THE TERMINATOR HIDDEN IN CONSTRUCTION CONTRACTS

In the Strongbuild case, administrators were appointed and lending facilities withdrawn after Strongbuild’s $40 million south-west Sydney construction contract was terminated without cause.

Most cancellation rights in construction contracts only arise when triggered by certain events or actions (generally known as ‘termination for cause’). Such rights usually arise from breaches of contract or insolvency situations. However, ‘termination for convenience’ clauses are becoming more common. Such clauses entitle a party, usually the Principal, to terminate at will.

“Most cancellation rights in construction contracts only arise when triggered by certain events or actions (generally known as ‘termination for cause’). Such rights usually arise from breaches of contract or insolvency situations. However, ‘termination for convenience’ clauses are becoming more common. Such clauses entitle a party, usually the Principal, to terminate at will.”

PrefabNZ / Kensington Swan.

Termination for convenience’ is common in some overseas markets and standard forms but is becoming a more regular feature in special conditions of New Zealand construction contracts. There is no standard condition in either NZS 3910 nor the NZIA Standard Construction Contract which allows a party to terminate at will, and there is no right to do so either under the Construction Contracts Act 2003 or at common law.

An example of a common ‘termination for convenience’ clause in construction contracts can be found in the International Federation of Consulting Engineers (FIDIC) standard construction contract (Red Book) and design and construction contract (Yellow Book) general conditions. The FIDIC clause provides:

15.5 Termination for Employer’s Convenience

The Employer shall be entitled to terminate the Contract at any time for the Employer’s convenience, by giving a Notice of such termination to the Contractor…

Exert from FIDIC Conditions of Contract for Construction (Red Book) 2017

There is also a ‘termination for convenience’ clause in the standard Contract for Consultancy Services (CCCS) which provides for termination for convenience and also allows recovery of actual and reasonable costs. CCCS is one of the most frequently used standard form consultancy agreements in New Zealand.

‘Termination for convenience’ clauses are often inserted in projects where there is significant political uncertainty, funding, and/or project planning risk.

Below are some matters for contractors and consultants to consider before drafting or signing down to clauses providing ‘termination for convenience’:

• Ensure that you are clear on the financial consequences of the termination. The contract should provide an appropriate calculation method for determining what establishment, demobilisation costs and margin are appropriate and fair in particular on the innocent party. Clauses often provide for costs incurred up to the date of termination plus demobilization costs, but not all clauses allow for lost profit. Recent case law from Singapore has tested the issue of whether a contractor could claim the lost profit on uncompleted work given the opportunity cost to the contractor was lost, but the Court considered that disallowing recovery of lost profits for uncompleted work is the approach unless the contract expressly provides otherwise.
• Consider whether the termination right is tempered by other contractual provisions. In some instances there are express clauses providing for overriding obligations of good faith or reasonableness which might limit a party’s right to exercise a ‘termination for convenience’. By way of example, in the UK, the NEC contract core clauses start with an obligation on parties to act “in a spirit of mutual trust and co-operation”. Some commentators argue that this may prohibit a principal attempting to terminate so that they can award the works to another party. However, this has not been tested by the courts.
• Consider the broader implications of such a clause on the contract as a whole. There has been case law where the mere existence of a ‘termination for convenience’ clause has been considered relevant for determining what the contractor was entitled to. Even in cases where the principal terminated for cause the courts have determined that the fact that the principal could have terminated for convenience disallowed recovery of lost profits to which the contractor might otherwise have been entitled.

Depending on how the clause is drafted, termination for convenience clauses do what they say – they provide a party with the right to end a contract without requiring there to be a specific triggering event. If a termination for convenience clause is to be incorporated into your contract, make sure you understand how the clause operates, how it affects you and importantly what compensation you can recover.

“Depending on how the clause is drafted, termination for convenience clauses do what they say – they provide a party with the right to end a contract without requiring there to be a specific triggering event. If a termination for convenience clause is to be incorporated into your contract, make sure you understand how the clause operates, how it affects you and importantly what compensation you can recover.”

PrefabNZ / Kensington Swan.

This article has been prepared by PrefabNZ (prefabnz.com) in partnership with Joe Bergin (solicitor) and Paul Buetow (partner) from Kensington Swan’s specialist construction and major projects legal team. For specific advice on this or any other construction legal queries, contact an appropriate legal firm in your area.■