Termination for convenience clauses in a construction contract

A termination for convenience clause allows a party to a contract to terminate it for any reason, even where the other party has done nothing wrong. This article explains how these clauses work.

What is a termination for convenience clause?

A termination for convenience clause allows a party to terminate the contract for any reason, even where the other party has done nothing wrong.

The right to terminate a contract at any time, for any reason, is not a right that exists at law (at least in the context of construction contracts). Rather, a party will only have the right to terminate for convenience if this right is expressly set out in the contract. Termination for convenience is very different to termination for breach or termination for repudiation.

To be effective, a termination for convenience clause must be clear and unambiguous.

In a construction context, the right to terminate for convenience is a right that is usually only given to the upstream party (ie the principal in a head contract, or the head contractor in a subcontract).

Why do they exist?

Historically, termination for convenience clauses were reserved for situations where the principal had a specific need to be able to cancel a project after commencement but before completion.

They were most frequently used by governments, to cater for situations where funding decisions might change (eg following a change in government), where a project might need to be cancelled for political reasons, or for other reasons.

Contractors have historically resisted termination for convenience clauses, given the disruption and financial consequences that a cancelled project could have on their business.

However in more recent times, particularly on larger commercial projects, termination for convenience clauses have become more commonplace.

Principals justify their inclusion on the basis that 'something might happen' that would require them to cancel the contract. In our experience, and largely as a function of market conditions, contractors have become more willing to accept these clauses, provided they are adequately compensated if the right is exercised. (We explain the contractor's entitlements in the event of termination in more detail below.)

How do you terminate for convenience?

If you are the party holding the right to terminate, the contract will most likely explain what you need to do in order to validly exercise it.

Most of the time, all that is required is a written notice that expressly:

• terminates the contract, 
• identifies the clause in the contract under which the right is being exercised, and
• identifies the date on which the termination will have effect. 

Again, you will need to refer to your contract to see what is required. Also note that some contracts will not allow you to terminate the contract immediately. Instead, a notice period might be needed (eg 14 or 30 days).

What does a termination for convenience clause look like?

There is no standard form of termination for convenience clause. For example, the Australian Standard forms of contract (eg AS 4000, AS 4300, AS 2124, AS 4902) do not contain termination for convenience clauses.

In addition to an express statement allowing the Principal or head contractor to terminate, a termination for convenience clause will usually explain:

• when the right can be exercised, and whether any notice period is required; 
• how the right can be exercised;
• what the contractor must do if the right is exercised (eg remove its plant and equipment from the site, return or destroy project-related information that does not have to be retained); and
• what the contractor will be entitled to be paid if the right is exercised.

In relation to the last point, the contractor's entitlements will vary between contracts. Virtually all contracts will allow the contractor to claim for the value of the work performed up to the date of termination. Most will allow the contractor to claim for unfixed materials ordered by the contractor before receiving the termination notice, provided the orders cannot be cancelled and title to the relevant goods will pass to the principal or head contractor on payment.

Some clauses will also allow the contractor to claim for:

• any other costs reasonably incurred by the contractor prior to the contract being terminated, in the expectation of the works continuing (which is usually subject to an obligation to reduce or mitigate those costs wherever possible);
• demobilisation costs;
• loss of profit on the works that are no longer required to be performed.

Is a termination for convenience clause legally effective?

Termination for convenience clauses are generally effective. But there are exceptions, and sometimes their effectiveness will depend on their drafting.

Generally, where a termination for convenience clause is clear and unambiguous, then it will not be read down so as to limit is efficacy. (An example of this may be found in the unreported court decision of Theiss Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd (2000) 16 BCL 130.)

There are occasions where legislation might prevent a party from being able to rely on a termination for convenience clause. An example is the legislation protecting small businesses from unfair contract terms contained in standard form contracts, which we discuss here. 

Also, if the principal or head contractor exercises this right and then has the outstanding work completed by a third party, this can potentially amount to a repudiation of the contract - depending on how the clauses is drafted. (The High Court considered a similar situation in this case here, in the context of negative variations.) You can read more about contract repudiation here.

Finally, some Australian courts have recognised that termination for convenience clauses may be subject to an implied duty of good faith. For example, in this case here it was noted that the exercise of a termination for convenience clause would be subject to a duty of good faith and fair dealing. (This is however an unsettled area of law, as the High Court is still to consider the issue.)

Key Takeaways

For principals:

• a termination for convenience clause can provide more flexibility if circumstances change in the course of the project;
• to be effective, the clause will need to be carefully drafted; and
• although as a general rule this type of clause is effective, there are situations where you may not be able to rely on them (and if you do so, this could amount to repudiation).

For contractors:

• at the time of entering into a contract, you should consider whether the principal (or head contractor) has the right to terminate for its convenience, and what your entitlements will be if it does; and
• although you should assume these clauses are enforceable at the time of entering the contract, there can be exceptions and this will always be a function of your particular circumstances.