Termination for Convenience Under Construction Contracts

The subject of terminating construction contracts is one of the most complex topics under the law.

This complexity arises from the intersections between the different laws; common law, contract law, construction law, governmental law on the different levels, and sometimes the special laws and legal Acts similar to the procurement law in Canada, and the nature of the project being under the private law or public/governmental law. Adding to that, the language, wording, and the structure of such clauses, which would add another layer of complexity.

Let's have a look on different construction contracts to understand this topic.

FIDIC standard forms of contracts are very common on construction projects. They are being used on construction projects in more than 100 countries.

FIDIC RB99,

• SC-13.1 (d) “Omission of any work unless it is to be carried out by others”, and,
• SC-15.5 “The Employer shall be entitled to terminate the Contract, at any time for the Employer’s convenience, by giving notice to such … the Employer shall not terminate the Contract under this Sub-Clause in order to execute the Works himself or to arrange for the Works to be executed by another contractor”.

In FIDIC RB2017,

• SC-13.1 (iv) “the omission of any work, unless it is to be carried out by others without the agreement of the Parties;”, and,
• SC-15.5 of RB2017, “The Employer shall be entitled to terminate the Contract at any time for the Employer’s convenience, by giving a Notice of such... Security. [Unless and until] the Contractor has received payment of the amount due under Sub-Clause 15.6 [Valuation after Termination for Employer’s Convenience], the Employer shall not execute (any part of) the Works or arrange for (any part of) the Works to be executed by any other entities.

It's critical to realize and understand the differences. The differences are obvious between both versions.

RB2017 is more flexible on the omission, termination for convenience, and undertaking the Works by the Employer or others in this case, but requires the agreement/consent of both parties, and [Unless and Until] compensating the Contractor in accordance of SC-15.6, in addition to the compliance with other requirements similar to Notices, etc.

Now, the critical question that would arise, do all construction contracts deal with the same matters similarly?!

The answer is?NO.

Not all construction contracts empower the Contractor/Subcontractor explicitly in the same approach, and they may not empower them at all.

For example,

• AIA A201- 2017 states "§14.4.1 The Owner may, at any time, terminate the Contract for the Owner's convenience and without cause.",
• CCDC2 doesn't include any provision regarding the termination for convenience, unless such provisions/clauses have been drafted and incorporated through the Supplementary Conditions or Particulars, or by reference.
• CCDC3 - 2016. GC 7.1.7 states " The Owner may , if conditions arise which make it necessary for reasons other than as provided in paragraphs 7.1.1 [Termination on account bankruptcy] and 7.1.4 [Termination for uncorrected default], terminate this Contract by giving Notice in Writing to that effect to the Contractor."

Sometimes, the termination for convenience clause could be implied rather than explicit, and this would be subject to each jurisdiction, similar to governmental public projects in specific jurisdictions. This is mainly in order to limit governments' exposure to financial risks and liabilities, and provide them with broader level of flexibility for terminating or altering scopes on construction projects when needed, to a point that, in some jurisdictions, if a Wrongful Termination arises on a governmental project after the termination process, the Termination would convert automatically to become a " Termination for convenience" rather than a " Wrongful Termination". - This subject has been citied in many specialized legal books and references.

There could be a connection between descoping/negative variations or what we call as?Deductive Changes?and the Terminations as both may intersect in some areas, and concerns may arise to whether the descoping/omission falls under the partial termination of the contract.

It's worth mentioning that, converting a termination from termination for default to termination for convenience would, generally, lead to mitigated associated cost, as the termination for convenience clause acts as a very "specific changes clause", therefore, leading to mitigated remedies and cost impacts.

The second critical question;

Would the Contractor who was terminated for convenience have the ground to sue the Employer, if the Employer/Owner hired another Contractor to complete the project??

The answer is Yes, the Contractor may have the grounds to sue the Employer.

However, would the first terminated contractor succeed in their proceeding?

The answer: It depends on the specific circumstances.

It's critical to understand that such clauses are sensitive for their wording; the wording and structure are critical components in the interpretation process.

Sometimes, even if the limitations of descoping to give to another contractor exist, it would be possible to award the work to another contractor to complete the project, subject to the lapse of specific duration in some AHJ.

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Some Recommendations before terminating the Contractor:

• It's critical to assess:

1- The circumstances that giving rise and leading to the termination process.

2- The impacts carefully and accurately, on all levels specially legal risks, financial risks, and schedule risks. For example, the termination process may lead to additional procurement costs to hire another contractor, and significant legal costs in litigation proceedings, in addition to significant delays and schedule risks.

3- The risks and liabilities and their flow, under the law and the contract.

For example, "On design-build projects, an important corollary issue to the delivery of design documents is the owner's intellectual property rights in such documents.

Under GC 1.1.7 of the CCDC 14, copyright in the design documents belongs to the consultant that was engaged by the contractor and alteration of the design documents by the owner is prohibited.

GC 1.1.8 also provides that any copies of the design documents retained by the owner are for “information and reference in connection with the Owner's use and occupancy of the Work” and “may only be used for the purpose intended and for a one time use”. Taken collectively, these GCs mean that an owner terminating a design-builder under an unmodified CCDC contract prior to the completion of the design documents would expect to have difficulty in engaging another architect to complete these design documents and may have to restart the design process." - Journal of the Canadian College of Construction Lawyers.

4- Follow the ADR process accurately under the construction contract. This is in order to mitigate the exposure to the different types of risks, and to ensure satisfying the different triggers on the escalation path, leading to adjudication, arbitration, or litigation.

• Consult a legal specialist, experienced with terminations in AHJ & follow the termination process accurately to avoid the risks and liabilities of falling into a Wrongful Termination, or bad faith.
• Mostly, when parties sue, the root cause is the unfair compensation, or if there is an opportunity representing itself to maximize profits and ROI, in terms of business. i.e, If the Contractor is being compensated properly for their entitlement under the law and contract, and the parties come to fair negotiated amicable agreements/settlements for pre-determined well-negotiated and well-structured contracts, many of the risks would be mitigated, and the possibility of going litigation would be significantly less, leading to mitigated exposure to risks, and sustainable business and commercial relationships.
• For Employers/Owners and Contractors out there, realize and understand the benefits and the importance of working collaboratively and fairly together, on the short and long run throughout the delivery lifecycle.
• Effective communication, collaborations, and teamwork are the most critical and important factors to deliver complex projects or any initiatives successfully, and these factors are mostly overlooked in the process, from experience.

Share your thoughts and experiences!

References:

• FIDIC RB 1999
• FIDIC RB 2017
• CCDC 3 - 2016
• AIA A201- 2017
• Journal of the Canadian College of Construction Lawyers.