Various circumstances may require a party to a construction contract to withdraw from the project before its completion. Moreover, contractors and property or project owners may have the right to terminate a construction contract under Michigan construction law. However, before you do so, you should understand the risks it could have on your financial interests.
Common Reasons That Contractors or Owners Consider Termination
Some of the top reasons why contractors or property/project owners consider terminating a construction contract early include:
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Delayed payment or missed milestone payments
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Material breaches by contractors, including substandard work quality, project delays, or safety issues
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Failure to meet project specifications, including poor work or use of substandard or non-conforming construction materials
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Unexpected or unreasonable project changes requested by owners
Contractual vs. Statutory Termination Rights in Michigan
A party may choose to terminate a construction contract either because of a counterparty’s breach or because terminating the agreement serves the convenience of the terminating party. Michigan’s contract laws give parties the right to terminate a construction contract for cause due to a counterparty’s material breach—that is, a failure to perform a fundamental obligation of the contract. A material breach relieves a non-breaching party of their obligation to continue performing under the contract. That said, even when a party wishes to terminate for cause, the agreement may specify a procedure that party must follow to terminate.
When a party wishes to terminate a construction contract for convenience, they typically must have a contractual right under the agreement to do so. A termination for convenience may occur under circumstances such as:
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A property or project owner becomes dissatisfied with the quality of a contractor’s work
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The owner becomes frustrated with the contractor’s delays
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A project becomes financially unfeasible for a contractor due to the property or project owner’s changes to the scope of work
A party that exercises a contractual right to terminate an agreement must follow the contract’s termination procedures, which may include notice requirements, cure periods for a breaching party to remedy their breach, or mandatory dispute resolution procedures before a party may terminate the contract.
Key Legal Risks When Terminating a Construction Contract
Some of the legal risks that a party can face when terminating a construction contract include:
- Mistakes in following contract provisions, as contracts typically require that notice of intent to terminate be sent to a specified party in a particular way
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Wrongful termination claims, which may give the other party the right to pursue legal action to recover financial losses caused by an improper termination of the contract
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Bond or lien claims, including satisfying liens that subcontractors may have on the project or triggering a contractor’s bond to secure replacement work
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Cure period violations, which may occur when a terminating party fails to give a breaching party the contractually required time to cure their breach
- Escalation, as terminating a contract may escalate the dispute underpinning the termination into litigation, which parties might avoid through negotiation or mediation
Terminating a construction contract can also pose financial risks for the parties, including lost profits for both contractors and project owners, delay-related expenses incurred to secure replacement contractors, and financial liability for remediation costs or liquidated damages.
Contact a Michigan Construction Law Attorney Today
Whether you’ve considered terminating a construction contract or your counterparty has informed you that they intend to back out of the contract, you need experienced counsel to help you understand the risks of an early termination of a construction contract. Contact August Law, PLLC today for a confidential consultation with a Michigan construction lawyer to better understand the risks and complications that may arise from a premature termination of a construction contract.