Terminating a Subcontractor
In construction projects, it can be difficult to find the right person for the job. Contractors know this can be especially true when it comes to finding the right subcontractor to complete niche portions of prime contracts. Additionally, contractors are sometimes faced with a subcontractor’s failure to properly perform a contract and wish to terminate the subcontractor from a project. While hiring and firing “at will” is a generally accepted practice for people who work directly for you, general contractors need to be aware that they may not be able to terminate a subcontractor from a project as easily as they could one of their own employees.
A contract contains numerous legally enforceable promises, and both parties are bound to follow what they bargained for, including in the context of termination. Since contracts often impose requirements on when a subcontractor can be terminated, it is important that a contractor not adopt the mindset of, “I’ll take action now and worry about the consequences later” because this mindset can cause the contractor several problems down the road and even result in the contractor being liable for damages because their breach of the contract’s requirements.
No two construction contracts are alike, much like no two construction projects are the same. Often times, contracts between the prime and subcontractors will include termination clauses that contain provisions that stipulate when the contract may be terminated, by whom, and for what reasons. However, enforcement of these various termination clauses is subject to strong public policy considerations, the laws of the state, the customs of the courts in settling contract disputes, and most importantly, the actual wording of these provisions.
For example, a general contractor may wish to terminate its relationship with a subcontractor on a project for the subcontractor’s failure to carry out the work in accordance with the project specifications. However, the contract may require not only that written notice of the subpar performance be given to the subcontractor prior to termination but also that the subcontractor be allowed a set period of time to cure/fix the issues with its performance. In this instance, the general contractor should review the contract’s termination and notice requirements and strictly comply with such requirements when notifying the subcontractor of its failure to carry out the work in accordance with the project specifications. Additional considerations such as substantial performance, course of dealing, and permission of the project owner will often need to be taken into account as well.
Courts around the country, including the Nebraska Supreme Court, have resolved several cases involving contractors attempting to terminate a subcontractor where the contractor failed to strictly comply with the requirements of the parties’ contract. One example is the Nebraska case of Bruning Seeding Co. v. McArdle Grading Co., 232 Neb. 181. In this case, the contract at issue stated that:
In the event the Subcontractor fails to comply or becomes disabled from complying with the provisions herein as to character or time of performance, and the failure is not corrected within five (5) days after written request by the Contractor to the Subcontractor, the Contractor . . . may furnish the necessary materials and/or employ the workmen necessary to remedy the situation at the expense of the Subcontractor.
Despite the foregoing, the contractor in this case attempted to terminate the subcontractor and hire a replacement contractor without providing the subcontractor with either written notice of the termination or any opportunity to cure its deficient performance, two clear violations of the contract at issue. As a result, the subcontractor sued the contractor for damages, and the court sided with the subcontractor. In the end, the subcontractor was awarded more than $19,000 in damages as a result of the contractor’s wrongful termination of the subcontractor.
As this case demonstrates, a general contractor who wishes to replace a subcontractor and perform the job professionally, efficiently, and effectively may find themselves in a quagmire of litigation if they have not complied with the contract’s provisions regarding termination. Instead of quickly solving an issue, failure to read, understand and comply with the underlying contract may end up diverting critical time, energy, and resources to an already undesirable situation. To avoid this situation, it is important to carefully review the entire contract governing the relationship and ensure compliance with the same.
If you have questions about your potential risks or liabilities under a construction contract or have questions regarding terminating a subcontractor from a project, please do not hesitate to contact one of the members of Koley Jessen’s Construction Industry Practice Area.