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Contractual Right of Termination

Contractual Right of Termination

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Construction contracts typically included a list of causes that allow the owner to terminate the contract either for cause or for convenience.  Contractors are also given the right to terminate the contract for cause under certain circumstances.

The owner’s right to terminate a contract for cause can rest on a number of justifications.  However, the owner may not terminate a contract for a cause not included in the termination clause unless it frustrates the very purpose of the contract.  (Pettinelli Elec. Co. v Board of Educ. of City of N.Y., 56 A.D.2d 520, 391 N.Y.S.2d 118 [1st Dept. 1977]) AIA Document A201 §§14.2.1 provides that an owner may terminate the contract sans termination clause if the contractor fails to supply enough properly skilled workers, fails to pay subcontractors, repeatedly disregards applicable laws, or otherwise breaches the contract.

Assuming there is an explicit provision in the contract providing the owner of the property with a unilateral right to terminate the contract for convenience, the right is enforceable in New York regardless of the owner’s good faith so long as the contract requires written notice of termination to the contractor.  (Taylor-Warner Corp. v. Minskoff, 167 A.D.2d 382, 561 N.Y.S.2d 297 [2d Dept. 1990])  Should the contract lack such a provision and no cause for termination exists, the owner must allow the contractor to complete the work or pay the contractor damages for termination.

Pursuant to AIA Document A201-2007 §§14.1.1 and 14.1.2, contractors have a right to termination of the contract if the work is stopped for thirty days through no fault of the contractor or its subcontractors or agents.  The American Institute of Architects provides that acceptable reasons for such a termination of the contract include the stopping of work due to the order of a court or public authority, a government act that makes necessary material unavailable, failure of the architect to issue a certificate of occupancy or provide a reason for not doing so, failure of the owner to pay or provide proof he is capable of paying as well as excessive delays, suspension or interruption by the owner.

Similarly, AIA Document A201-2007, §14.1.4 provides for the contractor’s right to terminate the contract if the work is stopped for sixty days through no fault of the contractor or its subcontractors or agents.  Pursuant to the American Institute of Architects, the contractor may then terminate the contract if the owner has “repeatedly failed to fulfill its obligations under the contract documents with respect to matters important to the progress of the work”.  In order to terminate, the contractor must give seven days’ written notice to the owner and architect and in turn may recover payment for work completed and damages for losses with respect to materials, equipment, tools, overhead costs and profits.

Consequently, if a contractor fails to perform on a contract in any number of ways, the owner can terminate the contract for cause.  It is slightly more difficult for the owner to terminate for convenience, since they will be losing out on money as a result of owing the contractor damages for the work already done.  The contractor usually, however, may only terminate the contract for cause.

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