In the past, construction contracts could typically only be terminated if there was a breach of the construction agreement by the owner or contractor. Under such scenarios, litigation often arose concerning whether the termination was proper and whether the contractor might be entitled to lost profits and other damages as a result of the purported unlawful termination. This resulted in costly litigation for both an owner and a contractor if there were potential issues surrounding the termination. In the not-so-distant past, however, a new type of termination clause arose, which gained rapid traction in the industry. This was a “termination for convenience” clause.
A “termination for convenience” clause essentially functions exactly as you might anticipate. These clauses typically state that an owner may terminate a contractor at its convenience without setting forth any reason throughout the construction contract. Pursuant to these clauses, the contractor waives any claims related to an improper termination. This completely dispenses with litigation that might occur concerning whether a termination was lawful.
Furthermore, these clauses also contain detailed information about what damages and fees a contractor would be entitled to if they are terminated at the owner’s convenience. In general, the clauses often provide that the contractor would be entitled to payment for the amount of material and services it provided until the date of termination, and further, there may be an adjustment to cover any additional overhead or costs incurred by the contractor related to the termination. At the same time, the contractor waives any claim to lost profits or additional revenue that it might have earned pursuant to the contract subsequent to the date of termination. These clauses often help bring closure to a contractual relationship between an owner and contractor; however, there may still be litigation concerning what the contractor might be entitled to. Such litigation, however, would be more narrow in scope, and claims related to improper termination, lost profits, and other damages would be barred. As such, these clauses are very useful and helpful to an owner.
If you are an owner of a property who is going to engage a contractor, it is highly recommended that your contract contain a clause for termination for convenience. As set forth above, this type of clause gives the owner great latitude and often helps resolve a contractual relationship that is not working out without litigation. On the other hand, if you are a contractor, you should be aware of these clauses should they exist in your contract so that you can properly prepare should there be a dissolution of the relationship with the owner. It is always wise to consult with an attorney concerning such a clause if it exists in a construction contract which you as an owner or contractor are about to execute.
