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Owners, general contractors and subcontractors sometimes find themselves in situations where it becomes necessary to terminate a contract prior to when performance is complete. There are instances where rescinding or simply canceling the contract may be possible, but canceling a contract is not always a straightforward process. Common issues arise over insolvency, lack of communication, failure to make timely payments, schedule and delay problems, personality struggles, and conflicts over work quality and the parties’ expectations. While it is sometimes beneficial to terminate the contract to avoid further loss and mitigate damages, ending the contractual relationship can be a complicated process, and it often carries significant risk, even when each side mutually agrees to end the agreement. Prior to terminating a contract for cause, terminating a contract for convenience, or attempting to simply rescind or cancel an agreement, it is prudent to contact a knowledgeable construction attorney who can assist with weighing risks and options.

In December 2018, the Montana Supreme Court issued a decision requiring a subcontractor to pay contractual prevailing party attorney fees after determining the contract was mutually rescinded by the parties. Jorgensen v. Trademark Woodworks, LLC provides a cautionary tale of unforeseen pitfalls that can arise when attempting to terminate contractual obligations without adequately weighing options and consequences. Tim and Kiri Jorgensen (“the Jorgensens”) entered a contract (“the Agreement”) with Trademark Woodworks, LLC (“Trademark”) for the construction of a home near Wisdom, Montana. The Agreement provided that Trademark would supply the labor and materials for the framing, roofing, and siding of the home. Nathan Judd (“Judd”), the owner of Trademark was an acquaintance of the Jorgensens and he submitted a bid on behalf of Trademark to acquire the job. The Agreement was silent as to who would assume the role of general contractor. However, each side believed this role would fall to the Jorgensens because Tim Jorgensen was an experienced contractor and Trademark was contracted to perform limited aspects of the home construction.

Early in the project the relationship began to deteriorate because Judd felt the Jorgensens were causing unnecessary delays and Judd felt he was being forced to “assume a role left vacant” by the Jorgensens, whom he expected would act as the general contractor on the site. The Jorgensens disputed that Judd was acting as general contractor and asserted he was responsible only for his subcontractors. After numerous disagreements and miscommunications, Judd sent the Jorgensens an email: “If you feel like your [sic] being taken advantage of, mislead, or mistreated I apologize. I’ll be happy to finish the framing phase and turn the reigns [sic] over if you’d like. Please let me know on how you’d like us to proceed.” Roughly 3-weeks later, the Jorgensens emailed Judd and indicated that they wanted to take him up on the offer and requested a detailed accounting of the money spent and expenses paid. Following this exchange, Trademark ceased all work and did not return to the jobsite. The Jorgensens disagreed with Trademark’s final accounting and filed a lawsuit alleging breach of contract, bad faith, and, in the alternative, rescission. Trademark denied the allegations and counterclaimed alleging breach of contract and bad faith. At a bench trial, the court found the agreement had been mutually rescinded through the parties’ emails. The court ordered Trademark to pay the Jorgensens $19,977.19 in restitution damages and awarded the Jorgensens $27,475 in attorney’s fees.

On appeal, Trademark argued Judd’s email was not an offer to rescind but rather an offer for the Jorgensens to reassume their intended role as general contractor. Trademark also argued the District Court’s finding of rescission was improper because neither Trademark nor the Jorgensens intended to restore one another to their pre-contract positions. Trademark further argued it was impossible for the parties to be restored to their pre-contract positions since the framing was nearly complete and work had already been performed.

The Court considered MCA § 28-2-511 and explained that a proposal to rescind a contract may be revoked at any time before its acceptance is communicated, but not afterwards. An offer to rescind is revoked if the proposer communicates to the other party that the offer is revoked before acceptance occurs, there has been a lapse of the time prescribed in the proposal for its acceptance or, if no time is prescribed, the lapse of a reasonable time without communication of the acceptance. The court explained that termination of a contract by mutual consent is a factual question that was properly decided by the lower court. The circumstances and actions surrounding the emails between the parties provided evidence that both sides intended to cancel the contract, not merely cancel Trademark’s purported role as the general contractor. The Court further affirmed that Judd’s email constituted an offer to rescind the agreement and explained that rescission of a contract entitles each of the parties to be restored to the condition they were in before the contract was made, to the extent that is possible. “On adjudging the rescission of a contract, the court may require the party to whom such relief is granted to make any compensation or restoration to the other which justice may require.” While it was impossible to fully restore the parties to their pre-contract position given the work that was completed, the Court found that following rescission, the Jorgensens and Trademark worked to restore one another to the status quo.

Next Trademark argued that an award of attorney’s fees is proper only if one party has materially failed to perform its contractual obligations. Because the District Court did not find that Trademark materially failed to perform, Trademark argued the attorney’s fees were therefore improper. The court disagreed and explained that when parties enter into a contract and litigation later ensues over that contract, attorney’s fees may be recovered under a prevailing-party attorney’s fee provision in the contract, even though the contract is rescinded or held to be unenforceable. Ultimately, Trademark was required to pay Jorgenson’s attorney fees despite the court’s determination that the contract was mutually rescinded.

Reading between the lines, there are two interesting points to take away from this case. First, at the time the relationship deteriorated, it does not appear that either party consulted an attorney, or Montana’s Annotated Code, to determine whether the best course of action was to mutually cancel the contract. It is probably fair to assume that at the time, neither party fully understood the emails and breakdown in communication might later be construed as an intentional and mutual decision to rescind the Agreement. Based on the way the parties argued the case, the rescission theory was an alternative argument and according to Trademark, it never intended to cancel the entire contract and it certainly did not intend to restore Jorgenson its pre-contractual position. Second, while the case does not directly discuss termination for cause (or whether there was a termination provision in the Agreement), the court concluded that Trademark did not materially fail to perform its obligations. There was no dispute over the quality of Trademark’s work, and Trademark may not have understood the risks associated with mutually rescinding the contract, or that it would be required to pay to restore Jorgenson to its precontract position. Hindsight is 20/20, but given the facts of this case, I suspect the available remedies and outcome might have been entirely different if Trademark approached the termination process another way.

In ideal situations, the rights and termination protocol for each party are clearly laid out in the contract. Nevertheless, even when the contract contains a detailed termination provision, there are typically factual questions as to whether a party may suspend performance, whether it is justified to terminate the contract, or whether it must continue working to avoid giving the other side an independent basis to terminate the contract. The government has utilized termination for convenience clauses in public contracts since the end of the Civil War. More recently, private parties began utilizing termination for convenience clauses, which typically reduce a terminating party’s liability considerably. Still, even when a private contract provides the ability to terminate for convenience, state courts consider whether the termination may render the contract illusory or whether the terminating party acted in bad faith. As is the case with all legal issues, it pays to involve a knowledgeable professional early in the process to assist you.

When faced with terminating a contract, the available remedies and options are largely dependent on the contract provisions and case-specific facts. At Campbell & Bissell, PLLC we guide our clients through the convoluted termination process regularly and we are happy to help you weigh options and provide counsel regarding risks and the best path forward. Additionally, we regularly review (and provide) contracts to ensure that our clients’ agreements clearly set forth the parties’ expectations, including the intended termination rights and remedies.

By: Tyler Waite