A short time ago I got a call from a builder with whom I've
worked for many years. He usually seeks legal advice before
jumping into something new, but this time he was a bit slow to
check in. The builder had terminated a homeowner's renovation
contract before the work was complete and was being sued for
$200,000 in damages.
According to the builder, the job was tough from the start.
There was no architect, and the homeowner scrutinized
subcontractors' work and questioned the job foreman's
judgments. There were six change orders in the first four weeks
of work, all caused by the owner's indecision. The owner
complained and interfered so much that the subcontracted
carpenter quit the job. The builder didn't have another
carpenter to turn to and, with progress stalled, he terminated
the contract because he felt the owner had stepped over the
line. He tried to reach an agreement on payments by asking for
about half the job's value, since work was roughly half done,
but was rebuffed by the owner. Instead, he got an aggressive
lawsuit that called the builder's work "shoddy and
"Help," the contractor pleaded, "All I did was try to get out
of a bad deal." When we met to talk, I learned my client had
made a series of errors that began before he even met the
homeowner. His standard form contract had no termination
provisions and didn't allow him to collect his profits or his
legal fees if things went wrong. He tried to reach a settlement
without legal guidance and had unwittingly driven a wedge
between the parties. Consequently, he was facing expensive
court proceedings and judgment by a hostile jury. After all, he
was a contractor, and contractors often do not fare well in
Start With a Well-Written
Whether it's due to a difficult homeowner, a major illness, or
a customer's sudden job loss, most contractors will have to
terminate a contract at some point in their careers. If a
contractor doesn't plan for this in advance, he will almost
certainly lose his anticipated profit and may not be paid for
the work that's already done. He is likely to face expensive
legal fees and the possibility of an adverse judgment in court.
The best way to avoid these negative outcomes is to use a good
contract and get advice from a competent lawyer.
Contract law requires the parties to an agreement to abide in
good faith with the terms of the deal. Various legal theories
might be used to void an agreement (impossibility of
performance, for example, or fraud), but they rarely come into
play. The parties are bound by the deal they make and a judge's
role in any dispute is to interpret the contract and enforce
One way to avoid this type of financial disaster is by using a
good written contract. The contract should cover all
foreseeable events. Most builders use form contracts that they
adapt to each customer or job. You can buy standard forms from
a variety of on-line contract drafting services or have one
written by your attorney.
Use Specific Termination
Whatever approach you take, be sure to include termination
provisions that are clear and concise. If the terms aren't
clear, disputes are more likely to arise about the parties'
obligations under the contract. The only thing worse than
having no termination clause is having one that muddies issues
even further. For example, the contract could state that the
builder can walk away from the job if he's not paid "within 48
hours of submitting his invoice." This would be better than
saying the builder can quit if not paid after completing
certain work to "the owner's reasonable satisfaction."
While it's impossible to foresee every potential circumstance,
builders can anticipate many of them. Contracts should describe
conditions that allow the builder to walk away — a
failure to make timely payment, stoppage of work caused by the
owner's conduct, and death or disability of the contractor
should all be included. If one of these events occurs, the
contract should provide notice procedures and define financial
consequences. The terms should be as clear and specific as
Concerning owner conduct, a contract might require owners to
stay away from the job site while subcontractors are there and
report any perceived issues directly to the contractor alone.
Violations of a provision like this might be dealt with via a
written notice to the owner that the contractor will be forced
to leave the job if interference with work progress continues.
Should an owner cause the job to end, the agreement might
require payment of the builder's profit on completed work. The
amount due can be calculated through a progress payment scheme
whereby certain amounts are due as specific benchmarks are
reached. If a phase of the project is partially completed on
termination, the contract can provide for reimbursement based
on time and materials expended on that portion of the
Perhaps even more important is to cover circumstances that
allow the homeowner to back out of the job due to a builder's
supposed poor work. Contracts should require owners to give the
builder advance notice and an opportunity to cure before they
can terminate the contract for this reason. Because owners are
not normally expert at judging work in progress, contracts
might require them to offer specific support for any alleged
deficiencies and instructions on what should be done to remedy
any problems. The architect, if there is one, might be useful
for this purpose. It's hard to set a specific time frame for
"curing" a perceived problem, so writing that the contractor
must begin to address the problem within, say, seven days makes
sense. The contract can then provide that any problems be fixed
within a reasonable time.
Provide for Dispute
Fighting things out in court is difficult and expensive,
especially if there are issues of fact that require expert
testimony. A building contract can help lessen the financial
load by providing for the arbitration of disputes. This process
is less expensive and much faster than courtroom litigation. A
typical arbitration clause provides for the submission of
disputes to an entity such as the American Arbitration
Association, which can appoint a neutral arbitrator and provide
rules to govern the procedure.
Other components of dispute resolution to consider are the
payment of legal fees and the identities of the parties to
litigation. A contract can include language that requires the
party in breach to pay all fees and costs incurred by the
non-breaching party in an enforcement action. This type of
clause can head off lawsuits by making unreasonable parties
think twice about the consequences of their conduct. And if the
contract allows suit only against a corporate entity (which may
have limited assets) and not against the builder who owns it, a
homeowner may be more amenable to working out a deal. This is
how any dispute over contract termination should be
Don't Terminate Contracts Without Legal
Contract termination issues are complex. They are often
emotional and are based on individual facts that make it
difficult for a court to determine who's right and who's wrong.
Once in litigation mode, they are hard to resolve amicably.
It's essential, then, that courtroom warfare be avoided.
Reasonable counsel can almost always steer the parties toward
resolution. If a builder plans business relationships well and
has a full understanding of the law before one party or the
other terminates a contract, his focus can remain on the job
site, where it belongs.
Jack K. Merrillcounsels small businesses on employment
matters and dispute resolution for Kushner & Sanders LLP
in Wellesley, Mass.