UK: Termination At Will

Last Updated: 29 January 2014
Article by Peter Collie

Termination at will or termination at the employer's convenience clauses have become very common over the past 20 years. The clauses usually give the employer the right to escape from what is becoming an onerous contract but very rarely give the contractor the same right.

Obviously a clause such as this is very useful for the employer in cases where the project is abandoned for commercial, financial or political reasons, or possibly even if the contractor is underperforming to an extent not sufficient to allow termination for cause.

The FIDIC Red Book provides:

The Employer shall be entitled to terminate the Contract, at any time for the Employer's convenience, by giving notice of such termination to the Contractor. The termination shall take effect 28 days after the later of the dates on which the Contractor receives this notice or the Employer returns the Performance Security. 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.

Clauses such as this cause a good deal of heat, especially if the contractor feels that he has lost a very lucrative contract without compensation. Contractors will want to see if anything can be done to improve the position. There are two issues to consider: first, what the clause states and second, the applicable law.

Whilst every applicable law needs to be expressly considered, there is a reasonably common theme internationally. Termination at will clauses seem to be accepted if they provide for the contractor to be compensated for loss of profit and the project is abandoned rather than given to a new contractor.

It is fairly common for the right to terminate a contract to be subject to strict requirements or approval by the courts. For instance, in France the Code Civile restricts a party's freedom to terminate a contract unless it is by mutual consent or for permissible reasons. However, if an employer terminates for convenience it will have to compensate the contractor for costs and for the loss of profit.

In Australia termination at will is allowed if the contractor is compensated for their losses. Even in the USA (the home of freedom) the employer is required to use good faith and cannot use the provision "simply to acquire a better bargain from another source".

In Egypt the Civil Code provides:

"(1) An employer may terminate the contract and stop the work at any time before the completion of the works, provided that he compensates the contractor for all expenses he has incurred, for the work that he has done and the profit that he would have made if he had completed the work.

(2) The Court may, however, reduce the compensation due to the contractor for loss of profit if the circumstances justify such reduction. In particular, the court shall deduct from such compensation any savings realized by the contractor as a result of the rescission of the contract by the employer and any profit which the contractor could have made by employing his time otherwise."

This provision is unusual in that it expressly allows for termination at the employer's convenience. It is more usual to see a civil code that seeks to limit the ability of a party to escape from a contract. Such a provision is to be found in the UAE Civil Code which expressly forbids a party to terminate a contract unless by agreement or the termination is authorised by the court (Article 267).

However, even in the UAE the courts have adopted a pragmatic approach and in one case it was found to be "judicially established" that the employer may terminate for any reason as long as the contractor is compensated for the loss of profit and other losses. The reasoning is that construction projects are long and circumstances may change such that the project is no longer feasible.

In England the courts have recently considered a termination clause which did not provide for any compensation (see TSG v South Anglia Housing Ltd). Further, the situation was one where, following termination, the project was going to be given to a new contractor. The facts were that the contract was a maintenance contract which the Housing Association was required by statute to have in place.

The court simply decided that the parties had freely negotiated the terms of the contract and the court applied those terms:

"I do not consider that there was as such an implied term of good faith in the Contract. The parties had gone as far as they wanted in expressing terms in Clause 1.1 about how they were to work together in a spirit of 'trust fairness and mutual co-operation' and to act reasonably. Even if there was some implied term of good faith, it would not and could not circumscribe or restrict what the parties had expressly agreed in Clause 13.3, which was in effect that either of them for no, good or bad reason could terminate at any time before the term of four years was completed. That is the risk that each voluntarily undertook when it entered into the Contract, even though, doubtless, initially each may have thought, hoped and assumed that the Contract would run its full term..."

The court was not in the least concerned about SAH's motives or the fact that the contract had to be given to someone else It is doubly interesting as a common law case because it is well established that an employer cannot omit all the rest of the work in order to give it to another contractor per Amec Building Ltd v Cadmus Investment Co Ltd (1996) 51 ConLR 105.

However, it may be that one of the unique aspects of the TSG case was that the clause allowed either party to terminate for convenience and so either party could escape from an onerous contract. The FIDIC Red Book allows the employer to terminate for convenience provided the employer is abandoning the project and the contractor is compensated for costs incurred. However, it does not provide the contractor with a right to loss of profit. In this aspect the clause seems to be out of step with most of the world. Therefore whether the termination will be legal will depend wholly on the jurisdiction of the country you are in.

International Quarterly is produced quartely by Fenwick Elliott LLP, the leading specialist construction law firm in the UK, working with clients in the building, engineering and energy sectors throughout the world.

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.

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Peter Collie
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