Monday, 14 April 2014

Termination for Convenience Clauses Often Inadequate

Author: Corbin Devlin

Termination for convenience clauses often get short shrift in negotiations, perhaps because termination seems like an unlikely prospect at the early stages, when resources are being committed to a project and all parties are motivated to get construction underway.  

The Case for the Owner

Owners reasonably require termination (or suspension) for convenience clauses for projects of all kinds. The economics of a project may change, causing the owner to terminate (or suspend) the project. In theory, without a termination for convenience clause, the owner can still terminate a project, but then the owner is likely liable to the contractor for breach of contract damages, including lost profits. While contractors might consider this fair, the reality is that industry practices and market conditions permit construction owners to allow for termination for convenience, and include contract terms to address it.  

The Case for the Contractor

The basic termination for convenience clause gives the owner termination rights and protection against claims for loss of profit. And most such clauses provide for the contractor to be paid for work performed.  But additional terms are required to reasonably protect the contractor. First, the contractor should reasonably expect to be paid direct costs resulting from early termination, such as demobilization.  Second, the contractor requires compensation or protection for subcontracts, supply contracts and perhaps other costs committed for the project (e.g. equipment leases); I find it remarkable this point is often omitted from termination for convenience clauses. The owner likely requires that subcontracts mirror the termination convenience provisions in the prime contract, which may be enough to address subcontracts. But additional considerations pertain to supply contracts and equipment leases; it may not possible for a contractor to cancel a material order or an equipment lease without loss, and the contractor should address this risk in the construction agreement. As for suspension for convenience clauses, the most common and glaring omission that I see is a failure to include some time limit – a contract cannot be suspended indefinitely; after some reasonable time there must be a mechanism for the contractor to bring the contract to an end.

The Problem with Unit Prices and Stipulated Price Forms

Author: Corbin Devlin

A Common Mistake

A surprisingly common mistake made by owners and contractors alike is to use a stipulated price contract form for a unit price contracting arrangement. That is, I frequently see contracts that attach a schedule of unit prices to a form that is otherwise clearly intended for use with a stipulated (lump sum) contract price. This creates uncertainty in the contract terms, which increases the chances of dispute and litigation.

The Difference Between Them

The terms and conditions of unit price and stipulated price contracts are generally very similar. After all, a unit price is a stipulated price; i.e. the price (per unit of measurement) is fixed, subject only to determination of the total quantity of work. On the other hand, there are a couple of important terms required in a unit price contract, beyond the schedule of unit prices, that are not found in a stipulated price contract. A unit price contract requires provisions for measurement of quantities (What is the basis of measurement?  Who is responsible to determine quantities for payment?), and for certifying progress payments (usually based on estimated quantities, subject to adjustment upon completion). A unit price contract may also have unique provisions relating to changes in the work (e.g. Are unit prices subject to adjustment if the quantities of work are substantially increased?).   

The Potential for Dispute

It is not uncommon to have some disagreement over final quantities in a unit price contract.  Such disagreement can turn into litigation when there are no clear contract provisions relating to the determination of quantities for payment. Quite simply, a contract that refers to an overall stipulated price, and then attaches a schedule of unit prices, may be ambiguous. Ambiguity as to a key contract term (price) may invalidate a contract. Attaching a schedule of unit prices does not obviously make it a unit price contract; it is equally possible to have a lump sum contract that attaches a schedule of prices intended to apply only to changes in the work. The parties may have it clear in their minds which of these scenarios is intended. I have unfortunately seen it come to pass, more than once, that one party believes they have signed a unit price contract while the other party believes it to be a lump sum contract (with unit pricing only for changes in the work). The contract documents can often be interpreted either way. Use of the right contract form could have avoided dispute and legal expense in these cases.