As part of the continuing series of articles identifying important construction contract clauses, perhaps the most impactful clause in a contract can be the standard termination for convenience clause. Imagine this scenario: your firm expended time and material in bidding a project, you have obtained an award and entered a contract. You may enter into other contracts with subcontractors or suppliers. Everyone feels good and the project is moving forward. You’ve dedicated a certain percentage of your fixed overhead costs towards this project, and your cash flow is dependent on moving forward, successfully and timely completing the project on budget. You may have hired additional personnel and dedicated your firm’s resources to the project, perhaps even turning away from other projects due to limited resources. You’re doing a great job on the project, hitting your marks, and the project is moving forward as planned. Then, you receive a notice of termination for convenience. Perhaps the owner has decided to move in a different direction due to economic or marketplace indicators, or perhaps financing fell through.
The termination for convenience clause is one of the most unique provisions of any contract clause in the world of contracts, arising only in construction contracts. It allows the owner or general contractor to unilaterally terminate the contract, even if it is the owner that may be heading towards a default, without incurring a breach of contract. This arrangement defies the legal principle of mutuality of contract and the contractual necessity of consideration. If it is the written contract, the courts will enforce it, absent a showing of bad faith. If you see this type of clause, negotiate with thoughts that it can and will be invoked. While the act of excluding the clause may not be negotiable, make sure that there is a clear distinction drawn between the conditions of termination for default verses termination for convenience. Note that the damages between termination for convenience and termination for cause should be different. Make sure that your firm is entitled to full reimbursement for actual costs incurred plus a measure of profit and overhead, perhaps going so far as delineating a specific profit number that you are entitled. To protect yourself, it is advisable to have a similar flow down provision in contracts with subcontractors and suppliers, in the event materials are special ordered. Consideration of expedited payment terms upon the owner invoking this clause may be a consideration.
As with any complex contract, to reduce risk, it is best to recognize different type of contract clauses and take the time at the front end to contemplate potential outcomes. Obtain the advice of a qualified attorney if you have questions.
– Paul A. Sheridan