T for C clauses set no limits on termination

Construction attorney Susan Linden McGreevy on Termination for Convenience clauses

Back in the olden days of construction, once a contract was entered, the contractor had the right to complete it and be paid the full price. Over time, the concept of a “Termination for Convenience” (T for C) clause arose. By inserting this clause into a written contract, an owner avoided being sued for breach of contract if it changed its mind and wanted to pull the plug on a project.

Initially seen in federal contracts, the theory was that the public interest was not served by forcing the government to either build something it no longer needed or pay damages for not doing so, if, in fact, there was a compelling “sovereign” reason to stop — such as a breakout of war or peace, or hazardous materials found on a site. The clause said that the owner would pay costs incurred to date and reasonable “termination expenses,” meaning unavoidable costs incurred due to an early termination (i.e., uncancelable material orders, restocking charges, unexpired rental contracts).

Currently, nearly all public contracts, standard form construction contracts and even stand-alone contracts now contain T for C clauses. The ConsensusDOCs has a provision, leaving a blank where the parties are to insert the amount/percent of “premium” over and above costs incurred that the contactor will receive if the contract is terminated without fault. I suppose that if no number is filled in, it would be concluded that they did not intend to give the contractor any premium. The 2007 edition of AIA General Conditions, A201, allows for a T for C, but obligates the owner to pay for work executed and costs incurred because of the termination, along with “reasonable overhead and profit on the work not executed,” in effect, giving the contractor the same profit it would have made had it completed the work. These nine words are among the portions of the AIA general conditions most frequently deleted by owners.

Aside from the unfairness of losing profit that a contractor was counting on for work taken away from him, what about the situation in which there really was no compelling reason to terminate the contract? Or worse yet, what if the owner terminates the contractor merely so that it can get a lower price or better terms from someone else? These clauses don't set any limits on the circumstances in which the owner can just cut the contractor off, but desperate people do desperate things. In these days of limited economic resources, it is not unheard of for an owner to want to jump ship to save money.

Is there nothing to be done? The answer is maybe, but not likely. Few states have addressed the issue adequately. Those that have generally looked to federal guidance for authority look to federal law as persuasive authority on T for C. Because all standard T for C clauses are one-way, giving only the owner the right to terminate in order to avoid the clause leading to abuse, they have “implied” into the T for C clause an implied duty of good faith.

In 1982, the “good faith or abuse of discretion” test was challenged in a case where the U.S. government used the T for C clause to terminate a contract for convenience because another bidder was able to perform the service for less. The court held that the government could not T for C absent “changed circumstances.” Since this decision, other federal courts have reviewed T for C on numerous occasions, until, in 1996, it was held that the U. S. could get away with using the T for C clause as long as the termination wasn't “tainted by bad faith or an abuse of contracting discretion.” Since the government is presumed to have acted in good faith in contracting, and this presumption may only be overcome by a “well-night irrefragable proof” that the government acted in bad faith, contractors have rarely succeeded in demonstrating the government's bad faith.

If you are in one of the many states where the courts just haven't written any opinions on this subject, you can protect yourself by modifying the words of this clause. For example, state that you will agree to be let go with no extra payment, but only if the project does not go forward for at least one or two years. If anyone else continues with the work in your scope, you are entitled to be paid for your unearned profit.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., e-mail to [email protected].

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