There are often two options in a contract or subcontract for an owner to terminate a general contractor or for a general contractor to terminate a subcontractor: termination for default or termination for convenience. The former is appropriate when the general or sub breaches the contract. The latter, which arose in the context of federal government contracts, allows an owner or general contractor to terminate the contract regardless of fault.
Although this distinction seems pretty straightforward—if the contractor defaults, terminate for default, but if there is no default, terminate for convenience—some owners and contractors terminate generals or subs for convenience when they should actually terminate them for default. Choosing the wrong type of termination reason can have serious financial consequences and limit an owner or general contractor’s ability to recover damages.
An example is the recent Oregon Court of Appeals case of Shelter Products, Inc. v. Steelwood Const., Inc., in which the subcontractor abandoned the project, thereby breaching the contract, yet the general terminated the subcontract for convenience and not default. Shelter Products, 257 Or App 382, 398–99, 307 P3d 449 (2013). The general then sought damages from the sub for the general’s costs incurred in repairing defective work the sub had performed prior to termination. Id. The court held that the general was not entitled to recover these damages because the sub had not been afforded notice and an opportunity to cure the defects, which the court found the general was required to provide when terminating for convenience. Had the general terminated the sub for default, it would have likely been entitled to recoup its costs for repairing the sub’s defective work. Thus, the choice between termination for default and termination for convenience is an important one with potentially significant financial consequences.
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