BY BRENT CARPENTER
This article originally appeared in the August 22, 2016, edition of the Daily Journal of Commerce
Termination for convenience is commonplace in the construction industry. It has long been an option for government contracting agencies for terminating a contract without cause and at will, with the Federal Acquisition Rules and the Oregon Public Contracting statutes both providing guidance in how the contracting parties may settle a contract terminated for convenience. Termination for convenience clauses also appear in private construction contracts, such as the form contracts provided by the American Institute of Architects and the Engineers’ Joint Contract Documents Committee. The decision to terminate for convenience has real impacts on the rights of both the owner and the contractor. This is true as well in the case where the prime/general contractor terminates a subcontractor for convenience.
One impact is on the amount a contractor may recover from an owner. Once terminated for convenience, contractors are limited in their ability to recover from the owner their costs incurred in performing the work, their costs incurred in settling the termination, and their profits on the work performed. Termination for convenience precludes recovery of anticipated profits. The burden is on the contractor to prove costs and profit with sufficient certainty so that a determination of the amounts will be more than mere speculation. The test of whether a contractor’s proof is sufficient is whether the submitted evidence (e.g., invoices, timecards) alone would reasonably allow a court to find for the contractor. Mere testimony by the contractor as to its costs and profit will not be sufficient in court.
While a contractor is not required to calculate its costs to a mathematical certainty, it must furnish a reasonable basis for computation through the submission of documentary support for its claimed costs. The preferred method for proving costs is through the submission of actual cost data. For example, for claims including costs for payroll, the contractor must submit time sheets recording each employee’s activities in order to prove the claim with sufficient certainty.
In other words, claims for costs and profit on termination for convenience hinge on the sufficiency of their supporting documentation. If it is not obvious from the documentation how much is owed, then the contractor’s proof is probably not sufficient. The owner has no obligation to disprove amounts (i.e., the burden of proof does not shift to the owner) unless the contractor has proven its costs with sufficient certainty. While termination for convenience is not something a contractor can necessarily predict, a contractor can be prepared for it—and consequently be in a better position to recover all of its costs—if it keeps thorough records of those costs. Obviously, good recordkeeping has other benefits and is also just good business practice.
Another impact of termination for convenience—at least in Oregon and probably in other jurisdictions—is that an owner will be precluded from recovering from the terminated contractor the owner’s costs incurred in repairing the contractor’s deficient work unless the owner gives the contractor notice and an opportunity to cure the deficient work. These costs would be recoverable if the owner terminates for default, but the Oregon Court of Appeals has held that a party may not terminate a contract for convenience and then pursue the terminated party for repair costs without first providing that party notice and an opportunity to cure. For federal government contracts, the case law on this issue is unsettled and therefore there may be an opportunity for the government to seek to offset amounts owed to a contractor upon termination for convenience with the government’s costs incurred in repairing deficient work, but in Oregon, an owner clearly may not.
Therefore, prior to termination for convenience, the owner should thoroughly inspect the terminated contractor’s work for possible deficiency. If a deficiency is found, the owner must give the terminated contractor notice and an opportunity to cure in order to offset the repair costs against amounts owed to the terminated contractor. Obviously, the best way to avoid this scenario is for the owner to terminate the contractor for default—provided that a sufficient basis for such termination is present—which gives an owner the right to recover such costs. However, the owner should also be aware that a termination for default without a sufficient basis may later be determined by a court to have been wrongful, in which case it is converted to a termination for convenience. Therefore, it is key that an owner inspects the contractor’s work and thoroughly analyzes its termination options prior to termination and give notice and an opportunity to cure if any of the contractor’s work is deficient.