Gail S. Kelley, P.E., J.D.
Termination of a contract for default can have significant consequences for a Contractor. In addition to the loss of work and loss of potential profit on the project, the Contractor may be liable for the Owner’s costs to complete the project with another contractor. Having a default termination on its record may also affect the Contractor’s ability to obtain future work. An improper termination can have equally significant consequences for the Owner, who may forfeit damages that it would otherwise be entitled to, and may be found liable for the Contractor’s damages from the termination. As a result, owners generally make sure that they strictly comply with all contractually required termination procedures, which raises the question of how an Owner should proceed when the contract is silent as to the requirements for a termination for default. The Connecticut Supreme Court addressed this issue in Centerplan Construction v. City of Hartford, 343 Conn. 368, 274 A.3d 51, and its opinion highlights the problems that can arise when a contract does not clearly state the parties’ rights and obligations.
The case involved a dispute over which party was responsible for delays in construction of the Dunkin Donuts baseball stadium in Hartford, Connecticut. The dispositive issue in the appeal before the court was whether the trial court correctly concluded that the plaintiffs—the project’s developer, DoNo Hartford, LLC (Developer), and the project’s design-builder, Centerplan Construction Company, LLC (Design-Builder) —”controlled” the architect and were therefore liable for any mistakes in, and changes to, the stadium’s design. However, in remanding the case for a new trial, the court addressed the issue of whether a term sheet signed by the Owner (the City of Hartford) and the Developer unambiguously eliminated the Design-Builder’s right to notice and an opportunity to cure before it was terminated for default.
The City had contracted with the Developer under the Developer Agreement; the Developer in turn, contracted with the Design-Builder under the Builder Agreement. The three parties—the City, Developer, and Design-Builder—also entered into an agreement (the Direct Agreement) which allowed the City to step into the Developer’s shoes, replacing the Developer as a party to the Builder Agreement, if the City terminated the Developer Agreement.
During construction, the Developer sent a notice of claim to the City, requesting a budget increase and time extension because of changes that the City and the baseball team had made to the design. To resolve Developer’s claim, the City executed a term sheet with the Developer which extended the substantial completion deadline by two months, prevented any changes to the stadium’s design without the City’s consent, modified the liquidated damages provision in the Developer Agreement, and increased the contract amount. The Design-Builder was not a party to the term sheet.
When the extended substantial completion deadline was not attained, the City terminated both the Developer Agreement and the Builder Agreement. The plaintiffs sought an injunction against the terminations, and subsequently amended their complaint to include a breach of contract claim, alleging that the City had failed to provide notice and an opportunity to cure the default before termination.
Under the Development Agreement, the City could only terminate for default and remove Centerplan after providing all applicable notice and cure periods. Likewise, under the Builder Agreement, the Developer could only terminate the Design-Builder for default if Design-Builder failed to cure the default after being given seven-days’ notice. However, the City claimed that in exchange for giving the Design-Builder an additional two months to complete the project, the term sheet divested the Design-Builder of any right to notice and an opportunity to cure. The court disagreed and found that because the Design-Builder was not a party to the term sheet, it was not bound by its terms. Although a contract may provide benefits to a third party, it cannot bind or impose any liability on a third party.
In both the Builder Agreement and the Direct Agreement, the Design-Builder agreed to certain provisions of the Developer Agreement, however, it did not agree to be bound by future modifications to the Developer Agreement. The court noted that even if the Design-Builder had somehow manifested assent to the term sheet, the fact that the term sheet was silent regarding any notice and cure requirements did not mean that no such requirements existed.
Under well-established common law, the right to cure is implied as a matter of law unless expressly waived. Because the term sheet was silent as to the common-law right, there was no express waiver of the right.
About the Author: As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performed constructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court. She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law. She provides risk management services for ConstructionRisk, LLC.
This article is published in ConstructionRisk Report, Vol. 25, No. 3 (March 2023).
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