“Termination for convenience” clauses are intended to allow the parties to terminate construction contracts for any reason at any time.
But, in practice, do these clauses really allow employers to terminate contracts, or even withdraw part of the works after they start, and hire others to do so in their place?
Three court rulings in 2002 and 2003 shed some light on this issue: they are of special interest as the use of these clauses is becoming more and more common.
Termination for convenience clauses are particularly useful for entrepreneurs undertaking speculative developments, where market movements may cause entrepreneurs to wish to terminate the contract halfway, for example in housing construction, where projects are often carried away. out in stages. Similarly, “variations” (i.e., “omissions”) clauses often allow employers to omit all the work they want, whenever they want, and for whatever reason, for example, in value engineering.
These clauses are also useful if there are problems between the parties and both want to go their separate ways. Most of the appointments of professional advisers promoted by the institutions include this type of clauses on the basis that if a professional relationship has been broken, it is not sensible to force the parties to work together.
Rice v Yarmouth Council (September 6, 2002)
A small horticultural company had taken on a complicated maintenance contract for the City Hall’s parks. The contract allowed the Council to terminate it for “any breach”, however trivial. In this case, the Court of Appeal refused to read the contract literally and decided that the termination was unlawful because the alleged beaches were not serious enough.
Abbey Developments v. PP Brickwork (July 4, 2003)
Abbey named PPB as a labor-only subcontractor on a housing development. Abbey repeatedly complained about PPB’s progress, eventually ordering it to limit its work to houses that were under construction. Abbey said that when these houses were completed, he would terminate PPB’s contract and appoint another contractor. Abbey requested a statement that he had acted correctly.
The subcontract stated that Abbey could vary the amount of work and renegotiate the rates or suspend the work and rebid without terminating the contract. Abbey relied solely on his ability to vary the amount of work.
The judge said a “convenience” or “omissions” clause needs “reasonably clear words” to allow an employer to transfer work from one contractor to another. He said such clauses that did not provide for compensation risked being treated as “inexplicable as well as inconceivable”. He viewed the purpose of the clause allowing the variance as critical, saying: “if … it turns out that the variance was not ordered for a purpose for which the power to vary was intended, then there will be a breach of contract.” He denied Abbey’s request on the grounds that the clause allowing variation in the amount of work lacked “the necessary clarity of expression” to allow Abbey to act as he did. He only allowed Abbey to omit work that he felt was no longer necessary for the project.
However, the judge suggested that the other clause could have been a termination clause for convenience and could have allowed Abbey to suspend work and rebid. This interpretation would be commercially justified because the contract was a labor-only subcontract, housing construction “is speculative” and the parties could be considered to share the risks.
Hadley Design Associates v. Westminster LBC (July 9, 2003)
Westminster appointed HDA as lead consultant on a construction project. Westminster then terminated her contract with HDA. It related to a one-month notice of termination clause that did not require grounds for termination. Westminster’s motivation was “to market test the current level of professional fees”, ie to appoint a cheaper consultant. HDA had been appointed in 1987 and by 1996, when Westminster gave notice of termination, compulsory public bidding had become the norm and it wanted to test the market for surveying services.
HDA stated:
- wrongful termination of the contract, i.e. Westminster had promised HDA that it would terminate the contract only if HDA defaulted or if Westminster ran out of money and either there was a collateral contract to that effect, or alternatively Westminster had made these representations to induce HDA to enter into the contract and HDA had been connected to them;
- the contract included implied terms and/or terms for commercial effectiveness, which meant that Westminster could only terminate it in good faith, or where it was fair or reasonable to do so; Y
- HDA had contracted on standard Westminster terms, and the termination clause was unreasonable and therefore unenforceable.
No reference was made in this case to Abbey Developments v PP Brickwork and, surprisingly, no suggestion was made that the clause was unconscionable, even though it did not provide compensation. There seems to be no obvious reason for the difference in these two cases, other than their particular facts.
The judge rejected all of HDA’s arguments and ruled in favor of Westminster.
conclusion
It is clear that all three cases were decided on their particular facts. However, some general points can be made:
- a trivial violation may prevent termination;
- the harder the target, the clearer the words used should be;
- the compensation provision may be significant; Y
- courts challenge job transfers between contractors.
Termination clauses for convenience and omission tend to favor entrepreneurs; contractors must make sure they know the consequences before agreeing to them.