April 10, 2019
How to Fire a Contractor
Property owners often have bad experiences with contractors and desire to end the relationship. In such instances, knowing just how to fire a contractor is important. An owner “invests” in the contractor by signing a written agreement, paying substantial amounts of money, and allowing demolition and construction to begin. At this time, the owner is vulnerable, and the true character and competence of the contractor, or lack thereof, becomes evident. If the contractor is good, the work continues diligently. There are many great contractors out there; this blog post isn’t about them. If the contractor is bad, the owner may see signs of a lack of commitment to the owner and supervision of the work, such as piles of dirt or trash, apparent workmanship defects or unapproved changes, communication problems and disputes over payment. After this happens, it’s all too common for the relationship to deteriorate. Sometimes the owner is to blame, in part. Many owners experiencing a breakdown in the relationship wonder if they should cut ties with the contractor or continue to make payments in the hope that the situation will improve. Be aware that unless the owner is the government, getting out of a contract may not be easy. Firing a contractor is more akin to getting a divorce than letting an employee go. An owner wanting to know how to fire a contractor will likely need an attorney and expert witness.
We all experience contracts daily, when we purchase retail goods, sign up for an online service, or summon an Uber driver. Contracts are like the air we breathe – something that happens without much ceremony: part of day-to-day living in a post-agrarian society. Many “contracts” are easily undone or abandoned without large consequences. A defective microwave oven may be returned with a swipe of a card. If they miss stains, dry cleaners will usually re-do garments for no extra charge. Signed builder contracts are not so easy to avoid. Part of this is practical or logistical. The contractor pulls permits, the county approves the owner’s drawings, subcontractors demolish existing structures, and the owner makes significant payments. The parties are usually bound by a written agreement. This agreement determines many issues during the course of the relationship, including how easily either party may get out of the deal.
Property owners want contractors who have the character, capability and competency to do the work properly without undue delay, for the agreed upon price. It is easier to choose the right contractor for the job before anything else happens than to try to make big changes in the middle of a project. For many owners, such preparation is easier said than done.
This blog post focuses on the rights and responsibilities of owners considering whether to unilaterally end their relationship with a contractor before the work is complete. The details may come as a surprise to anyone accustomed to having businesses bend over backwards to keep them as patrons.
- Any Contract May be Terminated by Mutual Agreement. Ordinarily, a contract may only be undone by agreement of all the parties. Many legal disputes may be avoided if the contractor and the property owner mutually agree to terms cancelling the agreement.
- Many Written Agreements Include Termination Provisions. There may be language in the contract that spells out how a party may terminate the contract for breach and which actions do not constitute a breach. Many agreements contain language limiting the ability of owners to terminate a construction contract unilaterally. For example, the owner may be required to give notice of the perceived defect, triggering a lengthy opportunity for the builder to cure. Experienced builders have been through this before. They know that it is in their interest to secure owners’ payment obligations and to restrict termination by the owner. If the termination clause is ambiguous, the court may resolve ambiguity contrary to the interests of the contractor who prepared it. Many sophisticated property owners retain an attorney to review the ten- to thirty-page contract before responding to the contractor. Professional assistance with the contract is imperative when the price is six or seven figures.
- It’s Called “Contracting” Because Parties Get a Contract: Many owners sign builders’ proposals under a false sense of security. The owner might get the results that they bargained for. Or they may simply bind themselves to papers. Generally, a contract is only as good as the character, competence and solvency of the contractor. If a contractor violates the regulations of the state licensing board, he may be fined or suspended. That proceeding won’t fix the defects in the work on the owners’ property, but it may interfere with that contractor’s ability to later pay a money judgment awarded by an arbitrator or court. Many states require contractors to pay into a fund or purchase a bond to provide some protections. For example, the Commonwealth of Virginia has a fund that can pay up to $20,000.00 for predatory practices with contracting. However, claims to this fund usually require the owner to first get a money judgment for fraud or misrepresentation. There are other technicalities that the board requires that may be used to deny a claim. Egregious problems usually exceed $20,000. To litigate a case to judgment may cost over $20,000.00 in attorney’s fees, let alone the damages for repairs. Many claims by owners against contractors aren’t covered by insurance. Many contractors organize as small limited liability companies or mom and pop corporations that don’t have many assets. The law obligates a contractor to maintain sufficient financial resources to keep the promises made in the contract. If the contractor is unable to perform the contract due to illiquidity, this may be grounds to terminate. This is of little consolation to an owner prejudiced by the impecuniousness of the contractor. Mistaken views of how regulatory safeguards work impairs owners’ ability to properly assess risks presented by various opportunities.
- Misrepresentation or Concealment. If one party commits fraud or the intentional concealment of facts to induce the other into signing the contract, then the court or arbitrator may “undo” the contract and relieve the parties of its terms. Even if a contractor blatantly failed to fulfill the contract terms, the building codes or professional regulations, it may not constitute fraud. Fraud is difficult to prove. The facts of the case may look like deceit to one person, and simple incompetence to another.
- Unilateral Right of Termination for Material Breach of Contract. When the contract does not outline terms for termination for breach, the law of contracts provides an answer. Sometimes, a contractor’s breach of the contract justifies the owner’s decision to terminate the contract. Whether a contractor’s breach is significant enough to justify termination presents an issue of fact to be proven later by the owner. Submitting a termination letter to a contractor with the sounds of construction work in the background is a drastic move. If the owner’s termination is unjustified, the contractor may have a claim for money damages or lost profits. The owner and the contactor should make a diligent effort to resolve any disputes amicably to avoid litigation. Even if the contractor materially breaches the contract, the contractor may eliminate the right to terminate by curing the breach. A material breach is one that “goes to the root of the contract” and defeats the contract’s essential purposes. For example, a breach by a contractor may be of great annoyance to the owner and require considerable cost to correct and still not be “material breach”. A material breach is so great that the work actually provided could be counted as nothing. One example is when the contractor causes a defect to the structural integrity of the building, eliminating all value of work done. The burden to obtain a money judgment for breach of a contract is significantly easier.
- Abandonment of the Job by the Contractor. Repudiation is a kind of, “material breach”. Sometimes, the contractor’s abandonment is obvious. He convinces the owner to pay the full price in advance (“Help me keep things going”), and then slowly winds down work on the project, removes his equipment, and stops responding to calls and emails. Or the contractor may directly refuse to do more work. Often, abandonment is less clear. Experienced contractors, even the unscrupulous kind, know that blatant abandonment gives the owner a clearer claim of repudiation. When contractors “ghost” a jobsite, it’s often in slow motion (with promises that the crews will be back soon) or by picking fights with the owner seeking any pretext to stop work.
- Owner Interference. Contractors frequently complain that owners interfere with their performance. For example, an owner might pressure a subcontractor to do something contrary to the general contractor’s instruction. There is a human tendency to try to hold things “hostage” to get demands met in a dispute. For example, upset owners may bar the contractor from the jobsite. Or, the contractor may try to misuse the “right to cure” in efforts to achieve milestones for additional progress payments. Such efforts may backfire if it appears in litigation that one side prevented the other from performing or mitigating damages.
A property owner with ongoing construction problems wants to know how to fire a contractor if necessary. In many cases, this is the best move for the owner because of the severity of the situation. It’s not impossible, but it will most likely test the owner’s patience, like going through any other “divorce.” The best way to avoid these problems is to make smart choices in “dating” a contractor before signing a high-priced deal, by asking good questions during meetings, checking out the contractor’s background and work history, and retaining other consultants as necessary to help with negotiating the agreement and inspecting the work. Because practical considerations make owners often vulnerable in such matters, and contractors highly motivated to make sales, it is usually not the owner’s fault for finding herself bound to a contract with the wrong builder and out lots of money with a half-finished project. In such situations, owners need legal, financial and technical advice to chart a pathway out of the mess in order to avoid potentially materially breaching the contract themselves or giving the contractor carte-blanche to make things worse.
photo credit: WSDOT A glimpse into the waterfront’s future via photopin (license) This photograph is provided to depict a construction site. The author of this post has no evidence of any defects on the depicted job site and contracting company
