There is no official word on the actual reason for replacing Terrence Howard from the second installment of the movie. Nonetheless, there are some speculative reasons, which were doing rounds in the industry about his departure or better say eviction from Iron Man 2 and the main thing which kept coming was..
Contract Negotiation
According to Entertainment Weekly, Howard was the most paid actor in the first movie, and Marvel was finding it hard to renegotiate the deal with him for Iron Man 2.
“Howard was the first actor signed to the film and, on top of that,
was the highest-paid. That’s right: more than Gwyneth Paltrow. More
than Jeff Bridges. More than Robert Downey Jr. And once the project
fully came together, it was too late to renegotiate his deal.”
It was also reported that, director Jon Favreau was not happy with Howard's work. Quoting from the same article, referenced above
Favreau and his producers were ultimately unhappy with Howard's
performance, and spent a lot of time cutting and reshooting his scenes
The unhappiness with Howard's work led Favreau and his screenwriter to trim down the role of Howard's character in the next installment.
As such, when Favreau and screenwriter Justin Theroux went to map out
the sequel they found themselves minimizing Howard's story line. Once
Marvel learned that Favreau was thinking of curtailing the role, the
studio went to the actor's agents with a new and drastically reduced
offer — a number that's similar to what supporting cast members were
paid for the first movie. The agents, according to sources, were so
taken aback by this new figure — estimated at somewhere between a 50
and 80 percent pay cut — that they questioned it
Marvel never commented on the above speculations officially.
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