TERMINATING A SUBCONTRACTOR: Pitfalls and Pratfalls

1. INTRODUCTION
2. THE GENERAL CONTRACT
1. Flowdown Provisions
2. Quality of Work
3. Delivery of Warranties
4. Timeliness and Delay Damages
5. Payments and Liens
6. Waiver and Estoppel Issues
3. THE SUBCONTRACT
1. Documentation is Critical
2. The First to Breach
3. Opportunity to Cure
4. Measures of Damage
5. Consequential Damages
6. Delay and Liquidated Damages
7. Payment Issues
8. Waiver, Estoppel and Tort
4. PUBLIC CONTRACTING AND SURETIES
1. Public Projects
2. Surety Issues
5. MISCELLANEOUS ISSUES
1. Default Converted to Convenience
2. Cross Default and Self Help
3. Bid Situations
4. Owner Interference and Quantum Meruit
6. CONCLUSION

Abstract

When a general contractor (hopefully, with the assistance of counsel) is compelled to analyze whether a subcontractor should be terminated, there are essentially three sources of information available which should be thoroughly reviewed. First, there is the actual subcontract agreement between the general and subcontractor. Second, the general contractor should review the terms of its own contract with the owner. Finally, the general contractor should be aware of the overlaying application of Texas statutory and case law. Even if the general contract, subcontract and Texas law preponderate in favor of termination, the general contractor must still fall back on the most important and intangible aspect involved in deciding to terminate a subcontractor – is it the right thing to do? In other words, is the timing of the termination appropriate, are the financial aspects acceptable, is a case for termination documented, and will a jury find the decision to be reasonable.

In light of the above, this article will be divided into four sections. The legal and practical concerns implicated by the general contract with an owner will be discussed first. Second, the legal and practical issues emanating from the terms of the subcontract will be examined. Third, this article will review public contracting and surety issues. Finally, this article will address the miscellaneous legal and practical considerations. One final point should be made before we begin. This article is merely food for thought. This article is neither an encyclopedia of legal citations nor a glossary of hard and fast rules. Each project, contract and case is different. Where appropriate, existing cases, codes and statutes will be cited. However, as the construction practitioner knows, the manner in which trial judges, juries and arbitrators react to contract provisions and project situations often times bring about resolutions which never appear in the Southwestern Reporters.

Documentation is critical. In even the most clear-cut case, the general contractor will still find itself embroiled in litigation. In the closer case, documentation may save the day. Finally, the decision to terminate a subcontractor should never be taken lightly or simply to placate the owner. There are a number of legal and practical pitfalls existing by virtue of the contract, Texas law or simply the facts and circumstances giving rise to the problem. All of these must be considered in order to avoid "a fall on the buttocks, a humiliating mishap or blunder" — the pratfall.

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