Termination for cause on a construction project is the equivalent of “going nuclear.” Construction is riddled with claims and litigation, and termination for cause litigation may be the costliest.[i] Construction professionals need to be familiar with the termination clauses in their contracts. This article examines the importance of writing an effective termination for cause provision and how the American Institute of Architects (AIA) and ConsensusDocs standard construction contracts differ on this issue.
The contractual requirements governing termination must be followed to terminate a party effectively. This includes giving notice pursuant to the timing and in a format specified in the contract. Notice typically gives the defaulting party an opportunity to cure the default before being terminated. This is a fairer and more economically efficient course of action. After all, a contract should aim to complete a project successfully, not successfully start a lawsuit.
How Do You Terminate a Party Under AIA’S A201 General Terms and Conditions?
Under AIA A201 general conditions document, an owner must give the contractor and the contractor’s surety seven days written notice of its intentions to terminate. There is no explicit opportunity to cure. Consequently, after seven days expire, the contractor may be terminated.[ii] Section 11.2.2 of the AIA A201 provides, “Upon seven days and certification by the architect, the owner can exclude the contractor from the site; take possession of their tools and equipment owner by the contractor on site; assign the contractor’s subcontracts; and finish the work on the project.[iii] At the subcontract level under the AIA A401, a contractor must give its subcontractor ten days' notice before termination. Again, there is no opportunity to cure.[iv] There is no explanation for why a subcontractor would be given three more days' notice than the contractor. A contractor needs more notice time than a subcontractor, presumably to both receive notice of default from the owner and then give notice to the subcontractor to commence and continue correction. AGC warns its members against this when it states, “Ultimately, the Constructor will want to ensure any cure rights and notice provisions contained in this section are consistent with – or shorter than – any cure periods permitted under the Prime Agreement.”[v]
How Do You Terminate a Party Under ConsensusDocs 200 Agreement?
ConsensusDocs takes a much different approach than AIA on an opportunity to cure before termination for cause. These differences include no certification by the architect to trigger a notice of termination, an explicit opportunity to cure, and a second shorter notice period that must occur before termination is effectuated. Also, notice periods are flowed down to the subcontract level, giving the general contractor time to receive and turnaround notice to attempt an effective cure in coordination with its subcontractor.
Specifically, under the ConsensusDocs 200 Owner and Constructor Standard Agreement with General Conditions, the owner must first give notice that the Constructor is in default and that within seven days, Constructor must commence and continue satisfactory correction of the default.[vi] The notice must set forth “the nature of the default.” Then, if correction is not started and continued, the owner gives a second three-day notice under which, upon expiration, the owner may terminate.[vii] Under the ConsensusDocs 750 Standard Subcontract, the Constructor gives the Subcontractor an initial notice of default of three days. If correction is not commenced and continued, a second two-day period is given before termination can occur. Consequently, a Constructor has one day between giving a second notice of default to its subcontractor and potentially getting terminated by the owner for a second default. An owner’s notice of its intention to default will evoke a heightened sense of quality control and supervision.
The ConsensusDocs’ approach that explicitly provides an opportunity to cure is a superior because it helps parties work toward getting a project back on track toward completion. Practitioners should consider modifying their construction contract to include an explicit right to cure when giving notice for a termination – or, as some would say, “going nuclear.”
AGC’s Member Only Comments to ConsensusDocs (downloads on the right-hand side)
Comments or questions about this article can be directed to Brian Perlberg, Executive Director and Senior Counsel, ConsensusDocs Coalition at bperlberg@ConsensusDocs.org.
[ii] AIA A201 Subsection 14.2.2.
[iii] See AIA A201 Subsections 18.104.22.168.3.
[iv] While there is no explicit right to cure in the AIA A201 termination notice requirement, a majority of states have interpreted the AIA’s notice of default and similar bespoke provisions as impliedly providing the opportunity to cure. See e.g., The Cure for the Common Defect The Contractors Right to Cure Defective Performance (analysis on lack of any express right to cure under North Carolina law). However, a minority of states construe this provision strictly and do not provide an implied opportunity to cure.
[v] See AGC Members-Only Comments to the ConsensusDocs 750 at Section 10.1.1 on page 30 of 45 (January 2023 edition), available at www.agc.org/contracts.
[vi] See ConsensusDocs 200 Section 11.2.
[vii] See ConsensusDocs 200 Section 11.2.1.