Possible Legal Issues of

Unilaterally Contract Termination for Convenience

Seng Hansen
Master Student of Construction Contract Management UTM
Email: Hansen_zinck@yahoo.co.id

Introduction
The Malaysian Contract Act 1950 section 2(h) has defined a contract as an
agreement enforceable by law. In construction industry, contract has
become a very strong and powerful tool used by the parties involved in the
contract to ensure and protect their rights and interests. One of the main
functions of a contract is to set out the parties’ rights, duties and liabilities.
Any breach of parties’ duties and liabilities will entitle the innocent party to
terminate the contract.
Under Contract Act 1950, there are four ways that entitling parties to
terminate the contract, i.e. by performance (section 38-68), by agreement
(section 63-64), by frustration (section 57), and by breach of warranty or
conditions of the contract (section 40). However nowadays appear what have
been called as termination for convenience. It is actually intended to allow
parties to end their contract at any time for any reason. It was first
introduced during the World War II by the United States government. In the
US case of Torncello v United States 681 F.2d 756, 764 (Ct. Cl. 1982),
there was a statement says, “The concept that the government may, under
certain circumstances, terminate a contract and settle with the contractor for
the part performed dates from the winding down of military procurement after
the Civil War. It originated in the reasonable recognition that continuing with
wartime contracts after the war was over clearly was against the public
interest. Where the circumstances of the contract had changed so
dramatically, the government had to have the power to halt the contractor’s
performance and settle.”

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The given case is illustrated below.

Century Dev Decade Cont

(Employer) 1 (Contractor)

Century Dev engaged Clause xx.

Decade Cont to carry
out a 30-storey
apartment project
Termination for
2 There is a clause
Convenience
states the right of the
employer to terminate
for convenience

During construction,
3 the economic
condition is sky-
rocketing

4 The employer want to

exercise the
‘Termination for
30 storey apartment convenience’ clause

Termination for Convenience in a Nutshell

Termination for convenience is first developed in United States. However,
due to the more globalization and thanks to the more complexity of
construction industry, this type of termination has been introduced widely
in other jurisdictions. Basically, the common law doctrine of freedom to
contract has also contributed to the use of this termination. It means that
as long as both parties use their freedom to contract to confer a contractual
right upon one or both parties to terminate the contract ‘without cause’ or
‘no-fault’, the contract is enforceable. This kind of right is considered as an
exceptional right, which means that it must be embodied in the contract.
Under civil law, termination for convenience is commonly recognized.
However if the parties use this right, they can only do so under the
constraints imposed by the law. For example, if the employer gives notice of
his intention to terminate the contract for convenience, the contractor shall
be entitled to the payment of the contract price with deduction of the saved
expenditure. While under common law, the employer may face claims which
do not result directly from the contract, but occur in connection with the
contract. Normally, a termination for convenience in common law

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jurisdictions will oblige the terminating party (usually the employer) to pay
the terminated contractor for the work done and perhaps some costs
associated with the contractor’s need to terminate his subcontractors or
suppliers.
Reasons which fall under the scope of termination for convenience are
normally events out of the employer’s control. One of the main legal basis
and issue in executing termination for convenience is to what extent the
employer can be deemed to execute it in a good faith. More explanation
about this issue will be presented below.

Procedure on Unilaterally Contract Termination for Convenience

In Malaysia, we can find the termination for convenience clause in some of
widely used standard forms of contract. CIDB and PWD clearly include this
clause, while in PAM we cannot find it. FIDIC as an international standard
form of contract also has this clause. Below are some procedures of
termination for convenience as have been mentioned in some standard
forms of contract.
CIDB 2000 Clause 46 TERMINATION WITHOUT DEFAULT
46.1 Right of the Employer to Terminate
The Employer may at any time, give to the Contractor 30-Day notice of
termination of the Contract. Upon the expiry of 30 Days from the receipt of
such notice the Contract shall be terminated.
46.2 Effects of Termination
In the event of termination under Clause 46.1 the provisions of Clause 45.3
shall apply.
PWD Form 203A (Rev. 2007) Clause 52.0 TERMINATION ON NATIONAL
INTEREST
52.1 Termination
(a) Notwithstanding any provision of this Contract, the Government may
terminate this Contract by giving not less than thirty (30) days written
notice to that effect to the Contractor (without any obligation to give any
reason thereof) if the Government considers that such termination is
necessary for national interest, national policy or national security.

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(b) For the purpose of this clause, what constitutes “national interest”,
“national policy” and “national security”, shall be solely made and
determined by the Government and such determination shall for all intent
and purposes be final and conclusive and shall not be open to any challenge
whatsoever.
FIDIC Red Book Clause 15.5 EMPLOYER’S ENTITLEMENT TO
TERMINATE
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.
After this termination, the Contractor shall proceed in accordance with Sub-
Clause 16.3 [Cessation of Work and Removal of Contractor’s Equipment]
and shall be paid in accordance with Sub-Clause 19.6 [Optional
Termination, Payment and Release].
From the above clauses, we may conclude that the right to terminate for
convenience shall be exercised by the employer by giving a written notice to
the contractor within specified time. The notice must be clear and
unambiguous in its terms. In Avofos Shipping Co SA v Pagnan [1983] 1
WLR 195, it was held that these procedural normally will amounted as
condition precedent that shall be strictly complied with, before the effectively
exercise the employer’s right to terminate for convenience, otherwise the
notice will be of no effect.

Legal Issues on Termination for Convenience

Since termination for convenience is a very unusual type of termination in
which both parties actually do not breach any contract conditions and
warranties, there are some legal issues regarding the validity of this
termination. Below are some possible legal issues regarding this matter.
1. Is the termination for convenience a valid termination?

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 2. What does good faith mean?
3. What are the consequences of termination for convenience?
4. Can the contractor claim for loss of profits? or Is the contractor
entitled to compensation?
5. What if the employer finds defective works after the exercise of
termination for convenience clause? Can he recover from the
contractor the cost of remedying the defective work discovered after a
“termination for convenience?

Is the termination for convenience a valid termination?

Termination for convenience is a unilaterally termination which gives power
to one or both parties (but normally only the employer) to end the contract
at anytime and without reason. Reasons for such termination may include
supervening financial problem of the employer, changing circumstances or
simply the decision not to proceed with the project any more. Under
common law, its clause is considered as an exceptional clause because it
defies the basic principle of mutuality of contract. It is very difficult to see
whether this kind of termination is a valid contract or not due to
consideration inadequacy. The contractor may be challenged the employer
for wrongful termination due to consideration inadequacy. However in today
interpretation, termination for convenience is considered to have
consideration. In the case of Hadley Design Associates v The Lord Mayor
and Citizens of the City of Westminster [2003] EWHC 1617 (TCC), the
court has confirmed the validity of termination for convenience clauses.
Westminster appointed HDA as lead consultant on a construction project.
Westminster then terminated its contract with HDA. It relied on a one-
month notice of termination clause that did not require reasons for
termination. Westminster’s motivation was to “market test the current level
of professional fees”, i.e. to appoint a cheaper consultant. HDA had been
appointed in 1987 and by 1996, when Westminster served the termination
notice, compulsory competitive tendering had become the norm and it
wished to test the market for surveying services.
HDA claimed:

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 • wrongful termination of contract, i.e. Westminster had promised HDA
that it would terminate the contract only if HDA defaulted or if
Westminster ran out of money and, either there was a collateral
contract to this effect, or, alternatively, Westminster had made these
representations to induce HDA to enter into the contract and HDA
had relied on them;
• the contract included implied terms and/or terms for business
efficacy which meant that Westminster could only terminate in good
faith, or when it was fair or reasonable to do so; and
• HDA had contracted on Westminster’s standard terms, and the
termination clause was unreasonable and therefore unenforceable.
The case of Abbey Developments v PP Brickwork (2003) was not referred
to in this case and, surprisingly, it was not suggested that the clause was
unconscionable, even though it did not provide for compensation. There
appears to be no obvious reason for the difference in these two cases, other
than their particular facts. The judge rejected all of HDA’s arguments and
found in favour of Westminster.
In the case of Tenth Circuit v. Eastern District of Pennsylvania EDO
Corp., 911 F.2d and T.I Construction Co. Inc. v. Kiewit E. Co. Civ. A.
No. 912638, 1992 WL 382306 have held that the ability to terminate for
convenience does not constitute lack of consideration where the contract
requires the corporation to notify the subcontractor of the termination and
pay damages after the termination.

What does good faith mean?

Termination for convenience basically has nothing to do with the
contractor’s performance, which is the subject of the termination for fault
(or default) clause. Therefore, since it does not constitute a breach by the
contractor, the employer can only execute this clause due to good faith. The
concept of good faith can be defined as an obligation to act honestly,
reasonably, and not capriciously. It has also been said that good faith
precludes acting with ulterior motives and acting purely to injure another

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party’s interest. Although it is a difficult concept to define, it has been
considered applicable to termination clauses.
The case in Court of Appeal of New South Wales, Australia between Renard
Construction v Minister for Public Works (1992) shows difficulties in
defining good faith termination. The fact was that the contractor in default
for delays and the employer then served a show cause notice saying if the
breach not remedied within the time stated in the notice, the employer could
terminate the contract. The contractor however did not cure the breach in
time and therefore the employer terminated the contract. It was of fact that
the employer had also contributed to the delays. The court found that the
decision to terminate was based on unfairly misleading, incomplete and
prejudicial information. The court found that the employer had not acted in
good faith, but for different reasons. However, Priestley JA found that there
was an implied term to act in good faith and reasonably. Meagher JA found
that as a matter of construction of the contract the clause required the
employer to act on accurate information.
In Kellogg Brown & Root v Australian Aerospace (2007), there was a
termination for convenience clause in the contract. After the dispute
resolution notice was served, it was followed by termination notice. The
court found that there was a serious question to be tried as to the existence
of an implied term of good faith and whether it had been breached.
In Malaysia, the legal position of this doctrine can be seen from the case of
Bains Hardings Sdn Bhd v Arab-Malaysian Merchant Bank Bhd &
Others [1996] 1 MLJ 425, where Talalla J observed that where a
termination for convenience clause in a contract is exercised not for
convenience but for the purpose of employing another subcontractor so that
the other subcontractor can enjoy whatever profits remain in the contract,
then such use of the clause amounts to the employer acting in bad faith and
in an unconscionable manner.

What are the consequences of termination for convenience?

Normally, the exercise of termination for convenience gives the right of the
contractor to be paid for the work done. The other consequences such as the

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contractor shall stops the works and leave the site, and the employer shall
repossess the site and stipulate the mode of payment and may be financial
compensation are made after the termination. If the termination for
convenience was exercised by the employer, we can refer the effect of
termination without contractor’s default (see CIDB Clause 46.2, PWD 203A
Clause 52.2 and FIDIC 1999 Red Book Clause 15.5 and 19.6). In FIDIC the
consequences of an employer termination may be similar, if not identical to,
the consequences of a termination by the contractor for employer default.

Can the contractor claim for loss of profits? or Is the contractor

entitled to compensation?
The typical clauses usually only provide the contractor to be paid for the
cost of performance and profits up to the time of the termination for
convenience, but he usually does not receive any compensation for the
remaining work that he does not perform, meaning no recovery of lost
profits. However, the American Institute of Architects provides the recovery
of lost profits for the remaining work not yet performed by the contractor.
In Malaysia, standard form of contract PWD 2010 mentions the composition
for payment to the contractor after this termination shall be:

the value all work carried out up to the effective date of termination

the amount in respect of any preliminary items so far as the Works or
services comprised therein has been performed and a proper
proportion of any item which partially performed

the cost of materials or goods reasonably ordered for the Works which
have been delivered to the contractor or of which the contractor legally
liable to accept delivery

any reasonable cost of any suitable protection Works

cost for demobilization the contractor’s plan, equipment and sire
facilities

any expenditure other than cost mention above, reasonably incurred
by the contractor directly because the termination
Under CIDB form of contract, payment to the contractor after the
termination without default is basically same with the composition of the

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payments stipulated in the PWD form of contract. While under FIDIC,
generally the contractor may claim for loss of profits or other loss or damage
sustained by the contractor as a result of this termination.
In Chiemgauer Membran v New Millenium Experience Company [2000]1,
the court determined that where the power under such a termination clause
was exercised, and where the express provision of the clause identified the
mode under which loss recovery was to be had, certain issues of causation
were “side-stepped” (except the quantum meruit for the works done), unless
the particular event was inevitably going to affect the execution of the
contract in normal course. Therefore, in the assessment of financial
consequences in termination for convenience, where the contract lays down
what heads of loss can be recovered, the agreement of the parties set out in
the contract is to be respected. The question of financial consequences has
already been resolved by the contract.

What if the employer finds defective works after the exercise of

termination for convenience clause? Can he recover from the
contractor the cost of remedying the defective work discovered after a
“termination for convenience?
Reported decisions addressing the employer’s right to recover for defective
work following a termination for convenience in the absence of specific
contractual language have been inconsistent. In other words, both parties
must realize this and if agree, they must state the contractor’s liability for
defect works even after termination for convenience.
In Layton Construction Co. Inc v Barclays Capital Real Estate Inc., No
2009 CV 606, slip op. (District Court, Eagle County, Colo., Sept 15, 2010),
the court held that where the parties’ contract provided that the contractor’s
warranties and obligations survive termination (not specifically limited to
terminations for cause), the contractor remained liable for corrective costs
following termination for convenience. The court additionally held that the
termination for convenience was not a waiver of any claims for corrective
work which already may have existed prior to the date of termination.
1
In paper by John Tackaberry Qc. 2002. “Termination for Convenience”, page 19-20. Hong Kong.

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However, different decision was given in the case of New York
Shipbuilding Co (1972). The board relied upon earlier decisions denying
direct recovery for costs to correct defective work after a termination for
convenience, rationalizing that a contractor who has been terminated for
convenience did not have prior notice of defective work and therefore did not
have the opportunity to perform its own corrective work. Thus, it would be
unfair to charge the contractor with the employer’s costs to correct any
defects in the contractor’s work after the termination for convenience.
Therefore, it is suggested that the employer who terminates a contractor for
convenience may only recover the cost of correcting defective work if he can
show that the defects resulted from the contractor’s under performance of
its contractual obligations.

Conclusion
Termination for convenience clause is useful to employers undertaking
speculative developments, where market movements may make employers
wish to terminate the contract part way through. Moreover, this clause is
also useful if there are potential problems between the parties and both wish
to go their separate ways. Termination for convenience clause usually
favours employers, therefore the contractors should ensure that they are
aware of the consequences before they agree to sign the contract. Generally,
the termination for convenience clause limits recovery to profits and
expenses for the work done only, with loss of profits in some court decision
was not allowed. If the employers do not have a good reason to exercise the
clause or if the parties cannot agree on the price adjustment, disputes may
arise.
Based on the given case, Century Development can exercise termination for
convenience clause since it has been stated in the contract. However,
Century Development must show that he exercises it in good faith, follow
the procedures, realize the consequences of exercising this termination, and
understand some possible legal issues regarding this matter.

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References
Contracts Act 1950.
FIDIC 1999 Red Book.
PWD 203A.
CIDB 2000.
Peter M. Kutil and Karl Silverberg. Contract Termination Clauses Part II –
Termination for Convenience. Tunnel Business Magazine, Dec 2007.
Frederick Cohen and John S. Wojak Jr. Termination for Convenience of
Construction Contracts. New York Law Journal Volume 245, no 30. ALM
Publication, 15 February 2011.

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