From the position of the general contractor on a project, a termination for convenience provision is an important limitation of liability that should be built into subcontracts. Any manner of things could go “wrong” on a project that make it advantageous and desirable for the general contractor to part ways with one or more subcontractors without the intense legal wrangling or cause required by termination for default. The termination for convenience provision provides the subcontractor with payment for work completed, but limits the general contractor’s liability for any anticipated profit, lost opportunity or other damages that could attach without the termination for convenience clause.
While this article focuses on the general contractor’s perspective when negotiating subcontracts, the general contractor must also be cognizant of the termination for convenience provision in its contract with the owner. With the owner, the general contractor’s goal is to maximize the general contractor’s recovery in the event of termination for convenience. With the subcontractor, the general contractor’s goal is to limit liability for payment to the subcontractor. In other words, a desirable termination for convenience clause in the general contractor’s subcontract is not a desirable termination for convenience clause in the general contractor’s prime contract.
Frequently, the general contractor may actually have little, if any, negotiating room with the owner on provisions like termination for convenience, whereas, by contrast, the general contractor has much more control over its subcontracts. Regardless, being aware of these issues in either case is essential.
The Importance of Termination for Convenience
In a contract between the general contractor and its subcontractors, the termination for convenience clause (“T4C”) is a limitation of liability clause for the general contractor. Conceptually, the T4C clause allows the general contractor to “breach” the contract by terminating the subcontract without cause and limits the general contractor’s exposure to the subcontractor for associated damages. Without a T4C clause, if the general contractor decided to terminate the contract without cause, the general contractor would be liable to the subcontractor for damages that could include anticipated profit on work not performed and potentially even lost opportunity for other work.
Generally, the T4C provision is versatile and allows the general contractor to terminate for any reason or no reason at all. But be aware that states may imposes some limitations by statute or case law (e.g., termination must not be in “bad faith”).
With a properly drafted T4C, the general contractor can terminate the contract without cause and limit the subcontractor to payment only for the work properly completed, the reasonable costs to end the work, and exclude any anticipated profit on work not performed.
Ensure Payment for “Work” Completed Is Well-Defined
The T4C language identifying what payment is owed for work completed is important to ensuring the general contractor’s exposure is properly limited, particularly on lump sum subcontracts.
Potential Issues with Broad “Work Performed” Language
Frequently, broad “work performed” language is used that may not consider the contract payment terms and may not properly limit payment to the subcontractor to the contract scope of work properly executed. For example, the subcontract may read as part of the T4C provision:
“Subcontractor will be paid for work performed prior to the date of termination.”
If the subcontract is a lump sum subcontract, this language could leave the general contractor potentially exposed to claims by a subcontractor for payment in excess of the subcontract price for the amount of work completed and for the subcontractor’s own failings on the project.
- Paying for Subcontractor’s Inefficiency. If the subcontractor has not executed the subcontract work with the efficiency it estimated at bidding, the broad “work performed” language could leave the general contractor exposed to pay for the subcontractor’s inefficiency. Assume, for example, that half of the work is completed when the general contractor decides to terminate for convenience.
- Is the subcontractor limited to recovery of half of the lump sum contract price?
- Or, is the subcontractor entitled to recovery all the costs the subcontractor has incurred on the project regardless whether the subcontractor’s costs exceed more than half of the subcontract price because of the subcontractor’s own inefficiencies?
- Paying for Defective or Deficient Work. Similar to the above, if the subcontractor has performed defective or deficient work that had to be re-performed and that caused the subcontractor to incur additional costs, the broad “work performed” language could expose the general contractor to payment for the subcontractor’s re-work.
- Paying for “Work” versus Paying for “work”. If the T4C provision is not limited to payment for costs incurred in performing the “Work”—which should be the defined scope of work in the subcontract—and instead refers generally to payment for costs incurred in performing “work”—an undefined and potentially much broader term—the subcontractor’s claims for payment for inefficiency and re-work due to the subcontractor’s own fault will have another leg to stand on.
Consider Tailoring Language to Reflect Pricing Structure and Properly Executed Work
Instead of the broad work-performed language above, the general contractor should consider tailoring the T4C language to reflect the lump sum pricing structure, including schedule of values when applicable, and restricting to payable work to “properly executed Work.” For example, a redline of the above broad language may read as follows, depending on the subcontract,
This tailored language better protects the general contractor from exposure and provides leverage in the negotiations of the T4C payment with the subcontractor.
The general contractor may also draw from federal procurement law, which gave birth to T4C provisions in the private construction sector. The Federal Acquisition Regulations (“FAR”) and case law interpreting the FAR provisions encompass the most well-developed body of law regarding T4C. Outside of federal procurement, the FAR may be instructive and provide broad strokes guidance to T4C concepts, but the specific language of the contract provision at issue will always control the rights and liabilities of the parties to that contract.
Exclude Lost Anticipated Profit, Lost Opportunity, and All Similar Damages
While it is standard to allow the subcontractor a reasonable profit and overhead on the Work that was properly performed, the T4C provision should always ensure that the subcontractor expressly waives recovery of “lost anticipated profit,” “lost opportunity,” and any other damages not allowed under the T4C provision.
Tie It All Up With “Sole and Exclusive Remedy”
Finally, the subcontract should provide that the damages under the T4C provision are the subcontractor’s sole and exclusive remedy against the general contractor for a termination for convenience.
Conclusion
The termination for convenience provision is a limitation of liability provision for the general contractor and should be properly drafted to ensure that the general contractor is not exposed to payment for subcontractor’s inefficiencies and defective or deficient work simply because the general contractor is exercising contractual termination for convenience rights.
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