Strategic Contract Closure

Termination for convenience happens when one party to a contract (usually an owner or general contractor) decides to terminate the agreement without the need to establish that the other party is in default.

This could be for many reasons and needn’t be due to a breach of contract or poor performance. For instance, the client party’s needs may simply have changed or there may be unforeseen financing issues.

Including a termination for convenience clause in a contract entitles either party to terminate the agreement. In some ways, this type of clause acts like a “prenuptial agreement” in a marriage, where the parties make provisions for the eventuality that things don’t work out between them.

However, a specific clause to this effect must be included in the contract. Otherwise, if one party simply quits the contract, it is likely to constitute a breach of contract.

Some people wonder what the point is in having a contract if either party can terminate it without penalty.

Litigation in the construction industry gets time-consuming and expensive. Contractors and owners should prepare for negative scenarios by including appropriate provisions that stave off the threat of having to take legal action if things don’t work out.

A termination for convenience clause may be a useful “tool” for parties to contracts who want to avoid such expense: it provides a “convenient” way to end a relationship without unnecessary costs.

However, a termination for convenience may involve fees being paid for work done and a penalty fee or wind-down costs for terminating the contract. These potential costs associated with the termination mean that it should not be considered a “get out of jail free” card.

• It often results in a “cleaner break” than a termination for default.
• Developers may use this strategy to shut down or postpone projects when the market conditions are unfavorable.
• Customers/owners may realize that cash is running out or the necessary financing is not forthcoming — and terminating the contract can save unnecessary extra costs.
• Providided that costs payable for a termination for convenience are reasonable, they are much less than litigation would cost.
• Neither side “wins” or “loses” like in a court case (which is often a fairer outcome).

Even when there is a termination for convenience clause in a contract, it may not be possible to activate it because of certain limitations.

Under the basic principles of contract law, both parties to a contract must enter the agreement (and execute it) in good faith and with the intention of fair dealing.

If either party uses the clause to try to get an unfair advantage, this can be challenged in court and, contrary to the purpose of including the clause, litigation may result. Also, when the contract is made, both parties must intend to honor the contract and not terminate it for convenience.

This is important. The legality of a termination often comes down to whether it was made in good or bad faith.

Good examples of bad faith are when a customer terminates the contract after the work is almost complete — to avoid making a final payment — or to award the remaining work to another (cheaper) contractor.

Sometimes, the scope of work changes on a construction project. This can complicate contractual matters and one potential solution is a partial termination for convenience.

This means that a customer may cancel part of the work via termination for convenience but retain the part of the contract that allows the contractor or sub to conclude the remainder of the work required.

Another solution, when there is no clause for a partial termination for convenience, is for a deductive change order to be included. This narrows the scope of work to be performed.

Construction contracts in Florida usually contain default provisions. These state that the violation of a contractual condition will constitute a default, allowing the non-defaulting party to terminate the contract.

As with terminations for convenience, the terminating party must act in good faith for the termination to be lawful. They must also follow the default termination procedures outlined in the relevant contract or the termination may be challenged (which can be a potentially costly outcome).

Generally speaking, the non-defaulting party must provide a notice of default and give the defaulting party an opportunity to remedy the violation of the condition before terminating the contract. If the situation is not fixed within a given time limit, the non-defaulting party must usually provide a second notice before terminating.