Termination for Convenience on a Private Construction Contract: Advantages to the Savvy Contractor and Pitfalls for the Uninformed Subcontractor

By:  Whitny L. Norton

     Across the nation, few courts have addressed the validity and application of termination for convenience clauses in private construction contracts. Today, termination for convenience clauses have made their way into most private construction contracts. These clauses allow for one party, usually the owner or general contractor, to terminate its contract with a general contractor or subcontractor solely for that party‚Äôs convenience. For such a seemingly one-sided clause to be upheld, it must be supported by adequate consideration. This consideration may vary from notice alone, to the following: payment for work in proportion to the amount of work completed, overhead and profit for work not completed, and reasonable notice. Such clauses may be used to greatly benefit owners and general contractors and can leave general contractors and subcontractors terminated from a job without recourse. Prior to entering into a private or public construction contract, it is important to discuss not only termination for convenience clauses, but the construction contract as a whole, with a competent legal professional. 

     In a case of first impression for the state of Washington, Division I of the Washington Court of Appeals recently upheld a termination for convenience clause in a private construction contract. In SAK & Assoc., Inc. v. Ferguson Constr., Inc. (No. 72258-1-I, 2015 WL 4726912, Wn. App. Aug. 10, 2015), a contractor and subcontractor entered into a fixed sum contract under which the subcontractor was to provide concrete materials and paving services. The subcontract contained the following termination for convenience clause: 

In addition to the rights listed above, Contractor may, after providing Subcontractor with written notice, terminate (without prejudice to any right or remedy of Contractor) the Subcontract, or any part of it, for its own convenience and require Subcontractor to immediately stop work. In such event, the Contractor shall pay the Subcontractor for the work actually performed in an amount proportionate to the total Subcontract price. Contractor shall not be liable to the Subcontractor for any other costs, including anticipated profits on work not performed or unabsorbed overhead. 

     Per the terms of the parties subcontract, a general contractor gave the subcontractor written notice of immediate termination and paid the subcontractor the contract amount in proportion to the amount of work completed through the date of termination. After being terminated from the job, the subcontractor filed suit against the contractor, alleging that the contractor breached the contract by unilaterally terminating it without cause. The trial court granted summary judgment in favor of the contractor, finding that the contractor properly terminated the subcontract agreement for convenience. The subcontractor appealed. The main issue on appeal was whether partial payment was adequate consideration to support the termination for convenience clause.  

     The appellate court found that completion of 24 percent of the work was not a nominal amount of work and proportionate payment was adequate consideration to support the termination for convenience clause. The court also explained that the implied covenant of good faith and fair dealing does not trump express terms or rights of a contract. Thus, Washington courts are likely to uphold express and unambiguous termination for convenience clauses that are supported by adequate consideration. 

     In Washington, we can now expect that once a subcontractor has completed more than a nominal amount of work, a contractor may utilize a clear and unambiguous termination for convenience clause upon notice to the subcontractor and payment in proportion to the amount of work performed through the date of termination. Importantly, the implied covenant of good faith and fair dealing is unlikely to restrict a party from asserting its contractual rights under an express and unambiguous termination for convenience clause. 

     Notably, commonly used form construction contracts contain varied methods of consideration to support termination for convenience clauses. For example, the American Institute of Architects (AIA) form A201 (2007) provides compensation for work performed and for overhead and profit on work not completed. On the other hand, the Design-Build Institute of America document 530 (2d ed. 2010) provides for one fee to be paid prior to work commencement and another fee to be paid after work commencement. 

     In addition, some termination for convenience clauses provide only for proportionate payment for work performed through the date of termination. However, in some instances, notice of termination alone may provide adequate consideration in support of a termination for convenience clause. While the enforceability of such clauses depends on the circumstances, generally, the more generous the consideration supporting the termination for convenience clause, the broader the termination for convenience rights. 

     Ultimately, in Washington, notice and payment for work performed up through the date of termination will likely constitute adequate consideration to support a termination for convenience clause in a construction contract for work on a private project. Termination for convenience clauses are often negotiated during contract drafting. Whether you are in the process of drafting a construction contract or have a contract dispute, it is important to discuss the contractual language and implementation of contract terms with a competent legal professional.

     If you need professional legal services regarding a construction contract, or other construction law related issues, contact the attorneys at Piskel Yahne Kovarik, PLLC.