When a client has second thoughts
How easy is it to terminate a contract for the client’s convenience?
The ability to terminate a contract for convenience has been incorporated in the NEC suite of contracts, which may be worrying for contractors relying on contracts for financial stability.
This clause has been found in standard forms of contract for engineering, where it lets employers terminate a contract whether or not there has been a breach. But those using standard building contracts may not be familiar with it, particularly if using the JCT suite.
It exists to allow a client to change its mind. If a client engages a design and build contractor to carry out works but market conditions change, meaning the works are no longer viable, they may use the termination of convenience clause. The contractor will typically be paid all cost to date plus any additional costs incurred through the termination of third-party agreements.
This shows that termination for convenience is at the client’s expense and that they are not obliged to pay for contractual costs which would arise from a material or repudiatory breach of the contract.
Abandoning the contract in the absence of a termination for convenience provision would be the same. Such costs include consequential costs for loss of profit and a business opportunity. The mechanism provides that the contractor is not out of pocket and doesn’t have carte blanche to claim against the client.
This clause is sometimes wrongfully applied by clients that are unaware of the legal restrictions. Clients or contracting organisations have been known to use termination for convenience in order to replace a contract with a cheaper alternative, which is not acceptable.
Point of precedent
There is case law which forms part of a contract cannot be taken away from the contractor by variation and given to others, even where the variation clause is couched in wide terms. But does such precedent, which deals with work omitted by variation, apply equally to work omitted by termination for convenience?
This was dealt with in the case of Abby Developments Limited v PP Brickwork Limited (2003).
The judge allowed a termination for convenience provision to be used to give work to others on the basis that the wording of the contract expressly contemplated such an application.
But the judge also said that the contractor’s right to do the work was so obvious that any termination for convenience provision which was silent on its application could not have been used in the same circumstances.
It is implicit that a client exercises a power to terminate for convenience must require the work not to be done at all. It is not legally acceptable to exercise such power with a view to securing a cheaper alternative unless expressly provided for in the contract.
If a client tries to change contractors once a contract is under way and doesn’t have an express right under termination for convenience provision, it could be in breach of contract.
Greg Brownlee is managing director of management consultant Blake Newport.