Strategy, Legal & Operations
Contract termination: A matter of convenience
Found in many subcontracts is a “termination for convenience” provision. And as the words suggest, if for any reason—or for no reason at all—the prime contractor wishes to end the relationship, it can do so without penalty. In fact, not long ago, a Florida court upheld a general contractor’s right to exercise the termination for convenience just so he could obtain a better price from another subcontractor.
Effectively, a termination for convenience clause makes the construction contract nothing more than a day-to-day agreement. A typical subcontract termination provision looks something like this:
In its sole discretion and without notice to any guarantors or sureties, contractor may, at any time prior to final payment, terminate this subcontract for its convenience for any reason whatsoever, or for no reason, upon the giving of written notice to subcontractor. In no event shall subcontractor be entitled to consequential damages or loss of profits on portions of the work not yet performed. If terminated for convenience, subcontractor shall be entitled to be paid all costs of all work provided hereunder including reasonable and necessary costs of termination together with the profit percentage attributable to the costs so determined. Payment shall be made in accordance with and subject to the payments terms of this agreement.
Prime contracts also impacted
A similar termination for convenience provision can also be found in a GC’s contract with the owner. However, it may (and should) contain limitations on when the termination for convenience may be triggered. These triggers could be if a building permit is not issued or financing does not materialize.
Limiting your risk
Savvy GCs and subcontractors need to be aware of such contract language allowing a termination for convenience and make sure it won’t compromise any payment for work already completed. You can protect yourself by adding a provision such as this:
For a termination without cause or for convenience, contractor shall notwithstanding anything to the contrary, be entitled to receive payment for all work performed, materials ordered, and on-site demobilization as well as an agreed overhead and profit to date of termination.
While termination for convenience clauses may have originated in federal government procurement contracts, they are now becoming more common in private contracts. Make sure you fully understand all termination language in your contracts and take appropriate steps to mitigate your risks.
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