THE IMPORTANCE OF CONTRACTUAL TERMINATION PROVISIONS
The primary purpose of a contract is to expressly detail the rights and obligations of the parties. As such, a well-crafted contract will provide guidance on how to proceed in specific situations. For instance, what are the available options for the design professional when the owner has breached its contractual obligations by failing to submit payment for services? Here, a termination provision would provide strong leverage for payment and the means for the design professional to safely exit the project. Unfortunately, many contracts neglect to specifically address the process for, or the consequences of, such termination. Even worse yet, we see a lot of contracts containing one-sided provisions solely favoring the owner. In either situation, the design professional is faced with a distinct disadvantage and a path toward potential liability. Thus, it is imperative that the design professional acts proactively to address termination within the contract.
Termination provisions are typically divided into two groups: (1) termination for cause; and (2) termination for convenience. Each of these provisions effectively concludes the contract but with differing motivations and effects. The following is a brief overview with tips on the best approaches.
A termination for cause provision identifies certain events that act as a trigger for a party to terminate the agreement. Here, a contractual provision listing the failure to pay as a “cause” would provide the unpaid design professional a legally safe avenue to remove itself from the project (we note that a suspension of services provision would also be helpful). The AIA B101 Standard Form of Agreement Between Owner and Architect (the “B101”) contains such a provision at § 9.1. Beyond this, it is advantageous to the design professional to include the inability to agree on additional services or changed conditions as “causes.” On the defensive side, the design professional should start by seeking to define and limit the “causes” for which an owner may terminate. In addition, a notice requirement permitting the design professional the opportunity to cure the triggering event is helpful. Finally, the design professional should work to soften the type and amount of damages recoverable under this provision.
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