“Termination for convenience” clauses

1 June, 2006
by: Cripps

“Termination for convenience” clauses are intended to allow parties to end construction contracts for any reason at any time.

But, in practice, do these clauses really allow employers to terminate contracts, or even to withdraw part of the works after commencement, and engage others to do it instead?

Three judgments in the courts in 2002 and 2003 shed some light on this question: they are of particular interest as the use of these clauses is now becoming increasingly common.

Termination for convenience clauses are particularly useful to employers undertaking speculative developments, where market movements may make employers wish to terminate the contract part way through, e.g. in house building, where projects are often carried out in stages. Similarly, “variations” (i.e. “omissions”) clauses often allow employers to omit as much work as they like, when they like, for any reason, e.g. in value engineering.

These clauses are also useful if there are problems between the parties and both wish to go their separate ways. Most of the professional consultants’ appointments promoted by the institutions include this type of clause on the basis that if a professional relationship has broken down, it is not sensible to force the parties to work together.

Rice v Yarmouth Council (6 September 2002)

A small horticultural business had taken on a complicated maintenance contract for the Council’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 wrongful because the alleged beaches were not sufficiently serious.

Abbey Developments v PP Brickwork (4 July 2003)

Abbey appointed PPB as a labour-only sub-contractor on a housing development. Abbey complained repeatedly about PPB’s progress and eventually instructed it to limit its works to the houses then under construction. Abbey said that when these houses were completed, it would terminate PPB’s contract and appoint another contractor. Abbey requested a declaration that it had acted correctly.

The sub-contract indicated that Abbey could vary the amount of work and renegotiate the rates or suspend the works and re-tender without terminating the contract. Abbey relied only on its ability to vary the amount of work.

The judge said that a “convenience” or “omissions” clause needs “reasonably clear words” to allow an employer to transfer work from one contractor to another. He said that such clauses which did not provide for compensation risked being treated as “unenforceable as unconscionable”. He considered the purpose of the clause allowing variation to be critical, saying: “if … it turns out that the variation was not ordered for a purpose for which the power to vary was intended, then there will be a breach of contract”. He refused Abbey’s application on the basis that the clause allowing variation of the quantity of work lacked “the necessary clarity of expression” to allow Abbey to act as it did. It only allowed Abbey to omit work which it considered was no longer required for the project.

However, the judge suggested that the other clause may have been a termination for convenience clause and might have permitted Abbey to suspend the works and re-tender. This interpretation would be commercially justified because the contract was a labour-only sub-contract, house building “is speculative”, and the parties might be considered to share the risks.

Hadley Design Associates v Westminster LBC (9 July 2003)

Westminster appointed HDA as lead consultant on a construction project. Westminster then terminated its contract with HDA. It relied on a one-month notice of termination clause that did not require reasons for termination. Westminster’s motivation was to “market test the current level of professional fees”, i.e. to appoint a cheaper consultant. HDA had been appointed in 1987 and by 1996, when Westminster served the termination notice, compulsory competitive tendering had become the norm and it wished to test the market for surveying services.

HDA claimed:

  • wrongful termination of 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 this effect, or, alternatively, Westminster had made these representations to induce HDA to enter into the contract and HDA had relied on them;
  • the contract included implied terms and/or terms for business efficacy which meant that Westminster could only terminate in good faith, or when it was fair or reasonable to do so; and
  • HDA had contracted on Westminster’s standard terms, and the termination clause was unreasonable and therefore unenforceable.

 

The case of Abbey Developments v PP Brickwork was not referred to in this case and, surprisingly, it was not suggested that the clause was unconscionable, even though it did not provide for compensation. There appears 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 found in favour 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 breach may preclude termination;
  • the harsher the objective, the clearer the words used must be;
  • provision for compensation can be important; and
  • the courts question transfers of work between contractors.

Termination for convenience and omissions clauses usually favour employers; contractors should ensure that they are aware of the consequences before they agree to them.

Reviewed in 2015