Terminating a Contractor, or Being Terminated: What Texas Law Requires

What does termination for cause mean on a construction project?

It means ending the contract because the other side defaulted, and keeping the right to recover the cost of that default. The alternative is termination for convenience, which most commercial construction contracts also allow: the owner ends the contract for any reason or none and pays the contractor for work performed plus the costs the contract lists. The label matters because it decides who owes whom at the end.

Texas statutes do not define either kind of termination for private construction. The Property Code governs liens and payment timing, not when a contract may be ended. So the first question in every termination dispute is the same: what does the contract say, and was it followed to the letter.

In the common AIA structure, the owner-contractor agreement incorporates the General Conditions (A201), and Article 14 of the General Conditions sets out when each side may terminate or suspend. Owner-modified forms, ConsensusDocs and design-build agreements have their own versions. The mechanics below describe the typical pattern; the actual clause in the signed contract controls.

What steps does the contract usually require?

Three things, in order. First, a listed ground. Standard forms allow the owner to terminate for cause when the contractor repeatedly fails to supply enough properly skilled workers or proper materials, fails to pay subcontractors or suppliers, repeatedly disregards laws or the architect's instructions, or otherwise commits a substantial breach. A single late week or one quality complaint is usually not on the list.

Second, written notice and a chance to cure. Most forms require notice to the contractor (and to its surety, if bonded) and a stated number of days before the termination takes effect. Under AIA General Conditions the owner also needs the Initial Decision Maker, normally the architect, to certify that sufficient cause exists. The notice must go to the address and by the method the notice clause specifies; an email to the superintendent rarely qualifies.

Third, the right to take over. After a valid termination the owner may take possession of the site, materials and equipment, accept assignment of the subcontracts and finish the work by any reasonable method. The contractor is not paid further until the work is complete. If the cost to finish, including compensation for the architect's extra services and other damages, exceeds the unpaid contract balance, the contractor pays the difference; if it is less, the contractor receives it.

Example

Suppose a Dallas owner's general contractor on a tilt-wall warehouse is six weeks behind, two subcontractors have sent notices of nonpayment, and the owner wants it gone. The contract is an AIA agreement with A201 General Conditions. The owner's attorney first checks that the grounds match the list (failure to pay subcontractors does), then asks the architect to certify that cause exists, then sends the written notice to the contractor and the surety by the method the contract requires and waits out the cure period. During those days the owner photographs the site, inventories stored materials and lines up a replacement. If the contractor cures by paying its subs and adding crews, the termination does not take effect; if not, the owner takes over and tracks every completion dollar against the contract balance.

What happens if the termination was wrongful?

The party that terminated is in breach. Under Texas contract law a party may stop performing only for a material breach by the other side; ending the contract over a minor breach, or without following the contract's termination procedure, is itself a breach that excuses the other side's further performance. Material versus minor breach explains how Texas courts draw that line.

For a wrongfully terminated contractor the measure is normally the unpaid value of work performed plus the profit it would have earned on the remaining work, less what it saved by not finishing. Many contracts change that outcome by stating that a termination for cause later found to be wrongful is treated as a termination for convenience. That clause limits the contractor to payment for work executed, costs incurred because of the termination (including the cost of terminating subcontracts) and any termination fee the agreement states, and it removes lost profit on unperformed work. Whether such a clause is in the contract is often the single largest dollar question in the dispute.

For an owner, a termination that fails on procedure is expensive twice. The owner loses its own claim for the cost to complete, and it owes the contractor for work the owner may believe was defective. Owners who have a strong case on the merits still lose it on a missing notice or a cure period cut short.

Can a contractor terminate, or stop work, when the owner does not pay?

Yes, within limits. Standard general conditions let the contractor terminate after work has stopped for a stated stretch for reasons such as a court order, a government act, the architect's failure to certify payment or the owner's failure to pay a certified amount within the contract time, again after written notice. The contractor then recovers payment for work executed, costs incurred because of the termination, and overhead and profit on the work not executed to the extent the contract allows.

Texas adds a statutory tool on private non-residential projects. Under Property Code § 28.009, a contractor or subcontractor that has not been paid an undisputed amount on time may suspend performance on the tenth day after giving the owner (and in some cases the lender) written notice of nonpayment and of its intent to suspend. A party that suspends properly is not liable for the delay and need not resume until paid, including remobilization costs. Suspension is not termination; it preserves the contract while stopping the bleeding. The Texas Prompt Payment Act covers the notice conditions and the residential exclusion.

Walking off without using either route is abandonment, and abandonment is a breach. What an owner can do when a contractor never finishes describes the owner's claims in that situation.

What does termination do to liens, subcontractors and the surety?

Termination starts several clocks under Property Code chapter 53. The original contractor's lien affidavit deadline is measured from the month the original contract was completed, terminated or abandoned. On a non-residential project the owner must, within ten days after terminating the original contractor or after the contractor abandons, send notice of the termination to every subcontractor that has already sent the owner a lien notice or asked for notice of termination (§ 53.107); an owner who fails to send it loses the benefit of the retainage notice requirement against those subcontractors. The owner's duty to hold reserved funds continues for 30 days after the work is completed.

If the contractor is bonded, read the performance bond before sending anything. Common bond forms condition the surety's obligations on the owner declaring a contractor default, terminating the contract and giving the surety the chance to complete or finance completion. Terminating first and telling the surety later gives the surety an argument that its obligations never arose. The surety's address is on the bond; the notice to it should travel with the notice to the contractor.

What should be documented before pulling the trigger?

• The contract set, including supplementary conditions that often rewrite the termination article.
• Every earlier notice of the problem, with proof of delivery, and the contractor's responses.
• Schedule updates, daily logs, pay applications and the architect's or inspector's reports showing the default.
• Dated photographs of the site, stored materials and equipment on the day of takeover.
• Every completion cost, by category, so the cost-to-complete claim is provable later.

Delay claims and liquidated damages covers how the schedule record feeds the damages case after a termination for delay.

When should a litigator look at the file?

Before the notice goes out, not after. A termination letter is the most consequential document on a project, and the fixes available afterward are few. On the receiving end, a contractor has the same short window: the cure period is the time to cure or to put the owner on written notice that the grounds do not exist and the procedure was not followed. Tina Wysk represents owners and contractors in termination and completion disputes in Dallas–Fort Worth courts and arbitration; the construction litigation page describes that work.