Owner: “You're
FIRED! Please remove all equipment and leave the premises.”
Contractor: “You
can’t do that. We signed a contract and have done everything that has been
asked – we are performing ahead of schedule, under budget, and
the work quality is superb.”
Owner: “Yes, but
another company can do it cheaper and the contract we entered into has a
termination for convenience provision.”
This scenario is a common one in private and public construction in Florida. When building in Florida, you may encounter a contractual provision that allows the owner or general contractor to terminate a contractor’s work “for convenience.” What this means is that, depending on the language of the contract, one or both parties in a construction contract may have the right to terminate the agreement even in the absence of fault or breach by the other party, hence the name “termination for convenience,” or “T4C.” The reason could be that the owner found someone cheaper, that the owner or general contractor is simply not satisfied with a contractor’s work, circumstances changed, such as budget constraints, changes in project or scope, or shifts in business priorities, or for various reasons other than a default or breach of the contract. Understanding termination for convenience is critical for both contractors and project owners, as its financial and legal consequences can be significant.
In Florida, termination for convenience provisions are generally enforceable as long as they are clearly outlined in the construction contract and comply with general principles of contract formation. If a contract contains a termination for convenience clause, Florida courts typically enforce the terms as written, although the party invoking the clause must comply with the contractual notice requirements by providing written notice within the timeframe specified in the contract. In one Florida case, a contractor terminated a subcontractor simply to get a better price from another subcontractor. The original subcontractor argued that the contractor acted in bad faith, breached the implied covenant of good faith and fair dealing, and that without the imposition of good faith limitations, the termination for convenience provision rendered the contract an illusory promise that lacked consideration. The Florida appellate court disagreed, finding the termination for convenience provision enforceable. In fact, the court found that the contractor’s exercise of the termination of convenience provision simply to obtain a better price was not contrary to “the reasonable expectations of the contracting parties.” See Vila & Son Landscaping Corp. v. Posen Const., Inc., 99 So. 3d 564 (Fla. 2d DCA 2012).
Most commonly, the party that is receiving a service is the party that wants to be afforded the contractual right to terminate. In the prime contract, it is the owner that often demands the right to terminate the prime contractor for convenience. And, a general contractor will often want to include a termination for convenience provision in the subcontract with its subcontractor. As a result, the party providing the service that may have no choice but to agree to a termination for convenience provision should be careful to negotiate a termination for convenience provision that provides some protection in the event the right is exercised by the other party. For example, contractors will often negotiate a termination for convenience fee, which is a fee in addition to all costs incurred through the date of the termination of convenience, which may include things such as demobilization costs and other costs that may be associate with an unexpected termination. It is critical that contractors negotiate these items up front given the fact that it is difficult and often impossible to get out of a termination for convenience provision. As the Middle District of Florida acknowledged, such provisions are “difficult to argue around” and have limited plausible exceptions. See Oakes Farms Food and Distributions Services, LLC v. The School District of Lee County, Fla., 2021 WL 2186457, *11 (M.D. Fla. 2021).
If an owner or contractor seeks to exercise a contractual right to termination, the proper steps will often be outlined in the contract. Typically, the owner must provide written notice to the contractor, stating their intent to terminate the contract for convenience. The contract will usually specify the amount of notice that must be given (i.e., 30 days, 60 days, etc.), and how the contractor should proceed with the termination. While the contractor is entitled to payment for work completed up to the point of termination, as well as other costs that may be allowed by the contract, contractors are generally not entitled to anticipated profits or damages beyond the scope of work completed. The result is that contractors are likely to suffer losses for resources committed to the project, such as materials ordered, labor hired, or other investments made that cannot be re-used on future projects. Therefore, it is imperative that a contractor use as much bargaining power as it has to negotiate and clearly specify available reimbursements in the event of a termination for convenience.
Owners should understand the power of having a termination for convenience provision in their toolbox and should ensure that such provision is drafted in a manner that is enforceable. Contrarily, contractors should understand the importance of negotiating the most favorable (or least unfavorable) termination for convenience provision to mitigate their potential risks and ensure fair compensation in the event they are terminated early, through no fault of their own.
Author Troy Mainzer is an attorney in Carlton Fields, P.A.’s construction group in Tampa, Florida. Troy represents owners, developers, general contractors, and subcontractors in connection with an array of construction disputes, including but not limited to commercial projects, infrastructure, residential home construction, site development, and other areas. Troy can be reached at tmainzer@carltonfields.com or (813) 229-4239.
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