#30: Termination for Cause or Convenience
The concept of termination of a contract for breach (usually referred to as “cause”) is as old as contract law. If one party materially breaches a contract, the other party is excused from further performance and can end the contract without liability. “Materiality” is the key here. “Only a breach that is sufficiently material and important to justify ending the whole transaction is a total breach that discharges the injured party's duties.” Fitz v. Coutinho, 136 N.H. 721, 725 (1993).
From the contractor’s perspective, a failure to get paid always feels like a “material” breach. But that is not necessarily the case. The Fitz case just mentioned held that “[w]hether a delay in payments is a material breach is a question for the trier of fact to determine from the facts and circumstances of the case,” and affirmed a trial court finding that a failure to make the weekly payments prescribed by the parties’ contract did not qualify as “material.” Conversely, from the owner’s perspective, a contractor’s poor workmanship feels like a “material” breach. But that is not necessarily the case either. McNeal v. Lebel, 157 N.H. 458, 465 (2008) (“so long as any flaws in Lebel's performance did not amount to a material breach . . . the plaintiffs were contractually obligated to allow him to finish the job.”).
Because the materiality of a breach is often debatable, contracting parties may prefer to specify in their written agreement the defaults that will justify termination. For example, the AIA form A201 (2007) General Conditions of the Contract for Construction allows a contractor to suspend work on 7 days notice if not paid within 7 days after payment falls due (§9.7), and terminate the contract if the work remains suspended for an additional 30 days on account of that nonpayment (§14.1.1). The Owner may terminate the contract if the contractor fails to supply enough workers or materials, fails to pay subs and suppliers, or repeatedly disregards applicable laws or regulations (§14.2.1).
Invoking specified grounds for termination is not without risk: if a court ultimately finds termination not to have been justified, the party who was wrongfully terminated can sue for breach and recover damages. This risk is greatest for owners, whose grounds for termination are typically less clear-cut than a contractor’s termination for nonpayment. Owners can lessen this risk by inserting a clause in their contracts that any purported termination for cause, if ultimately proved to be wrongful, shall automatically be deemed to constitute a termination for convenience. This is a standard provision in government contracts. See 48 C.F.R. 52.249-8(g) (“If, after termination, it is determined that the Contractor was not in default, or that the default was excusable, the rights and obligations of the parties shall be the same as if the termination had been issued for the convenience of the Government.”)
A termination for convenience clause allows termination of a contract without cause, and specifies the compensation to which the contractor (or subcontractor) will then be entitled. For example, the AIA form A201 (2007) provides in §14.4.3 that upon termination for the owner’s convenience, “the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.” Some contracts have a less charitable measure of recovery for convenience terminations, limiting the terminated party to payment for work performed and denying any lost profits on work not performed. In such a case, automatic conversion of a botched termination for cause into a termination for convenience not only insulates the terminating party from breach, but is a real money saver.
When contractors agree with owners (or subcontractors agree with contractors) to such reduced compensation upon termination for convenience, a peculiar and perhaps unintended result is that the owner or contractor can continue to shop the contractor’s or subcontractor’s price throughout the project, and if it finds someone willing to complete the work for less money, it can simply terminate the higher-priced contract and make a change. Implied obligations of good faith and fair dealing are theoretical restraints against such a practice. So are transaction costs. But it can happen.