'Termination for convenience' clauses are
common in many contracts within the construction industry, and
operate to provide the Principal or Head Contractor with a
right to terminate the contract or sub-contract, at any time,
and without any breach of the contract by the other contracting
party, but merely for the Principal's
'convenience'. There is some recent judicial
comment that indicates that Principals may be required to
demonstrate that such a provision is being exercised in good
Such clauses create a simple 'exit strategy'
that can, to an extent, be costed and invoked in situations
where the continuance of the contract or project is no longer
appealing to the Principal. This could be due to a number of
reasons, including financial changes or pressures within the
Principal's business, a desire to allocate capital and
time to other potentially more profitable projects, or a matter
as simple as wishing to no longer work with the Contractor.
When exercising a termination for convenience clause, the
Principal is generally required to pay to the Contractor the
value of the work completed up to the date of termination, the
costs of materials reasonably ordered by the Contractor
(subject to such materials becoming the property of the
Principal on payment) and the reasonable costs of removal of
construction plant. So, typically, a Principal could terminate
for convenience for any reason at all, by providing notice in
writing and making the payments detailed above, and then be
free of any other obligations whatsoever to the Contractor.
The recent Supreme Court of Victoria decision of Kellog
Brown & Root Pty Ltd v Australian Aerospace Ltd
suggests that this landscape may be changing. The case
demonstrates a potentially growing judicial willingness to
intervene in the Principal/Contractor relationship in the area
of termination for convenience clauses and may eventually
develop into a requirement that such clauses be invoked in
The case was an application for an interlocutory injunction
to prevent the Principal from relying on a notice to terminate
for convenience, on the basis that the right to terminate for
convenience was subject to an implied term of good faith and
fair dealing and as such, the notice should not have been given
in the circumstances. The relevant contract was in the area of
defence procurement, and the termination for convenience was
exercised after the dispute resolution process under the
contract had been invoked.
As the application sought injunctive relief, Justice Hansen
was not required to determine whether the termination was or
was not in good faith, but rather to determine if there was a
'serious question to be tried'. The parties
ultimately agreed that there was a 'serious question to
be tried', and his Honour determined that the balance
of convenience rested with the granting of the injunction.
Mitigating The Risk In Termination For Convenience
With the law developing in this area, it is important that
Principals and Head Contractors consider mitigating the risk of
the requirement for good faith being implied. It is impossible
to predict how a court may impose any obligation of
'good faith' in such circumstances, however an
amendment to termination for convenience clauses to include a
percentage of profit or margin on the sums otherwise payable
may go some way to establishing an absence of 'bad
By providing the Contractor with a percentage of profit or
margin on the sums payable as a consequence of exercising a
termination for convenience, the Contractor is not robbed of
any of its bargain up to the date for termination. Without the
payment for profit and margin on the sums otherwise payable
under a termination for convenience clause, it could be argued
that the Principal obtained a direct benefit, if such profit
and margin would have been payable but for the exercise of the
termination for convenience clause.
Contract administration and considered application of
termination for convenience clauses will also minimise the
'good faith' risk. Exercising a termination for
convenience clause after the commencement of the dispute
resolution process, and in an apparent attempt to defeat or
avoid the dispute resolution process under the contract, will
more clearly demonstrate a lack of 'good faith'
than the exercise of such a clause prior to the commencement of
the dispute resolution process. Similarly, exercising such a
clause purely for the purpose of awarding the work to a third
party may also be indicative of bad faith.
On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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