Traditionally, parties to construction contracts could only terminate their contract when the other contracting party had materially breached the contract. “Termination for cause” or sometimes called “termination for default” is used to terminate a contract when the occurrence of certain “default” events by the other contracting party occurs, such as failure to pay, delays, or defective or incomplete work. Most construction contracts provide both contracting parties the right to terminate the contract for the other party’s default, with the upstream party—the owner under a prime contract or the contractor under a subcontract—tending to have more rights to terminate the downstream party—the contractor under the prime contract or the subcontractor under a subcontract. Termination for cause is often the most utilized clause cited when terminating a contract. But terminating a contract for cause is not the only method for terminating a contract. Contracts often contain a ‘termination for convenience clause’ which allows a party to be terminated in the event a material breach has not occurred.

The federal government first introduced the “termination for convenience” clause in public contracts where it was permitted to terminate its construction contract in the absence of the contractor’s default. Unlike termination for cause, the right to terminate for convenience is almost never given to the downstream party and is now found in private contracts, including many of the commonly used construction contract forms.

What to include in a 'termination for convenience' clause

A typical termination for convenience clause will entitle the terminated party to receive the costs for the work it completed on the project, and maybe a portion of its lost profits or overhead, up until the date of termination. The types of costs to consider may include the value of all work satisfactorily performed and material stored on site, or actual, direct costs plus an allowance or percentage of profit and overhead. Whatever the types of costs the terminated party is entitled to receive, they should be determined during negotiations and clearly stated in the contract so there is no dispute once termination occurs.

The clause should also list what the terminated party’s obligations are once terminated. The terminated party should be required to protect any incomplete work and any material or equipment that will be left on the project to be used by the terminating party or a replacement party. The terminated party’s contracts and permits should be assigned to the terminating party or a replacement party, and copies of any as-built documents and operation and maintenance manuals should also be turned over.

When to utilize 'termination for convenience'

Termination for convenience can be used when the upstream party is uncomfortable with the downstream party but does not have a reason to terminate for cause. Such a termination often occurs when the project or contracting party encounters financial difficulties. Many contracts also use termination for convenience as a backup to a termination for cause, in which case, if the termination for cause is held to be improper by an arbiter or judge, it is automatically converted to one for convenience.

Terminating party considerations

Before opting to terminate for convenience, inspections should occur to document the status and quality of the would-be terminated party’s work prior to termination. As previously mentioned, the terminated party should only be paid for work it has performed, and an inspection will confirm whether any incomplete work is being included in the costs sought by the terminated party. Having a detailed as built-record of the work performed is important to defend against any claim amounts that may exceed the cost to perform the completed work.

The terminating party must also inspect the completed work for any defects. Failure to check for defective work may result in the terminating party paying for unforeseen repair costs once the terminated party has left the project, been paid and a release for all claims related to its work has been signed. If defective work is evident, then pursuing a termination for cause may be more appropriate to recover the repair costs.

Terminated party considerations

When a party has been terminated for convenience, the amount of its recovery will heavily depend on the level of supporting documentation kept during the project. Generally, the burden will be on the terminated party to prove its costs and the failure to keep and maintain adequate records could be disastrous for its recovery. Key support documents include, but are not limited to, pictures of all work performed, invoices, and worker time sheets. Documentation is essential because anticipating when a termination for convenience will occur is difficult, and the party with the better record keeping habits will always be in a better position when a termination dispute arises.

The termination for convenience clause can be useful when wanting to terminate the other contracting party because continuing the project with it is either not financially feasible or desirable but its conduct does not constitute a default under the contract. When negotiating a termination for convenience clause, the terms relating to the type of compensation the terminating party must pay and the responsibilities the terminated party has when assisting project turnover must be clearly stated. Solidifying these terms is paramount to ensure a smooth ending to the contracting parties’ relationship.