By Bruce Jervis
Termination for convenience clauses are controversial in large part because they are unilateral. The project owner has reserved the right to terminate the contract without cause and to compensate the contractor only as stipulated in the termination clause. The owner acts at its sole discretion. The contractor has no leverage. This leads to contractor allegations of bad faith and self-serving motivation on the part of the owner.
Subcontracts can contain termination for convenience clauses, too. In one recent case, a subcontractor claimed that the prime contractor terminated the subcontract in order to usurp a highly profitable element of the work. The sub argued that this breached the implied covenant of good faith and fair dealing. It was held, however, that the clear termination clause was enforceable and the prime contractor’s motivation did not matter. The subcontractor’s compensation was limited by the terms of the clause itself.
What is your opinion? Should the exercise of the right to terminate for convenience be limited by a requirement of good faith? Some case law answers that question in the affirmative. Or, should the right be exercised in the free and discretionary manner stated in the contract clause itself? Your comments are welcomed.