Photo of Kip Childs

Kip Childs is a member of Stoel Rives LLP practicing in the Construction and Design group. Kip has extensive trial experience and has been heavily involved in both prosecuting and defending construction defect, delay, impact and design claims. He regularly participates in mediations and settlement conferences, and assists clients with negotiating and drafting construction and design contracts. Kip also practices with the firm’s Business Insolvency & Financial Services practice group and has significant experience in the areas of bankruptcy, commercial and general debtor-creditor law.He has represented both secured and unsecured creditors in numerous bankruptcy reorganizations and has extensive experience litigating bankruptcy preference, lien avoidance, priority and plan confirmation disputes.

In my latest Daily Journal of Commerce Construction column, I discuss the issue of whether a contractor may sue a lender. This occasionally arises when a project’s owner runs into trouble and the construction lender stops funding. The argument that is occasionally advanced is that the lender knew the contractor had started work and, if

With an increase in the use of arbitration as the preferred method for resolving construction industry disputes has come an increase in concerns with assuring fairness in the process. To this end, one of the recent changes the American Arbitration Association made to the Construction Industry Dispute Resolution Procedures (Including Mediation and Arbitration Rules), was

The Oregon Court of Appeals recently issued an opinion in Abraham v. T. Henry Construction, Inc., et al., a residential construction defect case, that helps clarify the circumstances under which a contractor may be sued for negligence. The issue of whether a contractor may be sued for negligence, as opposed to breach of contract

The Oregon Court of Appeals recently issued a ruling in the case of Waxman v. Waxman & Assoc., Inc. that resolves two significant issues regarding the statute of limitations in certain construction defect cases. First, the court ruled that where a plaintiff’s claim is based upon breach of contract, the applicable statute of limitations

A retail construction project illustrates the risks to an owner when the general contractor encounters financial problems. As is typically the case, the general’s financial troubles started when he got behind in payments on earlier projects. As a result, the initial payments on the retail project went to pay subs and suppliers from the earlier projects, which

Developer insolvencies are unfortunately becoming more and more common in our current economic climate and often result in partially completed projects being stopped. The consequences to contractors can be significant. A number of recent resort projects illustrate what the contractors and subs can typically expect.

First, the obvious, immediate problem is nonpayment, which in turn requires the

When disputes arise between an owner and its lender, and the lender, for any number of reasons, stops funding a project, the question of whether the contractor can sue the lender sometimes arises. The theory often advanced is that the lender knew the contractor had started work and, if it did not intend to advance the

Contract provisions stating that either the owner or the contractor’s bankruptcy will constitute an event of default are common. A corresponding provision typically sets out the nonbreaching party’s rights in the event of default, one being the right to terminate the contract. For all practical purposes, these provisions are meaningless and unenforceable.

Section 365 of the Bankruptcy

While the technical requirements for preparing and filing liens offer countless opportunities for mistakes, two in particular seem to predominate. The first is the failure to properly calculate the 75-day period for filing the lien. The 75-day period begins to run from the earlier of (i) the day the contractor or supplier ceased to provide

Risks of Termination

While most construction contracts permit the owner to terminate a contractor in the event of default, any owner will be well counseled to exercise such rights cautiously. The risks of termination are both practical and legal. Terminating the contractor will almost certainly result in delays. Finding a replacement contractor can be difficult, particularly if the project suffers from defective work. The cost of a replacement contractor can be significantly more than the amount left in the contract, and this in turn can lead to financing problems and perhaps even result in a default of the construction loan. The owner might not have the ability to assume the subcontracts, which could require any replacement contractor to also find subs to take over uncompleted work. Enforcing warranties later on could be difficult due to disputes over who was responsible for which portion of the work. And perhaps most concerning of all is that in most cases, the termination is likely to generate a lawsuit in which the contractor will be seeking all sorts of damages, including lost profits on this and possibly other projects.

Faced with these risks and problems, owners often elect to continue with a defaulting contractor, sometimes even in the face of enormous problems. Nevertheless, there are circumstances when termination needs to be considered and exercised. Careful planning, detailed analysis, and good documentation are critical.

Importance of a Well-Drafted Contract

Termination needs to be considered at the contracting stage, and well-drafted default and termination provisions are critical. The contract needs to set out clear, objective standards for what will constitute events of default and reasonable, but not overly burdensome, notice provisions. Many contracts will provide that the contractor is entitled to notice and an opportunity to cure. The time periods for curing need to be spelled out and should not be unreasonably short or long.

Termination for Convenience Provisions

Owners should try to include in their contracts provisions allowing them to terminate the contract for convenience. Such provisions are common in most public construction contracts. Owners should resist provisions that require the owner to pay the contractor some amount of unearned overhead and profit and instead commit only to payment for compensation earned up to the point of termination, plus reasonable winding-down (demobilization) expenses.

Right to Supplement Work Provisions

Owners might also consider trying to include in their contracts a provision authorizing them to supplement the contractor’s work force in the event of default. Such a provision essentially permits the owner to hire additional work crews to supplement the contractor’s work force. Any such provisions need to be drafted carefully, and such an arrangement presents its own set of risks and problems, but is a less risky option than termination and one that, in appropriate circumstances, might be of real benefit to the owner.

Strict Compliance with Contract Termination Provisions

When problems arise during the course of a project that might warrant termination, the owner needs to refer to the contract and follow all of the notice and pre-termination procedures precisely. At the same time, though, the owner’s initial response should be to consider options other than termination. One step might be a meeting with the contractor to discuss the defaults and to try to reach an agreement on a schedule and procedure for curing them. In the course of pursing termination alternatives, the owner needs to notify the contractor that efforts to resolve the defaults short of termination will not result in a waiver of the defaults or of any rights. If the owner agrees to give the contractor additional time for curing defaults or agrees to other concessions, the agreement needs to be spelled out clearly in a writing that clarifies precisely what the owner has agreed to and when the owner will be permitted to proceed with termination. Any such agreement will effectively result in an amendment of the contract and will therefore warrant the same attention to detail that went into drafting the original contract.