Few decisions on a construction project carry more risk than ending the contract. Texas law generally recognizes two ways to accomplish this: (1) termination for cause and (2) termination for convenience.
These options are based on different grounds and lead to different legal and financial consequences for the parties involved. Choosing the wrong path or failing to follow the proper procedures can quickly escalate into a construction dispute in Texas that exposes both parties to significant liability.
Termination for Cause
A termination for cause ends a construction contract because the other side defaulted. Common triggers include:
- Failure to perform or abandonment of the work
- Defective work that is not corrected
- Failure to maintain the schedule
- Failure to pay subcontractors or suppliers
- Insolvency or bankruptcy
Cause is a strong ground for termination because it can empower the non-defaulting party to stop payment, complete the work, and recover the extra cost of completion from the defaulting party.
Even so, the non-defaulting party must follow the contract’s procedures for termination. Most agreements require written notice of default and a chance to cure before a termination can take effect.
Wrongful termination can create legal consequences for the terminating party. If a court finds a default did not justify ending the contract or that the non-defaulting party skipped notice-and-cure steps, the terminating party could face penalties. Examples include the other side’s lost profits, payment for completed work, and idle labor and material costs.
Termination for Convenience
A termination for convenience lets a party (usually the property owner) end the contract for any reason, with no default required. With this option, the terminated contractor typically receives payment for work performed to date, and sometimes earned profit. However, the contractor will not receive the profit it expected to make on the unfinished work.
This form of termination might be used for the following reasons:
- To redesign or significantly change the project’s scope or direction
- Because the owner’s needs for the finished space have changed
- Because financing fell through or the project budget no longer works
- To respond to changing market conditions
- Because the project is being paused or canceled entirely
- To replace a poor contractor relationship, without alleging default
- Because permitting, zoning, or regulatory problems have stalled the project
- To bring the work in-house or consolidate it under a different contractor
For owners, this clause is a safety valve. It allows them to exit a project without proving fault, as long as they follow the notice terms in the contract.
In some states, an owner must exercise a convenience clause in good faith and cannot use it simply to secure a cheaper bid. Texas courts have been more reluctant to impose that limit. In one instance, a Houston court of appeals has declined to adopt the federal bad-faith standard for Texas contracts.
The Conversion Clause
Many Texas contracts include a conversion, or savings, clause. It provides that if a termination for cause is later found to be wrongful, it automatically becomes a termination for convenience.
This protects the terminating party by capping its exposure at the convenience remedy instead of full wrongful-termination damages. Texas courts have enforced these clauses in the past.
Contact an Experienced Houston Construction Attorney for Help With a Termination Clause
If you are weighing whether to terminate a construction contract or you have been handed a termination notice, the right guidance early can save you from a costly misstep. The attorneys at Porter Law Firm can help you negotiate, review, and exercise termination clauses so the outcome matches both the contract and your goals. Call (713) 621-0700 today to schedule a consultation.