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March 30, 2023
Clauses allowing terminations for convenience are often used as “a catch all for everything” in contracts, but subcontractors can protect themselves by negotiating language into their contracts, which can help them avoid unpaid expenses and legal hassles.
That was one piece of the advice offered to subcontractors by Karalynn Cromeens, a construction lawyer and host of “The Quit Getting Screwed” construction podcast. She spoke about the important distinctions between terminations and defaults at a World of Concrete educational session in Las Vegas this year that focused on contractor horror stories and offered tips to avoid legal disaster.
By adding contract language for reimbursement of any accrued costs, Cromeens said subcontractors can help ensure they get paid for any expenses if they get terminated for convenience.
Without this language, she added, it will be nearly impossible to recover accrued costs.
A default occurs when obligations in a contract are left unfulfilled, Cromeens said. By comparison, termination for convenience clauses allow a party to terminate a contract for any reason at any time.
Failing to do anything promised in a contract can put a subcontractor in default but that doesn’t immediately equal a termination, Cromeens said.
Understanding the differences between terminations and defaults is important because if subcontractors find themselves in default and don’t correct it, they’re not entitled to be paid, the lawyer said.
“Knowing what all the little provisions in your contract require is important,” she said.
Cromeens said general contracts can also be helpful in determining whether a subcontractor is in violation of a subcontract.
“In most subcontracts, within the first couple pages they will describe what you’d call the contract documents,” she said. “It will include the prime contract between the owner and the general contractor.”
It is important to review the terms of a prime contract because, many times, the subcontract will include the terms of a prime contract.
Cromeens said there are common forms of default that she sees when it comes to subcontractors: not having enough labor; not paying material suppliers on time; failing to keep up with a schedule; or failing to turn in daily reports.
She said default notices don’t have to be letters from a lawyer -- they could be emails or text messages from a general contractor.
If a default is not corrected, subcontractors risk being terminated with cause, Cromeens said. Subcontractors can also be terminated for convenience “for any reason at any time” if that clause is in the contract.
“If they didn’t give you proper notice of a defect and wrongfully terminated you, they could just call it a termination for convenience,” she said.
Cromeens said subcontractors are often in a different position than those on the other side of the table.
“Once you sign the contract, you’re on the hook to do the work; you cannot terminate for convenience,” she said.
She said it’s important to think of a contract as a promise.
“When you sign a contract, you are promising to the general contractor, or whoever you sign the contract with, that you’ll do that scope of work for this price,” she said. “That is a promise. If you terminate or breach the contract, you’ve broken that promise.”
She said exiting a contract before work is completed usually is a bad option because it leaves subcontractors on the hook for finding their replacements and administrative fees. Subcontractors considering walking out on a contract should “try to work with (the general contractor) if you can.”
“It’s not as easy as just walking away from the money that you have on the table,” she said.
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