Termination for Convenience - The Risk to Contractors
Provisions permitting an owner or contractor to terminate a contract for convenience appear with increasing frequency in general contracts and subcontracts. Because the thought of termination is a remote possibility at the start of a contract, and because these provisions usually provide compensation for work performed to the date of termination, they often are accepted without revision. For the contractor or subcontractor subject to a termination for convenience provision, that could be a serious miscalculation.
Most termination for convenience provisions contain no limitations as to what is convenient to the party exercising the power. In effect, a contractor or subcontractor whose contract includes that provision continues performance at the discretion of the other party to the contract. Any perceived advantage by that party in not continuing is a ground for an abrupt termination of the contract, and dismissal of the contractor or subcontractor from the project. For example, should an owner or contractor, holding the power to terminate for convenience, receive a significantly lower price at any time, he can abruptly terminate and award a new contract. It will not matter that the original contractor or subcontractor may have mobilized its resources, hired new personnel, commenced work and refrained from taking other work, all in anticipation of performing an awarded and signed contract.
So where does this leave the contractor or subcontractor so abruptly deprived of his contract and his expectations? One certainty is that he will be deprived of his anticipated profit under the contract. He will probably be compensated for the value of work furnished for the project. But that will not generally include the expense of mobilization or compensation for missed opportunities. And, unless reimbursement for cancellation costs are specifically provided for in the contract, the terminated contractor or subcontractor could face breach of contract claims, or, at minimum, cancellation charges from suppliers or subcontractors whose contracts he was forced to terminate prior to completion.
The reality is that a termination for convenience provision exposes a contractor or subcontractor both to a loss of expectations and money damages. The solution is to recognize the pitfalls, and either negotiate that provision out of the contract, or revise it by limiting its application to specific circumstances and providing adequate compensation in the event such a termination occurs.
This
newsletter is intended to provide general information of interest to the
construction industry. It is not intended to provide specific legal advice or
to address fact specific issues. For that you should consult your legal
counsel. Corwin & Corwin LLP assumes no liability in connection with the
use of this newsletter. The Supreme Judicial Court may consider this material
advertising.
©1992-2004 Corwin & Corwin LLP. All rights reserved