A termination for convenience ('TFC') clause in a
construction contract allows a principal to terminate a contract
with the contractor at its option, regardless of whether the
contractor has committed a default or breach of that contract. TFC
clauses essentially entitle a principal to terminate the contract
at any time and without cause for its own 'convenience'.
TFC clauses provide flexibility for principals to response to
contingencies in performing the contract, and reflect the evolving
need for principals' to respond to changes in current economic
conditions affecting construction projects.
The right of a principal to terminate for convenience is usually
qualified by an obligation to pay compensation for the cost of such
termination, namely payment for works completed, and in some
circumstances the direct and substantiated costs the contactor has
incurred as a result of termination.
A typical TFC clause will include words to the following
"[The principal] may, at its
option, at any time and for any reason it may deem advisable,
cancel and terminate the Contract, in which event [the contractor]
shall be entitled to receive compensation....".
How does it affect you?
Depending on whether you are a contractor or principal, a TFC
clause can be both advantageous and disadvantageous. It is
therefore important to consider the potential implications of a TFC
clause before entering into a construction contract.
If you are a principal under a contract, a TFC clause will
generally operate to your benefit. Such provisions provide
flexibility to principals to deal with contingencies that may arise
during the course of the construction contract with a contractor.
For example, during poor economic conditions, which reduce the
financial viability of a construction project. Here, a TFC clause
gives the principal an ability to exit the contract without
significant legal risk and to deal with the effects of such
contingency. Such clauses are also less onerous compared to other
termination provisions in terms of the procedure required to be
undertaken to terminate the contract.
However, principals should be aware that the right to terminate
may be limited. One question that has commonly arisen in cases
where a principal has terminated a contract for convenience, is
whether the principal is obliged to act in good faith in
terminating a contract for its convenience. Such issue remains
unsettled and the High Court is yet to endorse a duty to act in
good faith. However, case law suggests that acting in good faith
plays a substantial role in construction contracts generally.
Accordingly, principals may run the risk of unlawfully terminating
the contract, if such termination is not in good faith.
If you are a contractor, a TFC clause is more likely to have an
adverse effect, compared to a principal, particularly where a
contractor has directed significant resources into the performance
of the contract at the expense of other opportunities. Whilst the
contractor is usually entitled to compensation in the event a
principal terminates a contract for convenience, such compensation
is usually limited to payments owing for work completed as at the
date of termination, or for milestones met under the contract. A
contractor will not usually be compensated for loss of profits or
other consequential loss arising out of such termination.
Considerations for Principals and Contractors
Matters for principals to consider in relation to a TFC clause
when the TFC is being contemplated, consider all rights of
ensure the TFC is expressed clearly and in unambiguous terms
– it is good practice to set out components of compensation
payable and when termination will take effect;
ensure that all terminations for convenience are in good faith
– although it has not been affirmatively decided that a duty
to terminate in good faith applies in relation to all TFC clauses,
a court may nonetheless imply such duty in particular
enter into a deed of release to ensure the termination has been
properly effected and you (and the contractor) are released from
all future actions and obligations.
Matters for contractors to consider in relation to a TFC clause
when the TFC is being contemplated, negotiate to limit the
circumstances under which a principal may terminate for convenience
and ensure those limitations are clearly expressed in the TFC
if possible, attempt to increase the contract price to account
for the risk of termination for convenience;
consider whether the principal has acted in good faith in
terminating the contract;
be aware of your right to compensation and exercise it.
Both principals and contractors should also carefully consider
how TFC clauses are drafted to prevent either party being subjected
to unintended rights or obligations.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Warranties can be risk-shifting mechanisms when the party giving the warranty is not the party at fault for the defect.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).