Construction Advisor Newsletter, July 2011
Whether you are the party terminating a contract for convenience or the party being terminated for the convenience of another, it is essential that you understand the appropriate uses and limitations of the clause. The termination for convenience clause developed during the Civil War as a tool to allow the federal government to terminate contracts when the changing conditions of war affected procurement needs. The clause expanded through the years, but use of the clause is subject to very clear limitations. Exceeding those limitations could expose the terminating party to substantial unanticipated damages.
A termination for convenience clause is legitimately used where the subject matter of the contract is no longer needed. For example, where a property owner contracts for labor or materials to improve a property that is under contract, the contract owner would no longer need the labor or materials in the event that the contract falls through and the property is not purchased. Termination of labor and materials contracts in this situation would be a legitimate use of the clause.
The improper use of a termination for convenience clause, however, is where the contracting party simply gets a better deal for the labor or materials after the contract is signed. Terminating a contract for convenience to get a better price is not a legitimate use of a termination for convenience clause. As the Courts have appropriately recognized, if parties were free to terminate contracts for any reason whatsoever and more specifically because the party got a better deal, then contracts would be meaningless. The Maryland Court of Appeals has gone so far as to define termination for convenience due to obtaining a better price as a bad faith breach of contract.
Knowing your rights and responsibilities is essential. If you have been terminated for convenience, you may still have a claim for breach of contract, and if you are contemplating terminating another party for your convenience, make sure the termination complies with applicable law.