TERMINATING CONTRACTS FOR CONVENIENCE — “JUST BECAUSE”

Termination for convenience provisions are important provisions to include in construction contracts.  These are provisions that allow a party to terminate the contract for ANY REASON.  No cause is needed to exercise the termination for convenience provision.  In other words, the terminating party does not have to demonstrate the other party breached the contract.  A termination for convenience can be exercised “just because.”

Typically, the party providing the service should not get to terminate for convenience.  However, the party receiving the service will want to be afforded this contractual right.

For example, an owner (receiving a service) will want to include a termination for convenience provision with its prime contractor (providing a service).  And, a general contractor (receiving a service) will want to include a termination for convenience provision in its subcontract with its subcontractor (providing a service).  However, a general contractor providing a service for an owner, or a subcontractor providing a service to a general contractor, should not be able to terminate the contract for their convenience “just because” a better opportunity comes along.

Consideration should be taken as to the required notice to exercise the termination for convenience and any fee associated with the termination for convenience.   A party providing a service that agrees to a contractual termination for convenience provision will want to consider and negotiate a termination for convenience fee in the event the other party exercises this right, which is a fee in addition to all costs incurred through the date of the termination for convenience, including any demobilization costs and any early return fees (i.e., costs associated with the termination for convenience).  Sometimes the fee included in the termination for convenience provision make it cost prohibitive for the other party to ever exercise this right.  But it should be a consideration and negotiation on the frontend because a termination for convenience provision is an enforceable contractual provision and, as quoted below, “difficult to argue around.”  There is flexibility to have the contractual right to terminate “just because” without having to establish the cause or breach supporting the termination.

The Middle District of Florida discussed termination for convenience provisions in a non-construction case:

Termination-for-convenience clauses are difficult to argue around. The only plausible exceptions under federal andFlorida law are: (1) bad faith, or possibly (2) lack of consideration. As to the latter exception, Florida courts have heldthat “proper notice” is sufficient consideration. And “proper” notice does not mean that the language of the contractmust provide for “advance” notice—contemporaneous notice will suffice.

Oakes Farms Food and Distributions Services, LLC v. The School District of Lee County, Florida, 2021 WL 2186457, *11 (M.D.Fla. 2021) (internal citations omitted).

It is unclear whether Florida recognizes a “bad faith” exception to exercising a termination for convenience.  See id.  This is an exception applied in the federal context in limited circumstances where the government-owner acts with malice towards the contractor or with intent to harm the contract by exercising the termination for convenience.  See id.  Clearly, a difficult exception to prevail upon!  However, it is doubtful this exception would support a a basis to argue around the properness of a termination for convenience.

Keep in mind that termination for convenience provisions are enforceable.  This is why when reviewing a contract–and hopefully you are working with construction counsel–that includes such language (and this will be included in many construction contracts), negotiating the notice provision and costs/fees in the event such provision is exercised should not be overlooked.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

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