Claims Retrospective: The Improper Termination of Contracts Lead to Claims that Are Difficult to Defend
While it may not be a common occurrence, most engineers have had to terminate their contracts with clients on at least a few occasions. Typically, the engineer reluctantly terminates the contract after the client refuses to pay for services, fails to return communications, and/or engages in other actions or inactions making it impossible for the engineer to continue to perform their duties. The termination of contracts in these circumstances may be inevitable. However, engineers should act carefully in terminating contracts to either avoid claims or, at the very least, put themselves in the best possible position for defending such claims.
The engineer’s first step in evaluating how to terminate a contract should be to review all terms governing any applicable written contract. While it’s certainly good practice to include a termination clause in one’s written contracts, it does no good if the engineer fails to follow such clause when actually terminating the contract. Accordingly, engineers should consult and follow the termination clause in the applicable written contract.
If there is no termination clause in the engineer’s written contract or the engineer does not have a written contract, the engineer will likely still be able to terminate the contract, verbal or written, if the client breaches said contract. The most obvious breach being a failure to pay for the engineer’s services.
Please note that it is unlikely that an engineer will be able to terminate a contract due to the client’s failure to make a payment in relation to a different, separate contract.1 Where engineers have ceased all services for a particular client—including services under contracts for which the client has paid in full or has made timely payments—for failure to pay under only one or some (but not all) contracts, engineers have often faced claims and even licensing complaints. Moreover, in the aforementioned scenario, the clients have often obtained judgments against the engineers and/or the engineers have been disciplined as it has been determined that such practice is not proper. An engineer should consult a local attorney if they have any questions about whether there are grounds to terminate a contract.
Assuming the engineer has grounds for terminating the contract, they should still proceed carefully. The engineer cannot simply walk away from the project without any communication. Rather, the engineer should provide the client with written notice of the termination of services. The notice should include a citation to any relevant contractual terms, the reason for the termination, and what—if anything—can be done to cure the breach(es). Additionally, any advances or payments for services not yet rendered should be promptly returned to the client.
Although the pre-completion termination of services often leads to claims, an engineer who properly terminated their contract with the client will be in a much better position to defend said claims than an engineer who simply walked away from the project without considering the required or best way to terminate services. Depending on the complexity of the project and the nature of the relationship with the client, an engineer should consider enlisting the aid of a local attorney and/or their professional liability carrier in terminating services under a contract.
1For example, if the engineer has multiple contracts with the same client, they cannot cease work on a project for which they’ve been paid because the engineer was not paid on a different project unless there is contract language allowing for it.
