One version of the Golden Rule—he/she who holds the gold makes the rules—is particularly true when it comes to suspension or termination clauses in design and construction contracts.  In one of the tell-tale clues of who prepared the contract, termination clauses and suspension clauses (to a lesser extent) typically give all the power to the person who prepared the contract.  For example, if an owner prepared the prime contract, the owner typically has all the rights to terminate the contract; the general contractor usually has none.   

Aside from making an interesting anecdotal study about the Golden Rule, suspension and termination clauses are important contractual provisions with equally important distinctions.   When an owner’s financing disappears and the general contractor is not timely paid, is suspension or termination the proper remedy?  When a subcontractor or sub-subcontractor stops providing sufficient workers to complete the work within the project schedule, is termination appropriate?  

As with most questions involving the law, the answers are, “it depends”.  One of the more items is the specific language of the contract, ultimately relating back to who held the gold when the contract was negotiated.  We will base our discussion on one of the more common contract forms, the American Institute of Architects’ (“AIA”) Document A201-2017, the General Conditions of the Contract for Construction.

1.    Suspension

Suspension, as the name indicates, is intended to temporarily stop construction.  It is something less than termination.  Between suspension and termination, suspension is also the less used provision. 

Most contracts focus on the ability to suspend the contract as an owner’s option. If the owner chooses to suspend the project, then the contract time and contract sum will be increased by the amount caused by the delay, including profit, unless the cause of the suspension id due to the fault of the Contractor. 

Typically, construction contracts make few, if any, provisions for the contractor to suspend work.  Rather, the contractor is usually entitled to extensions of contract time, or increases in the contract sum, under other provisions of the contract. 

One of the few contractual grounds for a contractor to suspend work is if the owner fails to make timely payment. Under the standard AIA language, the contractor may stop work on the project upon proper written notice to the owner and architect.  The contractor would then be entitled to extension of the contract time and an increase in the contract sum, including the contractor’s costs for shutdown, delay, startup, and interest on amounts owing. 

Although suspension may seem like a readily available remedy, other clauses or contracts may modify or impede its use.  For instance, when an owner uses third-party financing to construct a project, the contractor is frequently asked to sign a separate agreement with the lender.  That agreement may provide a longer period of nonpayment or more onerous notice provisions before the contractor can suspend performance.

2.    Termination

Termination, the more severe option when compared to suspension, is more clearly delineated in the AIA standard form agreement.  As with suspension of contract, though, the Golden Rule prevails; the contractor typically has fewer grounds for terminating a contract than the owner.

Termination falls into one of two broad categories: For convenience and for cause.  For convenience does not require any cause; the terminating party does not need to show that the other party somehow breached the contract.  In contrast, termination for cause typically requires showing that one or more events have occurred and that proper notice of default has been provided.  

When an owner terminates the contract for convenience, the contractor is typically required to cease operations as requested by the owner. The contractor must take whatever reasonable actions are necessary to protect and preserve the project.  That includes terminating all existing subcontract and purchase orders and making no further commitments on behalf of the owner. In return, the owner typically agrees to compensate the contractor for all work properly executed through the date of termination, any costs incurred due to the termination, and a termination fee, if one has been negotiated in the construction agreement.

An owner can also terminate a contractor for cause if the contractor fails to abide by any one of a laundry list of reasons.  That list typically includes the contractor failing to supply enough skilled labor; missing payments to subcontractors or material suppliers; violating applicable laws; or “substantially breaching” the contract. When terminating for cause, the owner may usually withhold payment until the work is completed and, if the costs to cure the breach of defects exceeds the remaining contract balance, recover those additional amounts from the contractor. 

As the contractor is typically not the one with the gold, its termination rights under the contract are usually much more limited.  In some contracts, no termination rights at all are spelled out for the contractor, requiring the contractor to rely on case law developed by the courts.  With 14 courts of appeal and one supreme court in Texas, the case law is not always consistent from one county or city to another, potentially creating additional uncertainty about whether the contractor is properly terminating the contract. 

Under the AIA forms, a contractor may terminate only if the work is stopped for a finite period of time – often no less than 30 consecutive days – and then only if the stoppage is not the fault of the contractor or its subcontractors.  This is in marked contrast to the owner’s right to terminate for any “substantial breach” or any other the laundry list items typically included in the contract. 

As termination and suspension of projects become more common in uncertain times, it is always advisable to consult with counsel to determine whether the termination clause supports your or the other side’s position.  The attorneys in our Austin and Dallas offices are available to answer any questions you may have. 

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