The right to terminate a contract for the convenience of the project owner is a powerful one. These clauses originated in public construction contracts but are now found in many private contracts as well. The owner can terminate a contract without cause. No justification is necessary. It is for the owner’s convenience. The owner pays for the direct and indirect costs of work performed prior to the date of termination, plus profit on those costs plus reasonable termination expenses. But the owner incurs no liability for what would otherwise be damages for wrongful termination or breach of contract.
This is not entirely a free ride for the project owner. The contractor’s termination expenses can be broadly interpreted to include much more than simply demobilizing from the site and settling with subcontractors. This is particularly true in the public sector where termination expenses may cover administrative, legal and accounting costs. Six-figure claims in this regard are not uncommon.
Contractors, however, pay a heavy price when a project is terminated for convenience. They are deprived of work and revenue on which they had planned. They are deprived of the profit they would have earned on that revenue. And under the terms of the contract, there is no recourse.
This was illustrated in a recent case. A federal contractor argued the government had wrongfully terminated a contract for default and then converted the default to a convenience termination in order to avoid liability for lost profit on the unperformed work. Alleging bad faith abuse of the termination for convenience clause, the contractor sued for its anticipated profit. The claim came to naught. The government had broad discretion in this regard and could easily point to reasonable considerations when making the conversion.
What do you think? Do project owners abuse the right to terminate a contract for convenience? Are contractors compensated fairly in these situations? I welcome your comments.
Featured in Next Week’s Construction Claims Advisor:
- Lender Had No Obligation to Inform Contractor of Owner Default
- “Good Faith” No Defense to Consultant’s Exaggerated Lien
- Surety Not Allowed to Pursue Defaulted Contractor’s Delay Claim