The recent termination of the joint venture of Skanska-Hunt from the Washington State Convention Center project (article here) is a good reminder of the importance of well-written termination clauses in your owner-contractor contracts. The reasons for termination (or “severance,” a slightly kinder word) can be many, including failure to agree on pricing (the reason given here), slow performance, poor fit, or a host of owner issues, such as loss of funding or political jeopardy. In the context of design-build and CMGC projects, the contractor must first perform a variety of other tasks, including design and preconstruction services, before the physical construction work begins. The pricing for the physical construction is usually delayed until the design and preconstruction services are sufficiently complete to allow the contractor a sound basis to estimate the work. It is often at this critical juncture that the owner decides it wants to find an off-ramp from the existing contract. When the owner wants a change, the contract clauses allowing termination are paramount. The clauses should broadly allow for termination at any time (not just at the pricing juncture) and for either default (cause) or convenience (no cause). The right to terminate should be accompanied by clauses that preserve the owner’s right to make claims for the work completed and paid for up to termination (including claims for defects, delays, liquidated damages, etc.). Also included should be the owner’s right to continue to work with the design team and/or the subcontractors already engaged on the project.
Termination clauses typically give the owner a distinct advantage under the circumstances of the Skanska-Hunt challenge, but the court ruling thus far suggests that the project owner did not have robust termination clauses it could rely on before taking the off-ramp. It will be interesting to see whether a full trial will vindicate the owner’s right to find a better price, or the contractor’s position that you must accept its price, like it or not. The public interest should favor the former.