By Bruce Jervis
The function of a “termination for the convenience of the owner” clause is straightforward. The project owner, at its discretion, may terminate the project at any time without breaching the contract. The contractor is entitled to the reasonable cost of work performed prior to termination, as well as the cost of closing out the project. The owner is not liable for the contractor’s anticipated profit on the unperformed work.
This sounds like a balanced bargain, yet contractors have long complained about the process. Owners, it is said, use convenience terminations to shield themselves from legitimate claims for bad planning, faulty design, or project mismanagement. Contractors also contend owners allow them to perform unprofitable portions of the work and then terminate profitable portions. These complaints usually come up empty. Abuse of discretion is difficult to prove.
A recent case out of the District of Columbia does, however, indicate one limitation on the use of termination for convenience. The public project owner terminated the project. The contractor submitted a termination settlement proposal including two unpaid invoices for work performed prior to termination. The owner asserted a substantial offset for deficient work. The court ruled that once an owner has terminated a contract for convenience, the owner may not hold the contractor responsible for correcting deficiencies in the work performed prior to termination. The contractor was entitled to all reasonable performance costs.
What is your opinion about the use of termination-for-convenience clauses? Have you encountered project owners who abuse this contractual right? Or, have you seen the beneficial aspects of convenience terminations? I welcome your comments.
