HOLLYWOOD, FL – When attorneys and other professionals in the legal and commercial construction markets come together later this year at Construction Super Conference (CSC), termination provisions will be on the docket as one of many relevant topics.
At last year’s CSC in Las Vegas, Brent N. Mackay, partner at Watt, Tieder, Hoffar & Fitzgerald, L.L.P., Irvine, Calif. served on a panel for a session called Wrongful or Right: What Makes a Proper Termination?
With the topic still hot, Mackay agreed to sit down with Third Thursday to offer his continuing thoughts on termination provisions. All stakeholders will be able to discuss this topic (and more) when CSC convenes again Nov. 29 – Dec. 1, 2023 at The Diplomat in Hollywood, Florida.
Third Thursday: When it comes to relevant and proper termination provisions in contracts, how savvy are owners/companies these days when hiring contractors?
Brent N. Mackay, partner at Watt, Tieder, Hoffar & Fitzgerald, L.L.P.: I think it remains a mixed bag. With some variation, the players in the public works space tend to be fairly savvy when it comes to termination-related contractual provisions. This seems to be particularly the case with most larger public entities who likely have learned from past terminations—good and bad—and, as a result, their contracts tend to reflect such. When I do encounter inadequate contractual provisions relating to termination, it almost always occurs in connection with a private works project where the owner (prior to the subject project) had never had a project get to the point where termination was potentially warranted.
Third Thursday: What is a worst-case scenario that illustrates the headaches/expenses of terminating contractors either wrongly or without including proper wording?
Mackay: There are many possible worst-case scenarios with limitless permutations. That said, I once had a case where the owner and general contractor agreed to a termination for convenience, and then the owner months later attempted to convert the termination to one “for cause” based on defective work and project delays. However, the owner failed to timely provide the contractor with the contractually required notice and opportunity to cure, as well as the requisite architect’s certification setting forth the bases for termination for cause.
The owner had also retained a replacement contractor who, along with its architect, attempted to change the actual percentage complete, i.e. how far along the project had progressed at the time of termination, and claim hundreds of thousands of dollars of allegedly defective work the contractor was never given the opportunity to know about and fix. In that situation, the arbitrator found in favor of the contractor.
Unfortunately for the owner, their projects costs increased dramatically because they not only had to pay the original general contractor, but they also had to pay its replacement contractor a premium to complete the project, as well as incur the extended costs of its architect and other consultants. This, especially combined with having to pay the original contractor’s attorneys’ fees and costs, made the owner’s decision to terminate “for cause” significantly expensive under the circumstances.
Third Thursday: What are the most common reasons that terminations become problematic?
Mackay: Assuming the contract addresses termination, the most common reason for terminations becoming problematic is the terminating party’s failure to read and follow the contract in a termination “for cause” scenario (as opposed to “for convenience”). Some of the other common reasons I have encountered include the party seeking termination waiting either too long (e.g., project is almost complete) or not long enough (e.g., not giving contractor adequate notice and opportunity to cure) to terminate.
Third Thursday: What are some of the steps to take prior to a termination?
Mackay: First and foremost, read the contract. What does it say? What does it not say? Is there anything the party evaluating a potential termination must do? Asking and answering questions should occur in the beginning of any termination discussion.
Sometimes personalities, or a soured relationship between the parties, can obscure whether termination is actually warranted. That is why I generally recommend clients contemplating termination to perform adequate due diligence to determine—prior to termination—whether sufficient grounds exist to justify termination according to the pertinent contractual provisions.
This is sometimes best done by engaging an independent consultant to confirm whether the contractor has, for instance, delayed the overall critical path of the project or is not performing in some other material way.
Third Thursday: How would you describe your experience as a CSC panelist in 2022?
Mackay: I was surprised by the willingness of the audience to engage in both posing and facilitating discussion addressing various hypotheticals. This helped make it enjoyable. Also, having true experts as my co-panelists contributed to a positive experience as well.
Third Thursday: Why are face-to-face/in-person conferences still valuable?
Mackay: To be sure, technology, including virtual platforms, has brought much-needed efficiency and accessibility. However, achieving meaningful and lasting connection with others in my experience is best accomplished in-person. Consequently, I think there will always be a need for face-to-face conferences.