May 18, 2022

By Robert C. Shaia, Partner and Jane M. Kutepova, Former Associate,  Watt, Tieder, Hoffar, & Fitzgerald, LLP.

A contractor begins work on a project and everything is going well, until one day the owner informs the contractor that it is being terminated for convenience.  Possibly, there is no discussion about alleged defects, reasons for the termination, or any damages the owner might seek against the contractor.  In that moment, the contractor may be unaware of any perceived wrongdoing or problems with its work. 

The industry has typically accepted that, in this scenario, the owner implicitly waives the right to any remedies against the contractor, except those expressly set forth in the contract.  Reasonable minds might assume that, if the owner believed it needed to seek further remedies, it would terminate the contractor for cause instead of convenience.  And often overlooked during contract negotiations are the benefits of including an express “waiver of remedies” in the termination for convenience section. 

A recent California case – Chinese Hosp. Ass’n v. Jacobs Eng’g Grp., Inc., No. 18-CV-05403-JSC, 2019 WL 4168949 (N.D. Cal. Sept. 3, 2019) – should cause contracting parties to take a close look at the termination for convenience clause in their contracts.

This article addresses the damages available after an owner terminates for convenience and whether better contracting can avoid an undesired result. 

Prior Approach to Seeking Damages After Terminating for Convenience

Termination for convenience clauses first began to emerge in government contracts.  U.S. v. Speed, 75 U.S. 77, 82-83.  By the 1950s these clauses were widespread in military contracts and began appearing in civilian contracts.  Torncello v. U.S., 681 F.2d 756, 765 (Ct. Cl. 1982). 

Since the termination for convenience clause became a staple in construction contracts, courts, perhaps most prominently in New York, have addressed whether the owner (by terminating for convenience) waives any damages against the contractor.  In Fruin-Colnon Corp v. Niagra Frontier Transportation Authority, 180 A.D.2d 222 (N.Y.S.2d 1992), the court held that the government agency was not entitled to recover any damages against the contractor after terminating for convenience.  More specifically, the court concluded that because the contractor was not provided with an opportunity to cure any alleged defects, even though the defects were not discovered until after the contractor was terminated for convenience, the termination still waived the right of the government to recover damages.  Id. at 234. 

The New York cases that followed all reaffirmed the statement that a termination for convenience prohibits the owner from further collecting funds for any defaults or claims after the termination.  See Nasuf Construction Corp. v. State of New York, 185 A.D.2d 305 (N.Y.S.2d 1992); Paragon Restoration Group, Inc. v. Cambridge Square Condominiums, 42 A.D.3d 905 (N.Y. 2007) (holding that owner could not bring counterclaim for damages to cure alleged default after it invoked the termination for convenience clause.);  Tishman Constr. Corp. v. City of New York, 643 N.Y.S.2d 589, 590 (1996)(“[w]here the . . .[Party]. . . elects to terminate for convenience . . . whether with or without cause, it cannot counterclaim for the cost of curing any alleged default.”). 

Recent California Case – Chinese Hospital

A recent case from Northern California, Chinese Hosp. Ass’n v. Jacobs Eng’g Grp., Inc., No. 18-CV-05403-JSC, 2019 WL 4168949 (N.D. Cal. Sept. 3, 2019) (“Chinese Hospital”), has called into question the uniformity of case law on this topic.  The court held that an owner terminating an architect “for convenience” did not waive its right to recover monetary damages against the architect for defective design.

The Chinese Hospital matter involved alleged breach of contract and defective design claims for the construction of a new hospital in San Francisco.  During construction, the owner, Chinese Hospital Association (“Owner”), became aware of alleged defective designs provided by the architect, Jacobs Engineering Group, Inc. (“Architect”).  The Owner terminated the contract with the Architect for convenience.  To finish the project, the Owner and the Architect entered into a Termination and License Agreement.  The Owner then filed suit against the Architect for damages based on the alleged defective construction documents.   The Architect moved for summary judgment, arguing that the Owner waived its right to recover damages under the contract when it terminated the Architect for convenience. 

The court found that the termination for convenience clause was silent as to the effect of the termination for convenience and, thus, did not waive the Owner’s right to seek damages.  The Architect argued that the clause’s silence on the available remedies meant that the termination for convenience clause barred additional remedies.  Otherwise, it argued, the “for cause” provision – which states the owner “may without prejudice to any other remedy terminate the employment of the Architect” – would be meaningless.  That is, the lack of this same language in the termination for convenience clause meant that the drafters intended to exclude additional remedies available under the termination for convenience clause.  The court held that the remedy in the “for cause” provision was not meant to be exclusive to that provision.  It also held that the contract did not indicate that the “for cause” provision was the exclusive method of termination for obtaining future remedies.  Therefore, the court held that the absence of language preserving a remedy under the termination for convenience clause did not indicate a waiver of the right to seek a remedy. 

Further, the court held that the Architect did not establish that the Owner impliedly waived its rights to a monetary remedy under the termination for convenience provision.  The court found that the language in the initial termination letter and the Termination and License Agreement indicated that the Owner did not intend to waive any rights or remedies. 

What Now?

The takeaway from the Chinese Hospital decision is that contracting parties should pay close attention to the language of their termination for convenience clauses.  More specifically, if the parties intend to limit or eliminate an owner’s remedies upon a termination for convenience, that intent should be expressed unequivocally in the contract.

Watt Tieder is one of the largest construction boutique law firms in the United States, with a diverse and experienced team of attorneys representing many of the world’s leading corporations, developers and contractors on both domestic and international projects. We represent more than half of the Top 30 Engineering News Record contractors and most of the nation’s top sureties. With offices in six cities in the United States, the firm is a dynamic, mid-size boutique that provides knowledgeable and practical legal representation to the construction, surety, government contracts and bankruptcy industries world-wide.

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