What Is a Termination for Convenience Clause?
Jan 31, 2022
Contract law forms a significant basis for the overall construction industry, as virtually no building or structure in the United States is erected without the existence of a written agreement outlining the process, who pays for materials, who performs labor, etc.
One of the most common provisions in a construction contract is a termination for convenience clause—and it is essential for anyone involved in the trade to understand how such a provision operates.
In this article
What is termination for convenience?
Termination for convenience is a fancy way of saying a contract is ended simply because a party no longer wishes to continue it. The reason for termination may not necessarily be related to performance issues or breach of contract. There are a number of reasons why parties might want to terminate a contract for convenience:
- Cost. Terminations for convenience tend to be less costly than other forms of termination, such as default or breach, which often require legal intervention. When a contract is terminated for convenience, parties may only be responsible for paying certain wind-down costs, but these are often far less expensive than litigation.
- Economics. The market for housing can change from time to time, often without warning. So can the price of materials and labor. For these reasons and more, parties may wish to incorporate a termination for convenience clause, so that a project can be shut down or paused while markets recover from unfavorable conditions.
What is a termination for convenience clause?
A termination for convenience clause is a provision in a construction contract that permits one or both of the parties to end the agreement without cause—that is, a particular reason for terminating, such as a breach of contract. Without a termination for convenience clause, the contract is only terminable for default or breach.
Common language used in a termination for convenience clause might be based on template verbiage drafted by the American Institute of Architects, which may read: “The owner may, at any time, terminate this agreement for the owner’s convenience and without cause.”
In some cases, the ability to terminate a contract for convenience may be limited. All contracts entail an implied covenant of good faith and fair dealing. That is, a termination for convenience cannot be exercised deceptively, or in bad faith, like if a customer terminates the contract after a contractor has already performed 90% of the work simply to avoid rendering final payment.
How do you exercise a termination for convenience clause?
If you are a party to the contract that holds a right to terminate, the contract itself will most likely include language explaining what you need to do in order to exercise that right. All that is usually required is written notice of termination to all parties to the contract that:
- Expresses a desire to terminate.
- Identifies the clause under which the right to terminate has been exercised
- Identifies the effective date of termination (e.g., 90 days from the date notice is received).
What happens when a contractor is terminated for convenience?
Once parties exercise a termination for convenience clause, there are some costs one or more must pay in order to fully wind down the contract.
- Work performed. A customer may still be required to pay a contractor for all work performed before the termination for convenience.
- Wind-down costs. A customer may have to pay costs associated with a contractor having to terminate any subcontracts or vendor agreements impacted by the termination for convenience.
- Termination settlement. Some termination for convenience clauses will empower a terminated contractor or subcontractor to be paid profits they might have earned at the end of the fully-performed contract if it had not been terminated. (But this will require its own provision, in addition to a general termination for convenience clause.)
If a construction contract does not include a termination for convenience clause, termination without cause (default, breach, etc.) would likely entitle the terminated contractor or subcontractor to any profits they might have lost in the project due to termination.
Though traditionally used in government construction transactions, termination for convenience clauses are becoming increasingly popular for use in private-sector contracts. If, as a prime contractor, you encounter any such clause in the contract, any subcontracts to that agreement should include a similar clause—you don’t want to be stuck paying a subcontractor for work you won’t be getting paid for yourself.
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