Carry on at my convenience: Termination for convenience clauses

Termination for convenience clauses empower parties, usually employers, to end construction contracts for any reason. They are useful in speculative developments where adverse market movements may make employers want to pull the plug at any time.

Analogously, variations (or omissions) clauses often entitle employers to omit as much work as they like, when they like (when, say, 'value engineering').

But can these clauses entitle employers to dump contractors or withdraw part of the works, so that they can engage others to do the same work, perhaps more cheaply? Until recently the leading authority was a fifty-year-old Australian case. However, in July this year, within the space of five days, two Technology and Construction Court judgments arrived.

Whilst the cases turn on their particular contracts, some general points emerge from the court's treatment of termination for convenience and omissions clauses:

• The harsher the objective, the clearer the words that should be used.
• The courts question transfers of work from one contractor to another.
• Provision for compensation can be important to the court's approach.

There is no principle of law that says that in no circumstances may work be omitted and given to others without incurring liability to the original contractor.

It is worth looking in some detail at the three cases as well as the so-called 'doctrine of unconscionability', which it was suggested in our second case (Abbey Developments) might be applied to termination for convenience and omissions clauses.

Carr v J A Berriman Pty. Limited

The Australian case is Carr v J A Berriman Pty. Limited (1953). A building contract provided that the architect might 'in his absolute discretion' instruct the omission of work. Under the contract, the employer, Carr, was to provide the contractor, Berriman, with structural steel which was to be fabricated by Berriman to engineer's and architect's details. The architect informed Berriman that Carr had made his own arrangements for the structural steel to be supplied and fabricated and that the fabrication work should be omitted from the contract.

Berriman claimed that Carr had breached the contract by requiring the omission of the steel fabrication from the contract. The High Court of Australia agreed. The Court held that whilst the omissions clause empowered the architect to omit work, it did not empower the architect to omit work so that another could carry it out. The Court said that:

'a power in the architect to hand over at will any part of the contract to another contractor would be a most unreasonable power, which very clear words would be required to confer'.

The Court went on to say that even if, for the sake of argument, the power given to the architect by the omissions clause was wider than the Court considered it was, the clause did not empower the architect to give the instruction that he gave. By the time the architect purported to instruct the omission of the fabrication work, Berriman had, to the architect's knowledge, engaged a steel fabricator. The Court held that after Berriman informed the architect of this, under the contract, Carr became obliged to supply steel to Berriman's steel fabricator. Thus, when Carr told the architect that he had made alternative arrangements for the supply and fabrication of the steel and asked the architect to instruct the omission of the steel fabrication from the contract, Carr effectively informed the architect that he intended to breach the contract.

The architect's instruction to omit the steel fabrication, merely communicated to Berriman a breach of contract by Carr. It was not an instruction envisaged by the omissions clause because the architect had never exercised (and did not claim to have exercised) any discretion, as required by the omissions clause.

Consequently, Carr had breached the contract by requiring the omission of the steel fabrication from the contract and the architect had not been empowered to instruct its omission.

Abbey Developments Ltd v PP Brickwork Ltd

In Abbey Developments Ltd v PP Brickwork Ltd (4 July 2003) ADL engaged PPB as a labour-only sub-contractor on a housing estate development. Having repeatedly complained about PPB's progress, ADL told PPB to limit its works to the houses then under construction. ADL said that after the completion of those works, PPB's contract would be determined, another contractor employed and PPB pursued for extra completion costs. ADL sought a court declaration that it had been entitled to act as it had.

The sub-contract suggested that ADL could (without terminating the contract): (1) vary the quantity of work and (2) renegotiate rates or suspend the works and retender. Critically, ADL relied solely upon clause (1) (effectively an omissions clause) and not clause (2) (effectively a termination for convenience clause), apparently because ADL had not suspended the works and retendered.

His Honour Judge LLoyd QC said that 'reasonably clear words' are needed for a termination for convenience or omissions clause to entitle an employer to transfer work from a contractor (who otherwise has a 'contractual right to the opportunity to complete the works') to another.

The Judge held that whilst 'there is no principle of law that says that in no circumstances may work be omitted and given to others without incurring liability to the original contractor', termination for convenience clauses that do not provide for the contractor to be compensated when they are exercised (for example, for loss of profit), 'risk being treated as leonine and unenforceable as unconscionable.' Equally, it seems that omissions clauses might not be enforced if they do not provide for compensation and only provide for a reduction in the contract sum to the extent of the omitted work. Unfortunately, the Judge did not expand upon when clauses would be unconscionable.

The Judge went on to say that the purpose of the contract was critical, stating: 'If, with the benefit of hindsight, it turns out that the variation was not ordered for a purpose for which the power to vary was intended then there will be a breach of contract'. The same might be said of termination for convenience clauses. However, proverbially, the purpose of a contract can be as difficult to discern as the state of someone's digestion.

The Judge refused ADL's application. Clause (1) lacked 'the necessary clarity of expression' to entitle ADL to act as it did. It only conferred a right to omit work that ADL considered was no longer required for the project.

However, the Judge suggested (without expressing a final view) that clause (2) might have entitled ADL to act as it did (had ADL suspended the works and retendered), without apparently being unconscionable.

This interpretation was commercially justified because the contract was labour-only, 'housing building is speculative' and the parties might be taken as sharing the risks.

Hadley Design Associates Ltd v Westminster London Borough Council

In Hadley Design Associates Ltd v Westminster London Borough Council (9 July 2003), WLBC engaged HDA as consultants in relation to certain blocks of flats. WLBC washed its hands of HDA, relying upon a one-month notice of termination clause that did not require reasons for termination. This was apparently done to 'market test the current level of professional fees' - i.e. seek a cheaper consultant!

HDA claimed that WLBC had promised it would only terminate if HDA defaulted or WLBC ran out of funds and that the termination clause should be similarly limited. HDA, alternatively, said that WLBC could only terminate in good faith or when it was fair or reasonable to do so. HDA also claimed that it had contracted on WLBC's written standard terms of business and the termination clause was unreasonable and, therefore, unenforceable under the Unfair Contract Terms Act 1977.

His Honour Judge Seymour QC rejected all these arguments and upheld WLBC's termination of HDA's employment. Curiously, Abbey Developments was not mentioned. Also, although the termination clause did not provide for compensation, it was not suggested that the clause was unconscionable.

An unconscionable diversion

Given Judge LLoyd QC's suggestion that termination for convenience clauses (and seemingly omissions clauses) that do not provide for the contractor to be compensated when they are exercised, 'risk being treated as leonine and unenforceable as unconscionable', it is worth looking at when the courts have intervened in unconscionable contracts.

There are a number of well-established areas of the law where relief is available against unconscionable contracts. These include when a liquidated damages provision is unenforceable as a penalty.

However, it is unclear to what extent there is any general principle of English law entitling the courts to interfere with a freely concluded contract on the ground that the contract (or part of it) is an unconscionable bargain. One leading textbook on contract law (Chitty on Contracts), suggests that to the extent that there is a 'doctrine of unconscionability' it is limited as follows:

• The contract must be oppressive to the complainant. In recent times the courts have not intervened unless the transaction has been 'not merely hard or improvident, but overreaching and oppressive' so that its terms together with the conduct of the stronger party 'shock the conscience of the court' (Alec Lobb Limited v Total Oil (Great Britain) Limited). This is a high threshold for a complainant to get over.
• The complainant suffered from certain types of bargaining weakness. It is necessary that 'one party has been at a serious disadvantage to the other, whether through poverty, or ignorance, or lack of advice, or otherwise, so that circumstances existed of which unfair advantage could be taken' [emphasis added] (Alec Lobb Limited v Total Oil (Great Britain) Limited).
• The other party acted unconscionably in knowingly taking advantage of the complainant. Even if the other party did so, it is likely to be hard to prove.

Generally the courts do not intervene and strike down contracts as unconscionable. There are very few cases in which unconscionability has even been raised by one party, let alone successfully invoked. Most cases tend to involve consumers. It is very unlikely indeed that a court would find unconscionability where both parties are commercial entities and negotiated the contract freely at arm's length.

Chitty states that it is 'doubtful whether the doctrine [of unconscionability] would be applied as it has been in the United States to a single harsh term such as a limitation of liability clause, unless the contract was oppressive overall'. Thus, it is doubtful whether a termination for convenience clause or omissions clause alone would be rendered unenforceable because it was 'unconscionable'; the contract as a whole would be considered to see if it was 'unconscionable'.

Usually the remedy for 'unconscionable' contracts is to set them aside. However, if a contract containing a termination for convenience clause were found to be unenforceable because it was unconscionable, at first blush this would give the party exercising the termination for convenience clause precisely what it was seeking.

In view of the limitations of the doctrine of unconscionability, it is difficult to see that there is anything more than a miniscule risk of a termination for convenience clause or omissions clause being found to be 'unconscionable' and unenforceable, as suggested in Abbey Developments.

Conclusion

The courts treat with some suspicion termination for convenience clauses and omissions clauses when they are used to transfer work from one contractor to another.

It is particularly difficult to use termination for convenience and omissions clauses to transfer work from one contractor to another where:

• The original contractor has engaged a sub-contractor to carry out that work or a supplier to supply materials for the work.
• There is no provision for compensation.

On the other hand, the courts seem less questioning of termination for convenience and omissions clauses:

• In labour-only contracts (as in Abbey Developments) and consultants' appointments (as in HDA)
• Where the parties are engaged in speculative work or the project involves risk sharing (again, as in Abbey Developments).

Employers will no doubt continue to desire the facility of termination for convenience and omissions clauses. They will need to use clear words if they want to have the option to transfer work from the originally engaged contractor to another.

Contractors should agree to such clauses with open eyes: your expected profits may be flushed down the pan at the employer's convenience.

For further information please contact Rupert Choat at [email protected]