Public contracts usually contain clauses that allow the owner to terminate the contract for the owner’s convenience. The doctrine of termination for convenience originated in federal common law with the idea that the federal government could, under certain circumstances, terminate a contract without paying full expectation damages. The doctrine dates from the winding down of military procurement after the Civil War, and was initially based on the premise that continuing with wartime contracts after the war had concluded was against the public interest.
After World War II, the federal government began to apply termination for convenience to peacetime non-military procurement for the same fundamental purpose—to reduce the government’s liability for a breach of contract by allocating to the contractor a share of the risk of an unexpected change in circumstances.
After years of unfettered terminations for convenience, the court in Torncello v. United States, 681 F.2d 756 (1982), determined “that free termination for convenience is not supportable,” and held “that the government may not use the standard termination for convenience clause to dishonor, with impunity, its contractual obligations.” Based on that argument, some courts began to impose conditions on the government’s ability to terminate contracts. Those conditions vary from state to state. The majority standard seems to be that the decision to terminate can not be arbitrary or an abuse of discretion.
Ohio guidance on termination for convenience clauses is hard to come by. In fact, in Jeffrey B. Peterson & Associates v. Dayton Metropolitan Housing Authority, 2000 WL 1006562 (unreported), one Ohio court that faced a Termination for Convenience clause described Ohio’s case law on the subject as “sparse.” That said, termination for convenience clauses are generally upheld in Ohio.
The AIA’s (American Institute of Architects) A201-2007 General Conditions of the Contract for Construction contains a termination for convenience clause frequently used by public owners. That clause has remained unchanged since the 1997 version of the A201. It provides:
§ 14.4 TERMINATION BY THE OWNER FOR CONVENIENCE
§ 14.4.1 The Owner may, at any time, terminate the Contract for the Owner’s convenience and without cause.
§ 14.4.2 Upon receipt of written notice from the Owner of such termination for the Owner’s convenience, the Contractor shall:
.1 cease operations as directed by the Owner in the notice;
.2 take actions necessary, or that the Owner may direct, for the protection and preservation of the Work; and
.3 except for Work directed to be performed prior to the effective date of termination stated in the notice, terminate all existing subcontracts and purchase orders and enter into no further subcontracts and purchase orders.
§ 14.4.3 In case of such termination for the Owner’s convenience, the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.
While a termination for convenience clause sounds easy to use—after all, it has “convenience” in its title—it may present some challenges. The detailed instructions for the contractor in Section 14.4.2(1), (2), and (3) are clear and typically do not lead to claims. The AIA provision allows the Owner to terminate any time and without cause, but Section 14.4.3 allows the contractor to receive payment for some discrete items and settling upon a fair number for these post termination payments can be a challenge.
For instance, under the A201, the contractor is entitled to “payment for Work executed.” This sounds like a reasonably straightforward standard for making payment. What happens though when the contractor has frontloaded its billing? In other words, the contractor has billed—and sometimes paid—for work that it has not completed. The result could be that the contractor is actually overpaid and owes the owner money.
The moral here is to ensure that whoever is watching your project and approving payment applications is careful to approve work that is actually completed. This will reduce the chance that a termination for convenience leads to a lengthy battle over how much work was completed.
The Contractor, under the AIA clause, is entitled to “reasonable overhead and profit on the Work not executed.” Presuming you agree on the work that is not executed, how do the parties arrive at a reasonable number for overhead and profit? Unless the parties have clearly defined the amount of overhead and profit to apply, they are left with an argument that can cost both sides a great deal of time and money.
Finally, some legal commentators have noted that the existence of a termination for convenience clause may tempt an owner to avoid the unpleasantness of terminating the contract for cause and simply elect to terminate for convenience. This temptation is particularly great where the termination for convenience clause provides for no recovery of profit to the contractor on the unexecuted work. If there is good reason to terminate for cause, then a termination for cause is more appropriate. Tread carefully when weighing whether to terminate for cause or convenience; each presents challenges that demand consideration.
Terminations for convenience are complex and particular aspects of them are unsettled in the law. If you find yourself considering a termination for convenience, consult with your construction counsel. If you do not currently have a termination for convenience clause in your construction contracts—whether you are an owner or a contractor—get one. Defining the terms of an agreement in the beginning allows both parties to know their rights and responsibilities to one another and eliminate costly disputes later.