s no reason why such provisions can’t be included as supplementary conditions.
Even so, Derrick Dodgson of Glaholt Bowles LLP, suggests concern over the concept of “appropriate regard” for the original contractor’s interests when terminating for convenience.
“How can one party’s unilateral decision to terminate without cause have ‘appropriate regard’ for the other party’s interest in continuing the contract?” he asks. “Even in cases where termination for convenience clauses provides unfettered discretion, owners may not wish to take advantage of them where they expose an owner to greater liability for the contractor’s costs.”
There is also the matter of unravelling issues such as holdback periods and lien expiration deadlines, as outlined by Chelsea Wilson, senior associate with Dentons in Vancouver.
She describes how the British Columbia Supreme Court recently released a decision that a mid-project termination of the general contractor did not result in a termination of the head contract for the purposes of the BC Builders Lien Act, even though the replacement agreed to all the previous performance conditions.
“The court found that by hiring a new replacement contractor to complete all of the original work, the owner intended to assign, rather than terminate, the original head contract,” she writes. “As a result, the lien filing period would not expire until 45 days following substantial completion of the work under the replacement contract. Similarly, the holdback period would not expire until 55 days following substantial completion of the work under the replacement contract.”
It would appear that a termination for convenience can be anything but that, in terms of project progress and the after effects.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.
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