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  • November 08, 2021

    Risks of Terminating a Construction Contract: Upstream and Downstream Perspectives

    The ultimate hammer in the contractor’s bucket is to stop work. For the owner, it is to bar a contractor from a job. But there are significant potential downsides to taking such actions. Jim Dash identifies the risks of terminating a contract from either side.

    James M. Dash

    Whether you are an upstream party ​who is dissatisfied with a downstream party’s progress (or lack thereof) and want to throw the bums off the job, or a contractor who hasn’t been paid and figure you can work for free anywhere – before you make your next move, ask yourself: Do I feel lucky?

    If the answer is ‘yes,’ you aren’t likely to read the rest of this article. But if you do, hopefully you’ll change your tune about rashly jumping to the conclusion to throw off that contractor or skip out on that project for greener pastures.

    James M. Dash James M. Dash, Houston 1985, is a founding equity member with Carlson Dash LLC in Milwaukee, where he concentrates his practice in construction law and real estate litigation.

    Generally speaking, changing horses in the middle of a race (yes, this is a metaphor) – regardless of whose decision it is – is in nobody’s best interest. It’s a huge risk, with a low ceiling and an even lower floor. In fact, it could be the costliest decision you’ve ever made, even if you are firmly “in the right.”

    Sometimes the conclusion is unavoidable – an upstream party’s behavior threatens to put you out of business or a downstream contractor actually goes out of business and must be replaced.

    But we nearly always advise against walking unless there is no other viable option.

    Here’s a Scenario

    To get ourselves situated, we’ll use a fact pattern from a published opinion from another state, but which could easily have happened anywhere.

    Here’s a brief synopsis:

    Owner Rep 1: (looking at watch) We gave the contractor 10 days to finish, and it’s now Day 11. All they did was kick some dirt around. It’d be better for all of us if we send ‘em packing, and bring in a replacement.
    Owner Rep 2: I agree. We have a slam dunk case against them, so let’s just cut bait and take our chances in a lawsuit.
    Trial Court: Contractor entitled to damages for remainder of contract. Contractor entitled to damages for anticipatory repudiation.
    Owner Reps: But ...
    Trial judge: Contractor entitled to attorney fees!
    Owner Reps: But! ...
    Appellate Court: Affirmed.

    The owner proceeded with firing the contractor and bringing in a replacement with the notion that the amount of time that was reasonable to the owner had to be reasonable to anyone, and that clearly the contractor was being unreasonable.

    Not so fast, said both the trial court and appellate court:

    What constitutes a reasonable time is a matter of proof under all the conditions and circumstances that might surround the case. What is a reasonable time is ultimately a question of fact.

    Let’s Discuss and Hopefully Avoid Some Regrets

    If you’re thinking, “Oh, good … the court really handed the owner its head,” think again.

    This scenario flashes a warning to any ultra-confident party on either side of a construction dispute: proceeding to a lawsuit or arbitration is to sign up for a fight you will likely regret down the road.

    You won’t know how a fact finder (judge, jury, or arbitrator) will find until long after the events that gave rise to the dispute have concluded. You won’t know what kind of experience the fact finders have; maybe somewhere in their past they got screwed by someone just like you so they “know” how this really went down. By the time you learn the fact finder’s conclusion, it will be far too late to do anything about it.

    And that’s just the end-game.

    Before that comes the rest of the legal process. Think of the costs and other risks you will incur while you’re rolling the dice on whether people you may never have met see things your way.

    Some Downsides

    Here is a partial list of potential downsides – you may think of others.

    Downsides if you are the owner, lender, and/or upstream party:

    • Cost of getting somebody else to gear up.

    • Even if you have a collateral assignment of relevant contracts, you don’t have any direct relationship with the contractors. They were hired by somebody else, and they are likely to be loyal to the general contractor (GC) or customer who hired them.

    • Hiring a new successor contractor? No contractor is likely to warrant the predecessor’s work or the fit between the predecessor’s work and its own work.

    • Chances are that you are not going to get performance from subs that existing GC would get.

    • Future work is likely to be done without a stipulated sum and on a time & materials plus a fee basis.

    • There almost assuredly will be surprises in the dispute:

      • Does the GC/downstream party have a legitimate defense – or at least one that a sympathetic fact finder is willing to accept?

      • Even if not, can the GC/downstream party pay a judgment?

    • Performance bonds “may” take care of financial piece but ...

      • The principal that’s been kicked off is the one who buys the bond.

      • The first thing surety is likely to do is to try to make amends and keep terminated contractor on job, because if terminated, the contractor finishes performance, surety is off the hook.

      • Sureties aren’t in the business of writing checks.

      • Not all sureties are created equal. If the principal has iffy credit, the surety might as well.

    Potential downsides if you are the original contractor, subcontractor, and/or downstream party:

    • Is there an argument in contract that allows upstream party to say downstream party was first to breach? Form contracts can hook you.

    • Are you working from a clean slate? Where will the fight take place? You might have unwittingly haled yourself into a foreign jurisdiction. Red flags pop up in this context when multiple tiers of contractors are involved in a project. Where downstream subs have agreed to flow-down provisions incorporating an upstream contract you may not have seen that contains an arbitration provision requiring a dispute resolution proceeding out-of-state … your decision to walk off a project in Waukesha might land you in an arbitration in Wyoming.

    • What’s more, without knowing rules of these other jurisdictions, you could find yourself in an arbitration that ends up being fully appealable.1 In Wisconsin, judicial review of an arbitration award is extremely limited.2 In other jurisdictions, however, parties to an arbitration agreement can stipulate to allow full judicial review of the merits of the award (Texas, New Jersey, Alabama, and Connecticut)​. But Georgia, Maine, North Dakota, Tennessee, and Washington have reached opposite conclusions.

    It Needs a Lot of Thought

    A dispute resolution proceeding can be, and often is, a nightmare even with a “sympathetic ear.”

    In addition to the large sums of money spent on legal fees and other expenses, there is the time and effort (and aggravation) wasted that could have been spent on more profitable activities.

    Though the contractor in the case referenced above got attorneys’ fees, this is a highly unlikely event. Even with a valid fee-shifting provision, judges often view “reasonable” fees differently than counsel.

    Hesitation Is a Good Thing

    There may be circumstances where parting ways in the middle of a project is better than any available alternative, but the downsides – sometimes hidden from view at the time the decision is made – make those circumstances rare ones indeed.

    So look before you leap, because it can be a long way down.

    Join the Construction and Public Contract Law Section for a volunteer day organized with Revitalize Milwaukee from 9 a.m. to 3 p.m. on Saturday, Nov. 13, 2021. All skill levels are welcome! For more details about the project, the location, and signup information, see Volunteer Day.

    This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.

    Endnotes

    1 For example, Cable Connection Inc. v. DirecTV Inc., 44 Cal. 4th 1334 (2008).

    2See Sands v. Menard, Inc., 2010 WI 96, ¶​48, 328 Wis. 2d 647 (The court’s “task is to ensure that the parties receive what they bargained for – the adjudication of their dispute via the arbitration process.”).





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