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Does Your Contract Contain a “Termination for Convenience Clause?”

posted May 26, 2011, 12:17 AM by Administrator 1   [ updated May 26, 2011, 12:35 AM ]

Most construction Contracts include provisions for termination of the Contractor’s remaining work on a project, under certain pre-defined conditions.  Usually these clauses are included by the Owner wherein he defines the specific events under which he would be permitted to expel the Contractor from the project and so therefore prevent the Contractor from completing his scope of work.  Termination under these specific circumstances constitutes “termination for cause”.  This defines what will be sufficient cause for the Owner to terminate the Contract, and also details the rights that the Contractor has under the Contract by means of which he can cure such a default.

 

Many Contracts also include a clause permitting the Owner (or Primary Contractor) to terminate the Contractor’s residual work at the Owner’s convenience.  Notably, such a termination is not as a result of any error on the part of the Contractor. 

 

“Termination for convenience” clauses are stated to give the Owner the option to terminate the remaining balance of the contracted for work for a reason other than the default of the Contractor.  If the Owner, for instance, is unable to obtain finance to complete the work, he may terminate the balance of the work for convenience – provided such a termination for convenience clause is stated in the Contract.  Thus, if the Contract does not contain such a termination for convenience clause, and the Owner does terminate for convenience, the Contractor would be entitled to the value of the work completed plus the profit he would have earned on the balance of the Contract. 

 

It must be noted that an Owner can also delete all or a portion of the balance of the remaining scope of work from the Contractor.  If an Owner makes such a deletion before or during the performance of the Contract, the Contractor must be alert to carefully evaluate the Contract to establish what his rights and responsibilities might be in the given circumstance.

 

Termination for Convenience Clause Specified

 

The following wording and terminology would normally be stated in a the Contract clause:

 

Owner may at any time and for any reason terminate the Contractor’s services and work at the Owner’s convenience.  Upon receipt of such notice, the Contractor shall, unless the notice directs otherwise, immediately discontinue the work and placing of orders for material, facilities and supplies in connection with the performance of this Agreement.

 

Upon such termination, Contractor shall be entitled to payment only as follows: 

1)     The actual cost of the work completed in conformity with this Agreement; plus

2)     Such other costs actually incurred by Contractor as are permitted by the Prime Contract and approved by Owner; plus

3)     Ten percent (10%) of the cost of the work referred to in subparagraph (1) above for overhead and profit.  There shall be deducted from such sums as provided in this subparagraph the amount of any payments made to Contactor prior to the date of the termination of this Agreement.  Contractor shall not be entitled to any claim or claim of lien against Owner for any additional compensation or damages in the event of such termination and payment.

 

Certainly the Owner’s exercise of a termination for convenience clause can impact the Contractor’s Contract profit.  Hence, if the Owner terminates the Contract in this way, the Contractor will not earn the profit that he anticipated at the time when the Contract was executed.

 

What is the Difference between the “Termination for Convenience” Clause and the “Termination for Cause” or The ‘Owner’s Deletion of the Balance of Work?”

 

A change order provision is usually incorporated in most Contracts.  These change order clauses allow for reductions or additions that could be made to the work as outlined in the Contract.  But, if the Owner of, for instance, of a public works project should attempt to delete all of the remainder of the work on a Contract and then award this to another Contractor, the Owner will be in breach of Contract.  The courts have, in cases such as these, held that such clauses were intended to further the Contract, and not to prevent completion. 

 

Do Restrictions Exist on the Use of a Termination for Convenience Clause?

 

An implied covenant of good faith and fairness exists in each Contract.   If a Termination for Convenience clause is exercised it could be argued that this was done in bad faith and that the termination may be a breach of Contract.  In order to avoid paying the balance of the profit on the remaining Contract work, if the Owner chose to exercise the Termination for Convenience clause when the project was about 90% complete, this could be viewed as a termination in bad faith and constitute a breach of Contract.

 

Conclusion

 

Government Contracts commonly include termination for Convenience clauses.  If such a clause is not included in the Contract, termination for anything less than cause might entitle the terminated Contractor to his share of lost profits for the project.    Increasingly, more and more private Contracts are also including such Termination for Convenience clauses.  If the Prime Contract contains such a clause, any related Subcontracts should also include a similar clause.  The amounts paid under the Subcontract termination for convenience clause should be complimentary with that the of the Prime Contract’s Termination for Convenience clause.

 

Sometimes an Owner might make use of the Terminate for Convenience clause rather than make use of the cause clauses.  Termination for Convenience might be used as a safety net if the Owner is not certain whether valid and sufficient grounds exist to terminate for cause.  Termination for Convenience in this manner could mean that the Owner avoids possible contention that the Termination for Cause was improper (if this was the route he chose).

 

It is therefore imperative that before executing a Subcontract, a Subcontractor must always review the termination clauses.  If the Subcontract does contain a clause that if a Termination for Cause is later determined to have been improperly executed, the termination automatically converts to a Termination for Convenience.  The Subcontractor should object to the clause. 


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