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Most construction contracts contain clauses describing what happens in the event of a default. Subcontractors are protected by many such clauses, which provide an opportunity to cure the default before being liable for breach of contract. Prime contractors are protected as well because construction contracts provide a choice.

Prime contractors are often entitled to demand that the subcontractor cure a default and then recover any resulting damages. Alternatively, prime contractors can terminate a contract for convenience (to be clear, this is a contractual right that is contained in most construction contracts, but not all).

Therefore, if the subcontractor’s deficient performance continues to cause the prime contractor headaches, the prime contractor can choose to simply terminate the contract for convenience and find another way to perform the subcontractor’s work. Or the prime contractor can choose to demand that the subcontractor pay damages.

But those two rights granted to prime contractors to resolve a dispute on a construction project – termination for convenience or providing an opportunity to cure a default – cannot be used in tandem. For example, in the Oregon Court of Appeals’ recent decision in Shelter Products Inc. v. Steelwood Construction Co., the prime contractor concluded that the subcontractor’s performance was deficient and terminated the subcontract for convenience. So far, so good: The parties’ contract permitted such a termination.

However, the prime contractor then attempted to sue the subcontractor for damages. The Court of Appeals rejected that approach. It sternly noted that the contract “certainly does not . . . permit” the general contractor “to pursue two inconsistent paths simultaneously: both terminating the agreement for convenience and seeking damages against” the subcontractor as if it had given the subcontractor an opportunity to cure. The prime contractor had to choose which of two methods it wanted to use to resolve the dispute regarding the subcontractor’s performance; it could not eat its cake and have it too.

The choice between terminating the contract or giving a subcontractor an opportunity to cure a default can be frustrating. A prime contractor has already been harmed by a subcontractor’s deficient performance. By waiting for the subcontractor to correct that performance, the prime contractor is further harmed. Plus, the subcontractor’s credibility on the project is also harmed by the prior default.

Depending on the severity of the default, the prime contractor may not feel safe continuing to work with a subcontractor any further. But if it simply terminates the contract without providing an opportunity to cure, the prime contractor may not be able to recover damages caused by the subcontractor.

To resolve that problem, prime contractors should discuss contractual strategies with their lawyers before executing contracts on a project. Any strategy regarding subcontractor default and termination must be consistent with the terms of the prime contract. Disputes often arise out of ambiguity. If subcontracts and prime contracts are inconsistent, a prime contractor will be caught in an ambiguous situation at best or face conflicting contractual responsibilities at worst.

Three approaches are apparent and more are likely available based on the specifics of a project. First, the prime contractor includes a clause providing that if a prime contractor terminates a subcontract for convenience, the prime contractor can also sue for any damages it sustained from the subcontractor’s deficient performance.

A problem with that approach is that it may not be enforceable with certain contracts that require a prime contractor to provide the subcontractor an opportunity to cure defaults. Also, that is a heavy-handed approach that a subcontractor may not be willing to accept. Such a clause could also harm the relationship between the subcontractor and prime contractor if exercised. Accordingly, that first option should be exercised with care.

Second, the prime contractor could substantially limit the period that a subcontractor has to cure a default. That approach ensures that the default does not last very long before the contractor can terminate the contract and sue for damages if the subcontractor fails to cure the default. But that approach does not address the trust issues that may arise between a prime contractor and subcontractor following a default.

Third, the prime contractor could insist upon a graduated approach. The subcontractor could have more time to cure the first default than the second default. The third default could result in automatic termination without any opportunity to cure.

If the contract also contains a termination for convenience provision, the contractor would be able to terminate the contract or instead choose to give the subcontractor an opportunity to cure the default, albeit with a shorter leash. The problem with this approach is that a single default can wreak havoc on a project, so this middle-of-the-road approach may not make any meaningful change in the practice of a subcontractor or get the project back on track.

There is no single way to manage a default situation in a construction contract. The most expedient solution may require a party to sacrifice certain long-term interests, including the parties’ relationships. But patience with defaults can be ruinous. Because there is more than one way to manage such circumstances, contractors should seek assistance in drafting their contracts to appropriately plan for and manage a default situation for each specific project.

David Anderson is an attorney in the Portland office of Schwabe, Williamson & Wyatt. He focuses his practice on commercial litigation. Contact him at 503-796-2456 or at [email protected].