Termination of a Sub - a Checklist

Termination of a Sub - A Checklist

By: Larry R. Leiby, Esq.

The sub is very late. The sub is not bonded. The suppliers are calling for money. When the job needs 20 men the sub is furnishing two. Other than medically addressing your blood pressure, what can the contractor do? There are three legally acceptable choices (breaking legs by Guido is out of the question and won't help anything but your sense of machismo): 1) Continue to accept the inadequate performance, 2) supplement the sub's work force and take active control over the direction of payments, or 3) termination.

Option number 1 is generally not acceptable unless it is for a temporary period while the contractor gets the facts in order and documented to proceed with options 2 or 3.

Note that in this case, the sub is not bonded. If the sub is bonded, you should look at the bond to see what is required to invoke the responsibility of the surety. In most instances, the surety is not obliged to do anything until there is a declaration of default. However, there is variety in the language of performance bonds. See what the bond says. Are there written notices to the surety (or perhaps others) required? Is a meeting with the surety required? Do what the bond language requires in order to get the protection of the bond and not give the surety a defense. (Hint: Knowing this, perhaps you should review the bond language that you will accept in bonds from your subs. If a sub or contractor passes the requirements of surety underwriting, sureties will sign on almost any bond presented to them by their bonded principal. I am not suggesting that you include unreasonable language, simply make the language reasonable to both sides. There are some things a surety simply will not accept.)

If the sub (and/or the indemnitors to the surety) is financially viable, and there is any possible argument that the sub is performing properly, the surety may decline to step in. Remember that if the surety steps in and the sub has a viable defense, the surety loses its ability to collect back from the principal and indemnitors. If the surety does not accept responsibility document that fact by letter, and advise the surety that you will proceed and look to the surety for the damages resulting from their lack of performance under the bond.

Now, back to the unbonded sub. Look at the contract to see what it says about non-performance. Are there notices required? Even if specific notice is not required, remember that a judge, jury, or arbitration panel is usually very sympathetic to a sub that performed work and is unpaid. Your file should have several written notices describing the nonperformance of the sub before you consider termination (or even supplementation of work force) in most instances. Daily job logs should describe the poor performance and perhaps the impact on other work. You may refer to letters from other subs complaining about the impact of the poor-performing sub. You may wish to record the names and addresses of people on the job who have knowledge of the sub's poor performance. Failure to comply with the procedure for termination can make improper an otherwise proper termination. A wrongful termination may give the sub grounds to terminate.

Is certification of the architect or owner required? If so, get the certification(s).

Check the status of deliveries and payment to sub-subs, laborers, and suppliers. Is there some key or long-lead-time item(s) that will be impacted if you take adverse action with the sub? This may impact your decision on termination, at least in regard to timing.

Is there at least one other sub that has the resources available to complete the job, and at what price? Can you complete the job with your forces if you make arrangements with key suppliers?

You should have been attempting to communicate with the sub about the problems. You will have been sending letters or notices of nonperformance. At the time that you have the aforedescribed information in place, a sit-down conference with the sub is in order, although you can't force the sub to attend. You should try to see what could be amicably worked out. Perhaps an agreement could be reached for the sub to leave the job with specific terms of what will be done, and what and who will be paid. Can there be an arrangement agreed to for supplementation of the work force? (Remember that on private work you must consider a new permit for the MEP (and perhaps roofing) subs unless the errant sub agrees to allow supplementation.) On public (and sometimes private) jobs there may be a requirement for the owner to approve a substitution of subs.

If an agreement with the sub for completion of the job cannot be reached, then the contractor must decide whether to terminate or supplement (remembering permit issues).

Does the subcontract have a termination-for-convenience clause? The termination-for-convenience clause allows the sub to be terminated without cause, and then defines what the sub will be paid if the contract is terminated for convenience. They usually do not permit payment of lost profit, or anything beyond the value of work performed. Some termination clauses go so far as to provide both a termination for cause, and a termination-for-convenience clause, and further say that a wrongful termination for cause will be considered a termination for convenience. A prudent sub will usually not accept this absolution for a wrongful termination for cause.

Usually subs do not want a termination-for-convenience clause unless it is limited to the situation where the contractor is terminated for convenience. On the other hand, if there is a termination-for-convenience clause that provides that the subcontract may be terminated at any time at the convenience of the contractor, the contractor is in a very good position to minimize risk for wrongfully terminating the sub by using the termination for convenience.

To avoid the stigma of being the person who "pulled the trigger", the contractor should consider whether to complete the contract under a concept of supplementing the work force, and back-charging the sub for the work of the supplementing contractor. In some instances, because of the nature of the sub's work or the job itself, supplementing will not be possible. The idea is that you leave the sub the opportunity to do the work himself without throwing him off the job. However, this will not work in every case. It works best with agreement of the sub. It also works best where there are defined areas where the original sub can work and where the supplementing work force can work. Having both work next to each other in the same area may lead to more problems.

When the sub becomes a problem, the contractor should take particular caution in connection with potential claims of sub-subs, suppliers, and laborers. If the contractor has not bonded the job to the owner, the contractor should consider getting the owner to send, or getting the owner to authorize the contractor to send as agent for the owner, requests for sworn statement under F.S. 713.16(2). Responses to these requests help to get a reading on what may be owed, and in some instances, create a defense to a sub or vendor claim if the sub or vendor fails to respond, or responds with inaccurate information. If the contractor has given the owner a payment bond pursuant to statute (F.S. 713.23 or 255.05), the contractor has the right to send the requests for sworn statement on its own account, rather than as agent for the owner.

Remember to not let emotions get in the way, and remind yourself that the reason that you do this work every day is to get the best bottom line. In some cases, it might cost a little more to supplement with the sub's agreement, but that "little more" might be well worth the elimination of the risk and cost of defense of a claim of wrongful termination. You must also consider that the sub may not be collectable. Thus, even if the contractor is clearly right, it may end up with an uncollectable judgement.

Also remember that preventive law is more economical than remedial law. If there is any time to consult your lawyer, it is when you are considering termination (or when you are getting vibes from the other side that termination is possibly in the wind). Advice before the facts are set in stone can be extremely reasonable and valuable.

If you supplement, or terminate, be sure to keep discrete records of the costs and impacts of the termination. There have been many cases where the termination was proper, but the contractor failed in the record keeping to show what costs resulted from this subcontractor's breach. This may include, the costs to complete, costs to correct, increased contract administration costs, possible delay damages, and attorney fees (if provided in the contract).