This sudden shift in the economic climate has left a lot of developers and redevelopers wondering if they can exit of change existing construction contracts. According to David Alvarado, an attorney at Crosbie Gliner Schiffman Southard & Swanson, both the developer and the contractor can suspend or exit a contract, as long as both adhere to the terms of the exit, which may or may not include additional fees. As a result, canceling could be expensive.
“Many construction contracts include the right for the owner to either suspend or terminate their construction contract for convenience,” Alvarado, which is based in the firm’s Los Angeles office, tells GlobeSt.com. “In the case of a suspension, the owner is typically required to compensate the contractor for work properly executed and for the increases in costs and time caused by the suspension, including profit on such costs.”
If the contract is terminated after work has begun, the developer is liable for payment on the completed portion of work as well as any incurring costs. “The owner is required to compensate the contractor for work properly executed, cost incurred by reason of the termination and, in some instances, a termination fee to cover the anticipated profit,” says Alvarado. “The owner’s right to suspend or terminate for convenience are standard and not typically controversial; however, addressing the lost profit component can become contentious, with most owner’s successfully arguing that if they have to take the drastic step of suspending or terminating for convenience there are much bigger problems and that contractor’s anticipated profit should not be added to the equation.”
If the contractor is seeking to terminate a contract, they could still be due compensation. “Most standard contracts give the contractor the right to terminate the agreement and to receive defined compensation if the suspension is not the fault of the contract, is due to governmental action and the suspension lasts for a stated duration,” says Alvarado.
Some contracts, however, could have a force majeure, or something similar, clause that will allow both parties to walk away from the contract. Most construction contracts contain a force majeure type clause—a contract provision in which the parties make an agreement about their rights and responsibilities under the contract in the event of the occurrence of any agreed-upon event,” says Alvarado. “The provision is interpreted just as any other in a contract—based on the intention of the parties.”
Each state will approach these clauses differently, but California tends to err on the side of caution. “In California, the provisions are construed narrowly,” says Alvarado. “If triggered, the language of the force majeure clause will govern, and each clause is a bit different.”