Terminating a Contract? Dot the i’s and Cross the t’s!

From a Connecticut trial court comes a reminder to follow the contract process when terminating a contract. Failure to do so could constitute a breach by the one issuing the termination letter.

A sub and general contractor had many changes, claims and disputes on a complex hospital project. Semac, the sub, had overbilled for its work, and was facing the prospect of losing a lot of money to get to the finish line. When it couldn’t resolve multiple claims, Semac got so fed up that it started to pack up its tools and leave the site. Skanska, the GC, in the face of an unjustified abandonment by Semac, issued a termination letter effectively immediately. Except that the termination clause called for a 48-hour notice period and opportunity to cure.

Semac’s claim that the number and scope of changes amounted to a cardinal change in the contract was analyzed by the court, but turned down. The trial court concluded that Semac had been in financial distress, had front-loaded its billing, had disguised half a million dollars’ worth of payments to a company owner as payments for materials, and had failed to turn over a specific $250,000 payment that was supposed to go to a lower-tier sub.

Thus, Semac was in breach for abandoning the project. But Skanska then breached by failing to follow the subcontract provisions for terminating the contract for cause. Possibly because it wanted to seize Semac’s equipment, as it was entitled to under a default termination, Skanska did not allow Semac any opportunity to change its mind:

Under the contract, Skanska had the right to terminate Semac anytime it wanted with cause or without. But for Skanska to terminate Semac for cause as it said it was and grab Semac's equipment, the contract provides that it had to give Semac 48 hours to cure its breach and get back on the job. The contract doesn't name any exception or qualify this rule in any way. It doesn't say that the provision doesn't apply when the other party breaches first. It doesn't say it doesn't apply when the other party isn't likely to make use of the 48-hour period to cure. Elsewhere in the contract it does say that Skanska may seek any other remedies available at law outside the contract, but it doesn't say anything about rewriting explicit provisions already contained in the contract to make them easier on Skanska. So the 48-hour notice that was not given had to be given for Skanska to terminate Semac for cause.

The effect of this breach by both sides? Semac was not entitled to any further payment, and in fact had to reimburse Skanska for amounts overbilled. Skanska was not entitled to recover its considerable costs of completion of Semac’s work.

The lesson is this: if you are going to terminate a contract for cause, take steps to ensure that the contract terms for the termination are being followed. Even if you believe it would be futile or unnecessary to do so. The case is Semac Elec. Co. v. Skanska U.S. Bldg., Inc., 2017 Conn. Super. LEXIS 4320 (Aug. 23, 2017) (Lexis subscription required).