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.

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