CHAPTER 23
Termination for
Convenience

Termination for convenience allows one or both parties the right to terminate a contract in whole or in part at their discretion without being liable for damages associated with breach of contract. A contract often contains language giving only buyer the right to terminate for convenience; a condition that eliminates reciprocity. A termination for convenience provision will generally allow for the recovery of incurred costs and profit on completed work, but not for anticipatory profits. Preparation of the settlement proposal is normally an allowed expense in a termination claim.

Termination for convenience language originated with U.S. Government contracts; today, many commercial contractors are including termination for convenience language in their contracts as well. If the contract does not include such language, any attempt to terminate the contract for convenience is considered by buyer to be a breach of contract. The following example typifies a standard termination for convenience clause:

Buyer reserves the right to terminate this contract, or any part hereof, for buyer’s sole convenience. In the event of such termination, seller shall immediately cease all work hereunder and shall immediately cause any and all of its suppliers and subcontractors to cease work. In case of termination for convenience by buyer of all or any part of this subcontract, seller may submit a claim to buyer within sixty days after the effective date of termination for work completed up to and including the date of buyer’s notification of termination. In no event shall buyer be obligated to pay seller any amount in excess of the contract price. The provision of this article shall not limit or affect buyer’s right to cancel this contract for default.

RISK

Buyer may terminate the contract for convenience at their discretion, with or without cause. Seller risks losing lost revenue, fee, and prospective future business.

RESPONSE

Mitigation techniques include the following:

1) Try to omit this provision in its entirety.

2) If unsuccessful, request that buyer consider a termination provision whereby buyer may terminate their contract with seller for convenience provided that buyer’s customer has terminated the same effort in their contract.

3) If the above fails, try to negotiate a reciprocal agreement whereby both buyer and seller may terminate for convenience. A grace period such as thirty days from notice prior to the termination date may be considered, allowing seller time to evaluate their business strategy (e.g., transfer employees to other projects).

4) A final consideration is to ensure that buyer may not terminate seller for the following reasons:

a) Buyer found a less expensive supplier,

b) Buyer located a technically different product that they prefer to use, or

c) Buyer may personally want to furnish the product or services. Buyers may practice the latter scenario when they are capable of performing the work in-house and are experiencing a reduction in their workforce.

If seller agrees to accept a termination for convenience provision, seller should pay close attention to the following issues:

1) Termination Claims: Address termination claims during contract negotiations. Permitted claims should include reimbursement for all reasonable, allowable, and allocable costs connected with seller’s performance, as well as those costs associated with implementation of the termination claim. Try to negotiate in all reasonable profits that may have otherwise been granted had the contract gone full term. At a minimum, try negotiating receipt of all reasonable profits accrued through the date of termination. Insist that any preparatory work on the termination claim be an allowable cost during settlement.

2) Conditions: Ensure that the conditions applicable to the termination for convenience language are clearly stated in the contract. For example, cite that termination for convenience will be in accordance with the dictates of the applicable FAR. Seller may also consider drafting language similar to the FAR rather than citing the FAR directly.

3) Ceilings: Ensure that any termination for convenience provision does not contain a cap on buyer’s liability.