The Problem with Termination for Convenience Clauses in Construction Contracts

The Problem with Termination for Convenience Clauses in Construction Contracts

Private Law

Termination for convenience clauses are contractual provisions that allow one party, usually the principal, to terminate the contract without cause or default by the other party, usually the contractor. These clauses are common in construction contracts, especially in large-scale or complex projects, where the principal may want to have flexibility and control over the project’s scope, budget, or timeline. However, these clauses can also pose significant risks and challenges for the contractor, who may incur costs and losses that are not recoverable under the contract.

What are the benefits of termination for convenience clauses for the principal?

Termination for convenience clauses can provide several benefits for the principal, such as:

  • Reducing the risk of litigation or disputes with the contractor, as the principal does not have to prove breach or fault by the contractor to terminate the contract.
  • Enabling the principal to adjust the project’s scope, budget, or timeline according to changing circumstances, such as market conditions, stakeholder preferences, or regulatory requirements.
  • Allowing the principal to switch to a different contractor or subcontractor if the principal is dissatisfied with the performance, quality, or price of the original contractor.

What are the problems with termination for convenience clauses for the contractor?

Termination for convenience clauses can create several problems for the contractor, such as:

  • Losing the expected profit or revenue from the contract, as the contractor may have invested time, money, and resources in preparing and performing the contract.
  • Bearing the costs and liabilities of demobilising and terminating the contract, such as paying off subcontractors, suppliers, or employees, or disposing of materials, equipment, or waste.
  • Not being able to recover the costs and expenses incurred in the overall management of the contract, such as site visits, inspections, meetings, or administration, unless the contract expressly allows for the recovery of those amounts.

How can contractors protect themselves from termination for convenience clauses?

Contractors can take some measures to protect themselves from the adverse effects of termination for convenience clauses, such as:

  • Negotiating the terms and conditions of the clause, such as limiting the grounds or circumstances for termination, requiring notice and consultation, or specifying the compensation or reimbursement for termination.
  • Keeping accurate and detailed records of the work done and the costs and expenses incurred under the contract, such as invoices, receipts, timesheets, or reports, to support any claims for payment or damages.
  • Seeking legal advice from a construction lawyer before entering into, performing, or terminating a contract that contains a termination for convenience clause, to understand the rights and obligations of the parties and the remedies available in case of termination.
Contract Clauses: Termination for convenience

Contract Clauses: Termination for convenience

Commercial Law

A termination for convenience clause allows the benefiting party to terminate the contract for any reason. A termination for convenience clause removes the need to wait for a breach, repudiation, frustration, or some other stated termination trigger.

In Good faith

One unsettled issue is whether a party relying on the termination for convenience cause must act in good faith. Even where there is a duty to act in good faith, the scope of that duty is difficult to define.

A duty to act in good faith has been interpreted to include an obligation to cooperate in achieving contractual objectives, to comply with honest standards of conduct, and to comply with standards of conduct that are reasonable having regard to the interests of the parties. A duty of good faith does not require a party to act against its own interests.

In some circumstances a contract will specifically state whether the parties have a duty of good faith but where a contract is silent on the matter, the term may be implied where:

  • it is reasonable and equitable;
  • it is necessary to give business efficacy to a contract;
  • it is so obvious it goes without saying;
  • it is capable of clear expression; and
  • it does not contradict the express terms.

Where a termination for convenience clause is missing

The absence of a termination for convenience clause may mean that the parties need to rely on common law in order to terminate a contract. At common law, there must be a breach of an essential term, a sufficiently serious breach of an intermediate term, repudiation, or frustration for a right to terminate to arise. A termination for convenience clause gives the parties greater certainty in their ability to terminate the contract for any reason.

Drafting considerations

A termination for convenience clause should be clear and unambiguous. The consequences of termination in reliance on such a clause should be set out. Finally, the potential operation of an implied duty to act in good faith should be considered.