Most private owners negotiate for a contract clause permitting them to terminate a construction agreement without regard to the quality of the contractor’s performance. These so-called “termination for convenience” clauses come in handy when, for example, an owner’s financing runs dry and a project must be halted. A termination for convenience clause allows an owner to cancel a project without materially breaching the contract and avoid paying the contractor its anticipated lost profit on unperformed work.
The AIA A201-2007™ General Conditions expressly permit terminations for convenience:
§ 14.4 TERMINATION BY THE OWNER FOR CONVENIENCE
§ 14.4.1 The Owner may, at any time, terminate the Contract for the Owner’s convenience and without cause.
§ 14.4.2 Upon receipt of written notice from the Owner of such termination for the Owner’s convenience, the Contractor shall:
.1 cease operations as directed by the Owner in the notice;
.2 take actions necessary, or that the Owner may direct, for the protection and preservation of the Work; and
.3 except for Work directed to be performed prior to the effective date of termination stated in the notice, terminate all existing subcontracts and purchase orders and enter into no further subcontracts and purchase orders.
§ 14.4.3 In case of such termination for the Owner’s convenience, the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.
Ditto the ConsensusDOCS™ 200 General Conditions:
§ 11.4 TERMINATION BY OWNER FOR CONVENIENCE
§ 11.4.1 Upon written notice to the Contractor, the Owner may, without cause, terminate this Agreement. The Contractor shall immediately stop the Work, follow the Owner’s instructions regarding shutdown and termination procedures, and strive to minimize any further costs.
§ 11.4.2 If the Owner terminates this Agreement pursuant to this Paragraph 11.4 the Contractor shall be paid for the Work performed to date and any proven loss, cost or expense in connection with the Work, including all demobilization costs and a premium as set forth below: (Insert here the amount agreed to by the parties.)
.1 for the Work performed to date including overhead and profit;
.2 for all demobilization costs and costs incurred as a result of the termination but not including overhead or profit on work not performed;
.3 and shall receive a premium as set forth in a schedule below. (Insert here the schedule agreed to by the Parties.)
§ 11.4.3 If the Owner terminates this Agreement pursuant to Paragraphs 11.3 or 11.4, the Contractor shall:
.1 execute and deliver to the Owner all papers and take all action required to assign, transfer and vest in the Owner the rights of the Contractor to all materials, supplies and equipment for which payment has or will be made in accordance with the Contract Documents and all Subcontracts, orders and commitments which have been made in accordance with the Contract Documents;
.2 exert reasonable effort to reduce to a minimum the Owner’s liability for subcontracts, orders and commitments that have not been fulfilled at the time of the termination;
.3 cancel any Subcontracts, orders and commitments as the Owner directs; and
.4 sell at prices approved by the Owner any materials, supplies and equipment as the Owner directs, with all proceeds paid or credited to the Owner.
The incidence of such clauses in private construction contracts is nearing a point of ubiquity. What should you do if an owner relies upon such a clause in terminating your contract?
1. RTFC. Never forget the cardinal rule of construction risk management: Read the Freaking Contract. Your agreement, in its general conditions / supplementary generally conditions, almost certainly contains provisions applicable to terminations for convenience. Find those provisions, make sure the terminating party has followed its requirements for noticing the termination under those provisions, and make sure you’re aware of your own rights and obligations now that the work has stopped.
2. Be Mindful of Lien Deadlines. The shelf life for your lien rights almost certainly expires some period of time after your date of last performance. In North Carolina, that’s 120 days. If you haven’t yet taken the time to preserve, assert and/or enforce your lien and bond rights, don’t delay much longer; the clock is ticking.
3. Stop Working. The costs of any additional performance are very unlikely to be recoverable, so stop the bleeding. Anything other than demobilization would generally be a no-no.
4. Put It In Writing. The owner may ask you to take certain actions, such as terminating your subcontractor agreements and protecting the work, after sending you a notice of termination for convenience. If such instructions are made orally, make sure to confirm / memorialize these directives in writing to avoid confusion and create a written record.
5. Evaluate Your Legal Options. Termination for convenience clauses can be abused. When such abuse occurs, courts may be willing to conclude that the termination was in bad faith, opening up the possibility that anticipated lost profits on unperformed work may be recovered. Always contact an experienced construction lawyer to review all of your options.