Structuring Construction Contracts: Termination for Convenience vs. Termination for Cause

Description

In contracts, there are essentially two types of termination clauses. The most common clause is termination for cause, also known as a termination for default, which most contracts contain. The second type is TFC and outside of these clauses, the only way for a party to exit a contract is to breach the contract.

A TFC clause is a clause within a contract allowing the parties' contractual relationship to mirror that of at-will employment. In other words, it allows a party, or parties, to terminate a contract for almost any reason.

While technically a party does not need a reason to terminate a contract for convenience, there are some limitations in the capacity to exercise the TFC clause. The main limitation concerns the parties' good faith. In effect, all parties must enter the contract in good faith with the intention of fulfilling the contract. If a party terminates the contract to avoid making the final payment or it always intended to terminate the contract, the party will likely be held liable for breaching the contract.

Typically, after a contract has been terminated for convenience, the terminated party is entitled to payment for work it completed, costs it incurred due to the termination of the contract, reasonable profit and overhead on work that has yet to be executed, and anything else stipulated in the contract. These entitled costs are meant to disincentivize parties from terminating their contract for trivial reasons.

The terminated party is also deprived of the opportunity and contractual right to fix, or cure, any defective work; thus, the terminating party is unable to recover any costs associated with repairing the damaged work. If a party desires to withhold payment for defective work, they can go the traditional route of terminating the contract for cause/default. However, if the parties have contractually agreed that the cost of repairing defective work can be offset, a court will uphold that contractual agreement.

Listen as our expert panel of construction attorneys discusses how to best utilize a TFC clause in contracts. The panel will discuss how notice is provided and how damages are calculated when using these types of provisions.