If you are either a contractor or an owner dealing with a problematic downstream party, the analysis may be even more complex because construction contracts typically provide as many as four options if a downstream party fails to perform:
- Tolerate anemic performance by the defaulting party and merely seek to adjust its compensation (or back-charge);
- Allow the defaulting party to do what it can while supplementing its resources with other contractors so the project’s objectives are met, all the while keeping back-charges in full view;
- Terminate your contract with the defaulting party on grounds of its default; or
- Terminate your contract with the defaulting party on grounds of convenience.
Each option has advantages and disadvantages. Your rights against and obligations to the other party will be vastly different depending on the route you choose, and electing the wrong remedy can be costly.
The last item, termination for convenience, is designed for circumstances other than default by the other party, such as events that prompt the owner to defer or cancel the project. That said, termination for convenience may be used in marginal or uncertain default situations, but such use is proper in limited circumstances. If the contract is terminated for convenience, the non-defaulting party will find it difficult to seek compensation for damages incurred after termination. The non-defaulting party also will find it more difficult, albeit not impossible, to allege default by the other party as a defense against claims.
As stated above, exercising any of these options requires, at minimum, careful compliance with notice and other procedural requirements contained in the contract. Even if notices are not expressly required, it is prudent to serve written notice to the other party that you consider it to be in default. Finally, if the facts are murky and/or the contract is unclear, generally we advise clients to err on the side of continuing to honor and perform the contract.
For more information, contact Kamy Molavi at 770.818.1416 or [email protected] of theConstruction Law Practice Group.