Age of Convenience

Supply Management - 30/10/2008

The NEC3 contract now comes with an option to terminate for convenience. Paul Cinnamond explains the implications of such clauses being included in the contract.

Traditionally used in engineering, technology and outsourcing contracts, termination for convenience clauses have been rare in the construction sector, until now. Such a clause has recently been included in the NEC3 engineering and construction contract, and will be of interest to those procuring works under this agreement.

A termination for convenience clause allows the purchaser to end the contract and cease a project, programme of works or ongoing service irrespective of whether the contactor has breached the agreement. At its simplest it allows the purchaser to change their mind. For example, a manufacturer procuring a larger, more efficient plant because of an increase in demand for its products, may engage a contractor to carry out work. If, while the contract is under way, market conditions alter, then the purchaser may halt the project via the termination for convenience clause. The contractor is then paid compensation, such as costs incurred to date and possibly loss of profit on the terminated part of the work, along with any additional costs incurred through the termination of third party agreements.

Such a clause can be used to the purchaser’s benefit, but termination for convenience is also at his expense. It is likely to be costly, particularly where works are well advanced, so it ought not to be undertaken lightly. Purchasers should also be aware that a wrongful or mistaken attempt to terminate for convenience may end up being in breach of contract.

An option to terminate a contract should not be confused with an option to omit work. Many standard form contracts enable the buyer to omit some of the work on a project if it is decided (after the contract starts) that such work no longer needs to be undertaken.

But what if a buyer seeks to apply this provision to omit all of the works, in effect terminating to replace a supplier with a cheaper alternative?

This issue was highlighted in the 2003 case of Abbey Developments ltd v PP Brickworks Ltd, when a buyer sought to remove a contractor’s outstanding scope of work to have it completed by another party. The judge held that a termination for convenience provision could be used to give work to another party, provided the wording of the contract was sufficiently clear. But in seeking to terminate, the buyer’s reliance on the clause to omit work (as opposed to the separate termination for convenience clause) was an incorrect application of the contract. The judge therefore affirmed the contractor’s right to complete the work.

A clause for termination for convenience must be clearly defined and both parties should be aware of its consequences if used. As in NEC3, the clause ought to include a form of compensation to the contractor or it may be unenforceable. It should also set out what the compensation payment will be. If provisions are even slightly ambiguous, there may be some ‘interesting’ conversations regarding compensation to be had with the contractor if the right to terminate for convenience is exercised.

Paul Cinnamond is director of commercial and contract management consultancy Blake Newport.

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