Divorces in Remodeling: The Termination Clause

No matter how stellar your remodeling company is, if you've been in business long enough you've run into "irreconcilable differences" with a client. This scenario probably went something like this: You are well into the job, and disagreements begin to deepen. It's usually about something not being perfect or about problems with change orders. You can easily fix the problem, but the client doesn't want to hear about it. He or she just wants to be mad. The client who trusted you for the 1,000 steps you successfully accomplished thus far in the job suddenly doesn't seem to have confidence in you anymore.

As you try to offer suggestions to resolve things, you realize the client is either wacko or just too far down in the well of anger to work things out with you. That process -- from the time the client begins to question your competency to the point where the owner tersely asks to only "communicate with each other in writing" -- is something I call The Death Spiral.

This upsets you because you are a people person, a good negotiator and a good remodeler. But there is a more serious side to this that you might not have considered. Aside from probably being on the short end of the stick moneywise, you could be facing genuine legal trouble. Remodeling is a complex process, and a good trial lawyer can make mincemeat out of most of us even if we've performed up to industry standards. That's the reality. You don't want to go there, even if you have a good case.

The purpose of this article is to give you suggested language for terminating the relationship with your client with each party getting a fair shake. It sets up a specific procedure, and it makes sure the parties are fairly compensated for their trouble.

The suggested language goes something like this:

TERMINATION OF CONTRACT:

REMODELER'S REMEDIES
If the Owner (a) fails to materially comply with the provisions of this contract; (b) terminates the contract for a reason other than the Remodeler's failure to perform; or (c) orders the Remodeler or the Remodeler's agents, employees, or sub-contractors to stop work to be performed by this contract, the Remodeler may (a) terminate this contract and retain any down payments and/or deposits as liquidated damages; and (b) recover all unpaid costs, expenses, and fees earned to the time of defaulted termination; the pro-rated cost of overhead expenses; and the cost, fees, and pro-rated overhead expenses for all change orders approved by the Owner prior to the termination; and (c) 20% of the contract for downtime while arranging a new job and for the administrative time and expenses to resolve this contract; (d) institute arbitration judicial proceeding for specific non-performance and/or any other legal or equitable remedies. These costs shall be based upon the cost specified in the Cost Summary section of this agreement plus any change order items completed or in the pipeline at the time of termination. However, before taking such action the Owner must give the Remodeler ten (10) days written notice during which period the Remodeler may cure the violation.

OWNER'S REMEDIES
If the Remodeler fails to comply with the provisions of this contract in a material way, the Owner may give the Remodeler written notice. After ten (10) days, if the Remodeler has failed to remedy the breach of contract, the Owner can give a second written notice. If the Remodeler still fails to cure the breach within seven (7) days, the Owner may terminate the contract. The Owner may be entitled to finish the work by whatever reasonable method he or she may deem expedient. In such case the contract price shall be reduced by the cost to the Owner for finishing the work, providing that cost is reasonable in the marketplace. A material breach by the Remodeler may include the following: (a) a persistent deviation from the plans and specifications; (b) a persistent disregard for applicable law; (c) repeated failure to maintain the schedule agreed upon, as modified during the course of the work.

I have been using these paragraphs in my contracts for the past five years or so. Thankfully, I've never had to use them. Of course, I have had occasional problems with clients, and I like to think that these paragraphs have served to encourage clients to work things out with me because they know it will cost them to split the sheets. I have never had anyone ask me to strike these paragraphs. Clients seem to respect the foresight to have an escape plan spelled out in advance.

Of course, you should revise this as needed to fit your business and your jurisdiction. It would be wise to let your attorney read it over to be sure you are maximizing your protection.

Good luck -- I hope all of your marriages are long and happy ones.

Dan D. Bawden, CGR, GMB, is president of Legal Eagle Contractors Co. in Houston. He was voted Texas Remodeler of the Year for 2000.