A general contractor cannot offset the cost of defective work performed by a subcontractor if the subcontractor sues to recover unpaid fees after being terminated for convenience. According to a new Oregon case, termination for convenience denies the subcontractor an opportunity to cure any defects before it has completed its work and therefore cuts off the general contractor’s claim for defective performance. 

In Shelter Products, Inc. v. Steelwood Construction, Inc., decided by the Oregon Court of Appeals on July 3, 2013, Catamount Constructors, Inc., had subcontracted with Steelwood Construction to provide and install structural steel and the roofing system on a new building. The parties’ subcontract allowed Catamount to terminate the subcontract for convenience and “without cause and without prejudice to any other right or remedy.” Midway through the project, Catamount exercised that provision. Catamount hired another subcontractor to complete the work, at which time it identified defects in the work that Steelwood had performed before termination. Catamount never gave Steelwood the opportunity to fix its work. Because Catamount had terminated for convenience and provided no opportunity to cure, the court of appeals found that it could not recover the repair costs. The court stated that “at least in the absence of an opportunity to correct allegedly defective work . . . where a party has terminated a contract for convenience, that party may not then counterclaim for the cost of curing any alleged default.”

Taking the analysis one step further, the court looked past the contract’s provisions and concluded that as a matter of law, when a construction contract is terminated for convenience and there is no opportunity for the subcontractor to cure, the general contractor cannot also pursue a claim against the subcontractor as though it had been terminated for cause. This was a matter of first impression in Oregon.