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.
