Chapter Eleven
Termination
Ann B. Graff and Ryan P. Stewart
11.01Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
11.02Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
11.03 For Convenience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
11.04 Damages for Termination for Convenience . . . . . . . . . . . . . . . . . . . . . . . . . . 185
11.05 Backcharges and Termination for Convenience . . . . . . . . . . . . . . . . . . . . . . 187
11.06 Constructive Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
11.07 For Default (or Cause)—Common-law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
11.08 Contractual Termination for Default after Notice . . . . . . . . . . . . . . . . . . . . . 191
11.09 Damages for Termination for Cause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
11.10 Opportunity to Cure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
11.11 Required Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
11.12 Wrongful Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
11.13 Damages for Wrongful Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
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Chapter 11: Termination
11.01 Introduction
A party’s right to terminate its contract may originate from the general principles of contract law, or it may arise out of the terms of the contract itself.
In general, the effect of the termination is to discharge the parties from their
unperformed obligations under the contract. The reasons for termination
will determine whether a contractor is entitled to payment for work performed prior to termination and whether the contractor is responsible for
increased costs to complete the remainder of the project.
11.02 Termination
In the construction context, “termination” means to stop a contract before
it is fully performed or completed. The contract terms or applicable law
determine whether or when each party has a right to terminate the contract.
11.03 For Convenience
Normally, a party to a contract cannot unilaterally terminate a contract
with another without just cause. In this case, the contract contains a “termination for convenience” clause. This clause gives the owner the right to
terminate the contract without cause or for any reason.
Even though the contract has this provision, the contractor may recover
full breach of contract damages if it can show that the owner acted in bad
faith by invoking the termination clause.
To show bad faith in this context, the contractor must show that the
owner
(1) acted with malicious intent or animus toward the contractor or
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(2) entered into the contract knowing full well that it had no intention of honoring the contract.
Comment
Many public contracts, and a growing number of private contracts, contain termination for convenience clauses that give the owner the unilateral
right to terminate the contract if it deems the termination to be in its best
interest. See, e.g., Federal Acquisition Regulations FAR 52-249-1. Although
these clauses typically require that the owner pay the contractor for the
value of the work installed and typical contract closeout costs, the owner is
usually saved from paying for damages for actual breach of contract, profit
and overhead and work not performed, or punitive damages. See Krygoski
Constr. Co. v. United States, 94 F.3d 1537 (Fed. Cir. 1996), cert. denied, 137
L. Ed. 2d 819 (1996).
While the government’s right to terminate a contract for convenience is
not unlimited, the government is entitled to considerable latitude in making such a decision to terminate. Id. at *6.
Under the “traditional standard,” a contracting officer’s convenience termination is conclusive absent the contractor’s showing that the termination
decision either was a product of bad faith or constituted clear abuse of discretion. Id.; see also John Reiner & Co. v. United States, 325 F.2d 438, 442
(Ct. Cl. 1963). It is the terminated contractor’s burden to show bad faith.
Nat’l Factors Inc. v. United States, 492 F.2d 1383 (Ct. Cl. 1974). But see U.S.
Genes v. Vial, 923 P.2d 1322 (Or. Ct. App. 1996) (implied covenant of good
faith does not limit the right to terminate the contract for its convenience).
Contractors asserting claims of bad faith must overcome the strong presumption that in the absence of clear, contrary evidence, public officials act
conscientiously in the discharge of their duties. Cont’l Collection & Disposal
Inc. v. United States, 29 Fed. Cl. 644, 652 (Ct Cl. 1993). Since good faith
is presumed unless bad faith is demonstrated, the government is prevented
only from engaging in actions motivated by a specific intent to harm the
plaintiff. Id. The difficult burden of proof for a contractor attempting to
show that a government act was undertaken in bad faith has been described
as follows: “It requires ‘well-nigh irrefragable proof’ to induce the court to
abandon the presumption of good faith dealing.” Kalvar Corp. v. United
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States, 543 F.2d 1298, 1301–02 (Ct. Cl. 1976), cert. denied, 434 U.S. 830
(1977). In the cases where the court has considered allegations of bad faith,
the necessary irrefragable proof has been equated with evidence of some
specific intent to injure the plaintiff, motivated solely by malice, or actuated by animus toward the plaintiff. Id. Unsubstantiated suspicions and
allegations of bad-faith actions are not enough. To demonstrate bad faith,
the contractor must identify specific instances of the government’s ill will
directed toward it. Id.
The state of mind of the contracting officer is critical to determining
whether a convenience termination was made in bad faith. No less than
knowing and intentional conduct on the part of the contracting officer can
support a finding of bad faith. Thus, claims of bad faith have been rejected
when the contractor can only prove that the convenience termination was an
outgrowth of negligent conduct by the contracting officer. Salsbury Indus. v.
United States, 905 F.2d 1518, 1521 (Fed. Cir. 1990). Moreover, mere error
on the part of the government, even if it would constitute sufficient ground
for contractual breach, is insufficient to demonstrate bad faith. Kalvar Corp.
v. United States, 543 F.2d 1298 (Ct. Cl. 1976).
A contractor may also attack a contracting officer’s decision to invoke a
termination for convenience clause on the grounds that the decision to terminate was an abuse of discretion or arbitrary and capricious. Darwin Constr.
Co. v. United States, 811 F.2d 593, 598 (Fed. Cir. 1987). The contractor has
the burden of proving arbitrary and capricious conduct. Embry v. United
States, 17 Cl. Ct. 617, 625–26 (1989) (holding that two bases of termination—ruined business relations and inadequate performance—supported
government’s termination of contractor for convenience). In determining
whether a contracting officer has abused his discretion, the Federal Circuit
has generally examined the following factors: (1) subjective bad faith on
the part of the procuring officials, depriving a bidder of the fair and honest
consideration of his proposal; (2) proof that there was no reasonable basis
for the decision; (3) the degree of proof of error is ordinarily related to the
amount of discretion entrusted to the procurement officer; and (4) proven
violation of pertinent statutes or regulations. Id.
In Torncello v. United States, 681 F.2d 756 (Ct. Cl. 1982), the court
appeared to alter the “Traditional Standard” described above by requiring
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the government to demonstrate “changed circumstances” as a precondition to terminating a contract for convenience. According to the plurality
opinion, unless the government’s ability to terminate a contract under
a termination for convenience clause was limited, the inclusion of the
clause created an unenforceable illusory promise. In order to prevent
such a result, the court stated that the use of a termination for convenience clause must be limited to situations when “the circumstances of
the bargain or the expectations of the parties have changed sufficiently
that the clause only serves to allocate risk.” Id. at 771–74. In adopting
the changed circumstances test, the plurality rejected the government’s
argument that the traditional standard provided an adequate check on the
government’s use of termination for convenience clauses so as to provide
consideration for the bargain.
However, since Torncello, most courts have declined to apply the changed
circumstances test, stating that Torncello merely “stands for the unremarkable proposition that when the government contracts with a party knowing
full well that it will not honor the contract, it cannot avoid a breach claim
by adverting to the convenience termination clause.” Salsbury Indus. v.
United States, 905 F.2d 1518, 1521 (Fed. Cir. 1990).
11.04 Damages for Termination for Convenience
The termination for convenience clause limits the owner’s liability for a termination that would otherwise constitute a breach of contract.
Option A: (specific contract provision):
According to the contract, if the owner terminates the contractor for
convenience, the owner must pay the contractor the following amounts:
[list damages from contract: (1) the cost of the work performed,
(2) demobilization and closeout costs, and/or (3) a premium for work
not performed]
The contractor must prove the amount of such costs with reasonable
certainty.
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Option B: (no specific contract provision):
The measure of damages available to a contractor terminated for convenience is the cost the contractor actually incurred up to the date
of termination, plus a reasonable profit on the work performed prior
to termination.
The contractor bears the burden of proof to establish its termination
for convenience damages.
Comment
When the government terminates a contractor for convenience, instead of
receiving full expectation damages, the contractor’s recovery is defined by
the termination for convenience clause. Linan-Faye Constr. Co. v. Hous.
Auth. of City of Camden, 49 F.3d 915 923 (3d Cir. 1995).
The overall purpose of a termination for convenience settlement is to
fairly compensate the contractor and to make the contractor whole for
the costs incurred in connection with the terminated work. Nicon Inc. v.
United States, 331 F.3d 878, 885 (Fed. Cir. 2003). Generally, the contractor is entitled to damages in the amount of the cost of the contract work
performed before the termination, plus a fair and reasonable profit on the
work performed. United Partition Sys. Inc. v. United States, 90 Fed. Cl. 74,
89 (2009); Rhen v. United States, 17 Cl. Ct. 140, 143 (1989).
Unless provided in the contract, many courts determine a contractor terminated for convenience is not entitled to recover anticipated, but unearned,
profit. Rhen, 17 Cl. Ct. at 143; Century Marine Inc. v. United States, 153
F.3d 225, 227 (5th Cir. 1998); Mega Constr. Co. v. United States, 29 Fed.
Cl. 396, 475 (1993).
The contractor bears the burden of proof to establish termination for
convenience damages. White Buffalo Constr. Inc. v. United States, 52 Fed.
Cl. 1, 13 (2002); United Partition Sys. Inc., 90 Fed. Cl. at 89.
“[A] termination for convenience unequivocally terminates the contract
and relieves (the terminated party) from incurring any further obligation
associated with the project.” Pub. Bldg. Auth. of City of Huntsville v. St.
Paul Fire & Marine Ins. Co., 80 So. 3d 171 (Ala. 2010).
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11.05 Backcharges and Termination for Convenience
If the owner terminates the contractor for convenience, the owner cannot
recover damages or withhold money from the contractor associated with
either
(1) defective work that the contractor was not given an opportunity
to cure or
(2) the cost to complete the contractor’s work by other parties.
Comment
“[A] termination for convenience unequivocally terminates the contract and
relieves (the terminated party) from incurring any further obligation associated with the project.” Id. Further, there is “no applicable legal authority
to support a position that a termination for convenience may be converted
to a termination for cause. A party cannot resuscitate a dead contract so
that it may re-terminate it.” Id. After a termination for convenience, it is
not appropriate to backcharge the contractor for completion or work not
completed or billed by the contractor. Richerson Constr. Corp. v. Gen. Servs.
Admin., 93-1 B.C.A. (CCH) ¶ 25,239 (1992). Rather, it is well recognized
in the industry that an offset for costs to complete is only available when
the contractor is terminated for default. See Tishman Constr. Corp. v. City
of N.Y., 228 A.D.2d 292, 293 (N.Y. 1996); Fruin Corp. v. Niagara Frontier
Transp. Auth., 180 A.D.2d 222, 233 (N.Y. 1992).
“[W]here a party has terminated a contract for convenience, that party
may not then counterclaim for the cost of curing any alleged default.” Shelter Prods. v. Steelwood Constr. Inc., 257 Or. App. 382, 401–03 (2013); see
also N.Y. Shipbuilding Co., ASBCA No. 15443, 73-1 BCA ¶ 9852; W. States
Painting Co., ASBCA No. 13843, 69-1 BCA ¶ 7616, at 35,379; Paragon
Restoration Grp. Inc. v. Cambridge Square Condos., 42 A.D.3d 905, 906
(2007); Tishman Constr., 228 A.D.2d at 293.
This rule was upheld in Paragon Restoration Group Inc. v. Cambridge
Square Condominiums, 42 A.D.3d 905 (N.Y. 2007), in which the court held
that when an owner terminates a construction contract for convenience, the
owner loses its right to counterclaim for the cost of curing alleged defects
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in the contractor’s performance. Similarly, in Steelwood, the terminating
party placed the contractor on notice of potential claims related to deficiencies in the work. Then, immediately after sending the letter and prior
to allowing an opportunity to cure, the terminating party “terminated the
agreement pursuant to [the termination for convenience provision ‘without
cause.’” Steelwood Constr., 257 Or. App. at 402. “Under those circumstances,
nothing in the contract permits Catamount to receive an offset against
Steelwood’s costs for allegedly defective work done by Steelwood prior to
the termination.” Id. The court determined the remedy for the terminating
party to charge the contractor for costs to repair was available “pursuant to
its right to terminate for cause.” Id. at 401. Yet, the right to terminate was
only available after satisfying the contractor’s “opportunity [] to ‘correct,
replace and/or re-execute faulty or defective work.’” Id. at 401. As a result,
the court upheld the district court’s entry of summary judgment determining that the terminating party “was not entitled to offset any amounts it
owed [the contractor] with amounts it incurred in correcting [the contractor’s] allegedly defective work.” Id. at 403.
Similarly, in Fruin-Colnon, the court determined that when the contractor was terminated (purportedly for cause) without the contractually
required notice and opportunity to cure, the terminating party could not
recover costs to repair deficient work from the contractor. Fruin-Colnon,
180 A.D.2d at 233–34. In upholding the lower court’s denial of such repair
damages, the court stated as follows: “[D]efendant had the right to remedy
any defect at plaintiff’s expense, but only if plaintiff first had been granted
the opportunity to cure the defect and had failed to do so.” Id. (emphasis
added). Another court held, “Where the City elects to terminate for convenience, as provided in section 15, whether with or without cause, it cannot
counterclaim for the cost of curing any alleged default.” Tishman Constr.
Corp., 228 A.D.2d at 292–93. The court explained, “Had the City wished
to pursue these claims, plaintiff should have been terminated [for default],
which provides for recouping the expense of curing plaintiff’s default.” Id.
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11.06 Constructive Termination
The contract between the owner and contractor provides that the owner may
terminate the contractor for cause or for its convenience. The contract also
provides that in the event the owner wrongfully terminates the contract for
cause, such termination shall be deemed to be a termination for convenience.
Here, the owner terminated the contractor for cause. If you find that the
owner’s termination for cause was wrongful, you must consider the termination to have been for the owner’s convenience, unless you also find that
the termination was in bad faith. “Bad faith” in this context means that
the owner acted with malicious intent or animus toward the contractor or
by entering into the contract knowing full well that it had no intention of
honoring the contract.
Comment
Under most federal government contracts, as well as many state, municipal,
and private contracts, a termination for default that is found to be wrongful is automatically converted to a termination for convenience. See Federal
Acquisition Regulations FAR 52.249-8(g), FAR 52.249-10(c).
Thus, where a contracting officer has not explicitly invoked the termination for convenience clause, courts have held that if the contract contains a
termination for convenience clause and the contracting officer could have
invoked the clause instead of terminating, rescinding, or repudiating the
contract on some other invalid basis, the court will constructively invoke
the clause to retroactively justify the government’s actions, avoid breach,
and limit liability. Praecomm Inc. v. United States, 2007 WL 2317519 (Fed.
Cl. 2007); see also Best Foam Fabricators Inc. v. United States, 38 Fed. Cl.
627 638 (1997); Hancock Elec. Corp. v. Washington Metro. Area Transit
Auth., 81 F.3d 451, 454 (4th Cir. 1996).
Courts have imposed limits, however, on the use of the constructive
termination for convenience doctrine. As discussed in Part 11.03, to avoid
application of the constructive termination for convenience doctrine, most
courts require the contractor to demonstrate that the termination decision
either was a product of bad faith or constituted clear abuse of discretion.
Kavlar Corp. v. United States, 543 F.2d 1298, 1301 (Ct. Cl. 1976); see
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also John Reiner & Co. v. United States, 325 F.2d 438, 442 (Ct. Cl. 1963).
But see Torncello v. United States, 681 F.2d 756 (Ct. Cl. 1982) (holding
that the constructive application of a termination for convenience clause
requires some kind of change from the circumstances of the bargain or in
the expectations of the parties).
11.07 For Default (or Cause)—Common Law
As a general rule, a party to a contract is entitled to terminate the contract
if the other party breached a material term of the agreement and failed to
perform as agreed.
To demonstrate the termination was proper, [terminating party] has the
burden to demonstrate the following:
(1) [The terminated party] has an obligation under the agreement.
(2) The obligation was a material term.
(3) [The terminated party] failed to perform the obligation.
(4) [The terminating party] performed all of its responsibilities under
the contract.
Comment
This instruction is appropriate where contractual language provides that
an owner may terminate the contract for dissatisfaction or cause. Some
contracts allow an owner to terminate a contract for its convenience, at
will, or for no reason whatsoever. In such a circumstance, the owner can
usually terminate for any reason. See U.S. Genes v. Vial, 923 P.2d 1322
(Or. Ct. App. 1996). If the contract intends to leave a decision to one party,
subject only to the requirement of good faith, the court should not impose
an additional requirement of reasonableness. See Action Eng’g v. Martin
Marietta Aluminum, 670 F.2d 456, 460 (3d Cir. 1982).
A contract may be terminated for default only on a material breach of
contract. See Wells Benz Inc. v. United States ex rel. Mercury Elec. Co.,
333 F.2d 89, 92 (9th Cir. 1964) (default termination is proper only if “the
other’s breach is so gross that the very object of the contract is defeated”);
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Daff v. United States, 31 Fed. Cl. 682, 689–91 (1994), aff’d, 78 F.3d 1556
(Fed. Cir. 1996).
Virginia courts have determined that any breach of a contract that jeopardizes future interests of the other contracting party is by definition a
material breach. Clevert v. Soden, 400 S.E.2d 181, 182 (Va. 1991).
An owner may also be estopped from terminating the contract for a
contractor’s failure to perform according to the contractual terms if the
owner, after becoming aware of this failure, continued to encourage or
allow the contractor to continue. See Indem. Ins. Co. v. United States, 14
Cl. Ct. 219 (1988).
11.08 Contractual Termination for Default after Notice
In this case, [the owner] had a right, under the express terms of the contract, to terminate the contract for cause if the contractor failed to perform
a material obligation of the contract. Here, the owner contends that it was
entitled to terminate the contractor because [list reason].
In order to terminate for cause, the owner was required to provide the
contractor written notice and [list time frame] to cure the default.
The owner must demonstate the following:
(1) The contractor had an obligation to [list breach].
(2) The contractor failed to [list breach].
(3) The owner provided the contractor written notice and [list time
frame] days to cure the default.
(4) The contractor failed to make reasonable efforts to cure the default.
(5) The owner provided the contractor written notice that the contract was terminated.
Even if you find that the contractor [list breach], the owner was not entitled
to terminate the contract for default unless it gave the contractor written
notice of the breach and an opportunity to cure.
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11.09 Damages for Termination for Cause
If you find that the owner’s termination of the contractor for cause was
proper, then you may award the owner damages as follows:
cost to complete the project
[minus]
unpaid balance of the owner’s contract with the contractor
[plus]
owner’s reasonable and foreseeable costs arising from the contractor’s failure
If the owner completed the project for less money that it would have cost
the contractor to complete the project, the owner is not entitled to any
damages from the contractor.
Comment
The general rule for the measure of recovery by an owner for an incomplete
performance by a defaulting contractor is the reasonable cost of construction and completion in accordance with the contract. Kirkpatrick v. Temme,
654 P.2d 1011, 1012–13 (Nev. 1982).
Courts are split, however, as to which party bears the burden of proving the “reasonable” costs of construction. One line of cases holds that, in
determining damages based on cost to complete, the actual costs expended
by an owner in completing the work are “presumed to be reasonable absent
a showing [by the contractor] to the contrary.” LBL Skysystems (USA) Inc.
v. APG-Am. Inc., 2006 U.S. Dist. LEXIS 65142, at *79 (E.D. Pa. Sept. 6,
2006) (citing 24 Williston on Contracts § 66:17 (4th ed. 1999); see also
Fetzer v. Vishneski, 582 A.2d 23, 26–27 (Pa. Super. Ct. 1990).
In Fetzer, the court held that when the owner has presented evidence
as to the cost of remedying the defects, the burden is on the contractor to
challenge this evidence. Specifically, the court stated: “[I]f the owner has
had the repair or completion performed at the time of trial, the amount
paid by the owner may be presumed to be reasonable, subject to rebuttal evidence by the contractor. The amount actually paid by the owner to
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another contractor for correction of the defective work, within a reasonable time after the breach, is strong and reliable evidence in determining
the time and amount of damages.” Fetzer v. Vishneski, 582 A.2d 23, 26–27
(Pa. Super. Ct. 1990) (emphasis added); see also Darger v. Nielsen, 605 P.2d
1223, 1225 (Utah 1979) (contractor bore the burden of proof concerning
allegations that the cost was unreasonable or that the owner added construction beyond the contract specifications); Carlin v. Comstock, 450 A.2d
875 (Conn. Super. Ct. 1982) (if the owner has had the repair or completion performed at the time of trial, the amount paid by the owner may be
presumed to be reasonable, subject to rebuttal evidence by the contractor);
Webster v. Culver Roadways Inc., 79 Misc. 2d 256, 258 (N.Y. Sup. Ct. 1974)
(when contractor defectively performs “the . . . amount actually paid by the
plaintiff to another contractor for correction of the defective work . . . is
strong and reliable evidence in determining the . . . amount of damages”).
Other courts, however, have held that the owner bears the burden of proving the reasonableness of its costs to complete the work. Ferris v. Mann, 210
A.2d 121 (R.I. 1965) (holding that even though owner introduced evidence
of the nature and cost of the additional work done to complete construction, in the absence of any evidence as to the reasonableness of such costs,
the owner could not recover for the installed materials).
The standard for federal government contracting provides that when a
contractor is properly terminated for default, the government is entitled
to recover the excess cost of re-procuring the uncompleted work where it
demonstrates those completion costs were reasonably incurred. Cascade
Pac. Int’l v. United States, 773 F.2d 287, 293–94 (Fed. Cir. 1985). Courts
following the federal standard hold that excess re-procurement costs may be
imposed only when the government meets its burden of persuasion that the
following conditions are met: (1) the re-procured supplied are the same as
or similar to those involved in the termination, (2) the government actually
incurred excess costs, and (3) the government acted reasonably to minimize
the excess costs resulting from the default. 41 C.F.R. § 1-8.602-6(a), AstroSpace Labs. Inc. v. United States, 470 F.2d 1003, 1018 (Ct. Cl. 1972). The
first condition is demonstrated by comparing the item re-procured with
the item specified in the original contract. Envtl. Tectonics Corp., ASBCA
No. 21204, 78-1 BCA 12,986, 63,308. The second condition requires the
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government to show what it spent in re-procurement. Fairfield Scientific
Corp. v. United States, 611 F.2d 854, 863–66 (Ct. Cl. 1979). The third
condition requires that the government act within a reasonable time of the
default, use the most efficient method of re-procurement, obtain a reasonable price, and mitigate its losses. Astro-Space Labs. Inc., 470 F.2d at 1018.
In jurisdictions following the federal standard and holding that the owner
must prove reasonableness, the most desirable evidence for the owner to
proffer is a firm competitive bid. If that is not available, courts prefer expert
testimony, based on computation of the work undertaken. Additionally, the
owner can present testimony or documentary evidence by those qualified to
estimate the cost of repair and reconstruction, such as a contractor’s written repair estimate. John Ludington, Modern Status of Rule as to Whether
Cost of Correction or Difference in Value of Structures Is Proper Measure
of Damages for Breach of Construction Contract, 41 A.L.R.4th 131 (1986);
see also Henson v. Gonzalez, 326 So. 2d 396 (La. App. 1976); Ferris-Prabhu
v. Dave & Son Inc., 457 A.2d 631 (Vt. 1983).
11.10 Opportunity to Cure
Cure is a well-established and fundamental right. If you find that the breach
was capable of being cured, then the breaching party must have been given
the opportunity to cure it.
If the non-breaching party terminated the contract without providing
a reasonable opportunity for the other party to cure the default, that termination itself is a material breach and renders the termination wrongful.
Comment
Some breaches cannot be cured, such as a contractor’s failure to substantially complete the work before to the expiration of an unwaived completion
date; thus, an owner need not provide a cure notice. See Abcon Assocs. Inc.
v. United States, 44 Fed. Cl. 625 (1999) (cure notice not required when contract completion date not met); Bd. of Water & Sewer Comm’rs of City of
Mobile v. Bill Harbert Constr. Co., 27 So. 3d 1223 (Ala. 2009) (acknowledging that when “termination is for failure to meet a performance deadline,
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the law eliminates the notice requirement”); L.K. Comstock & Co. v. United
Eng’rs & Constructors Inc., 880 F.2d 219, 232 (9th Cir. 1989) (cure notice
is not required because it would have been a “useless gesture”).
However, if a breach can be cured, then the breaching party must be
given the opportunity to do so. See Burras v. Canal Constr. & Design Co.,
470 N.E.2d 1362, 1367 (Ind. Ct. App. 1st Dist. 1984) (because the subcontractor “was not given an opportunity to remedy any alleged defects,
any incidence of defective performance did not constitute a breach of the
construction contract”); Gulf Ins. Co. v. Fid. & Deposit Co. of Md., 847
N.Y.S.2d 896 (2007) (termination was wrongful because the subcontractor
was not provided notice and an opportunity to cure); Bruning Seeding Co.
v. McArdle Grading Co., 439 N.W.2d 789, 791 (Neb. 1989) (contractor’s
failure to give opportunity to cure before termination constituted a material breach of the subcontract); Blaine Econ. Dev. Auth. v. Royal Elec. Co.,
520 N.W.2d 473 (Minn. Ct. App. 1994) (owner wrongfully terminated a
construction contract by failing to first give a opportunity to cure).
The opportunity to cure is implied in every contract as a matter of law.
U.S. for Use & Benefit of Cortolano & Barone Inc. v. Morano Constr. Corp.,
724 F. Supp. 88, 98 (S.D.N.Y. 1989) (“Despite the absence of any contractual provision, a subcontractor alleged to be in default is entitled to receive
more notice than [the subcontractor] received here.”); Bates v. Benedetti,
E2010-01379-COA-R3-CV, 2011 WL 978195 (Tenn. Ct. App. 2011) (recognizing owner’s common-law duty to give notice and an opportunity to
cure before termination).
11.11 Required Notice
Termination of a contract for default without providing notice is a material breach.
The notice must describe the inadequate performance and must fairly
advise the contractor that the owner considers the inadequate performance serious enough that, without prompt correction, the contract will
be terminated.
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A contract can only be terminated for default for reasons that the contractor was provided notice of and an opportunity to cure. If an owner
notifies the contractor of one default (that is cured) and then terminates
the contractor for a separate default (without notice and an opportunity to
cure), the owner failed to comply with its notice obligations.
Comment
Failure to give required notice operates as a material breach of the contract.
Madden Phillips Constr. v. GGAT Dev. Corp., 315 S.W.3d 800, 823–24
(Tenn. Ct. App. 2009); Cuddy & Mountain Concrete v. Citadel Constr., 824
P.2d 151 (Idaho Ct. App. 1992); Bruning Seeding Co. v. McArdle Grading, 439 N.W.2d 789 (Neb. 1989); U.S. for Use of Cortolano & Barone v.
Morano Constr., 724 F. Supp. 88 (S.D.N.Y. 1989); Burras v. Canal Constr.
& Design Co., 470 N.E.2d 1362 (Ind. Ct. App. 1984).
Virtually all termination clauses require the owner to provide the contractor with a notice of default. Courts have imposed an implied obligation
to provide notice and an opportunity to cure, even when the contract does
not contain a notice provision. McClain v. Kimbrough Constr. Co., 806
S.W.2d 194 (Tenn. Ct. App. 1990).
Notice gives the contractor an opportunity to cure the default, correct
deficiencies, and stave off the threatened termination. A cure notice that
thoroughly sets out the extent of the deficiencies is adequate and advises that
they are serious enough to warrant termination unless corrected promptly is
sufficient. Hannon Elec. Co. v. United States, 31 Fed. Cl. 135, 148 (1994);
Blaine Econ. Dev. Auth. v. Royal Elec. Co., 520 N.W.2d 473, 477 (Minn.
App. 1994).
11.12 Wrongful Termination
The burden of proof to demonstrate that a termination was proper is on
the party who termiated the contract.
The owner’s termination is wrongful if you find any of the following:
(1) The contractor did not materially breach the contract.
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(2) The owner failed to provide the contractor with notice of the
breach.
(3) The owner failed to provide the contractor a reasonable opportunity to cure the breach.
If you found any of the above occurred, the contractor can recover damages
from the owner for the wrongful termination.
Comment
The legal standard for determining when a breach is material is not always
clear in construction cases. See Walker & Co. v. Harrison, 81 N.W.2d 352,
355 (Mich. 1957) (the decision to terminate a contract “is fraught with peril
for should such determination, as viewed by a later court in the calm of
its contemplation, be unwarranted, the repudiator himself will have been
guilty of material breach and himself have become the aggressor, not an
innocent victim”).
Depending upon the language of the subcontract termination clauses,
the termination of the prime contract also may result in termination of
subcontracts. See Carolina Cas. Ins. Co. v. Ragan Mech. Contractors Inc.,
584 S.E.2d 646 (Ga. Ct. App. 2003), cert. denied (Oct. 20, 2003) (holding
that a subcontract was terminated by virtue of an owner’s termination of
a prime contract for default and that the subcontractor had no obligation
to continue performance of the subcontract under the prime contractor’s
take over of surety).
11.13 Damages for Wrongful Termination
If you find that the owner wrongfully terminated the contractor, then you
may award the contractor damages as follows:
(1) the unpaid portion of the work it performed and/or materials it
furnished as of the date of termination;
plus
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(2) the profit the contractor would have earned on the remaining work
if it had been completed.
In order to award the contractor profit on work not performed, the contractor must show with reasonable certainty the amount of profit it would
have earned.
Comment
Wrongful termination is a material breach of the contract for which the
contractor is entitled to damages. Generally, the measure of the contractor’s
damages is the lost profit it would have realized, had it completed the project, plus the costs reasonably incurred in good-faith partial performance of
the contract. Ballard v. Krause, 248 So. 2d 233, 234 (Fla. App. Ct. 1971);
Liner v. Armstrong Homes of Bremerton Inc., 579 P.2d 367, 371 (Wash.
Ct. App. 1978); Sweeney Co. of Md. v. Eng’rs-Constructors Inc., 823 F.2d
805, 812 (4th Cir. 1987); Imaging Sys. Int’l Inc. v. Magnetic Resonance Plus
Inc., 490 S.E.2d 124, 126 (Ga. Ct. App. 1997); Ark Constr. Co. v. City of
Florissant, 558 S.W.2d 418, 423 (Mo. Ct. App. 1977); Edvard Dev. Tompkins Inc. v. City of Bridgeport, 110 A. 183 (Conn. 1920).
Lost profits due to the wrongful termination of a construction contract
may be established by showing the total cost that would have been incurred
in performing the contract, had the contractor been permitted to complete
the job, and subtracting that amount from the contract price. Johnson
Enters. of Jacksonville v. FPL Grp. Capital Inc., 162 F.3d 1290, 1325 (11th
Cir. 1998). The loss, however, “must be proven with a reasonable degree of
certainty” before it is recoverable. Id.
The contractor bears the burden of proving its wrongful termination
damages with reasonable certainty. Ballard v. Krause, 248 So. 2d 233, 234
(Fla. App. Ct. 1971).
Where the owner’s wrongful termination results in the contractor’s inability to obtain future work due to lack of bonding capacity, the contractor
may also recover its future lost profits. However, a contractor seeking to
recover on a claim for damages allegedly resulting from lost bonding capacity bears a heavy burden. It must establish proximate causation (e.g., that the
termination was the cause of its inability to maintain its bonding capacity);
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as a consequence of that diminished capacity, it lost profits; reasonable
certainty (e.g., the actual losses are not speculative but can be quantified
with a reasonable degree of accuracy); and reasonable foreseeability (e.g.,
the purported damages were within the contemplation of the parties at the
time they entered into the contract). Delahanty v. First Pa. Bank NA, 464
A.2d 1243, 1258 (Pa. Super. Ct. 1983) (citing R.I. Lampus Co. v. Neville
Cement Prods. Corp., 378 A.2d 288 (Pa. 1977)).
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