A “termination for convenience” clause is the big, red, ejector seat button that allows a party, typically an owner, to exit its contractual relationship. The presence of such a clause in a construction contract should give the parties cause for second thought, as recent judicial developments are changing the way damages may be awarded in these contracts.
A construction site is a finely balanced environment, where everything has to come together efficiently for a project to get done on time and in a cost-effective manner. Experienced owners and developers know that things do not always work as planned, and it can therefore be tempting to include a clause in their contract for “termination for convenience,”
A clause allowing for termination for convenience grants a party the right to terminate a contract for its own purposes and without the presence of any of the conditions that would typically be required to terminate a contract for cause, notably an event of default. These clauses also generally provide for a method for the calculation of damages payable, to compensate the terminated party for the termination of the contract. Such clauses were initially often included in contracts involving government agencies or publicly funded enterprises, but have since become common place in private contracts of all varieties.
A contract with a termination for convenience clause remains subject to the “good faith contract performance” requirements described by the Supreme Court of Canada in Bhasin v. Hrynew (2014 SCC 71). In that decision, the Supreme Court of Canada recognized that good faith contractual performance is a general organizing principle of the common law, and that this duty applies to all contracts, requiring parties to act honestly in the performance of their obligations.
However, a recent decision of the Ontario Court of Appeal, currently pending leave to appeal to the Supreme Court of Canada, could clarify the understanding of damages payable on termination in the situation when the parties have included a “termination for convenience” clause in their contract.
In Atos IT Solutions v. Sapient Canada Inc. (2018 ONCA 374), Sapient terminated a contract for cause, but then sought to rely on the penalty payable in event of termination for convenience, as it would result in a lower amount payable to the plaintiff. The contract provided a fixed fee for the performance of a portion of the services rendered (which had largely been completed), and the plaintiff claimed the balance owing for this amount, $2,404,000, as damages.
The Ontario Court of Appeal found that the presence of clauses allowing for termination for cause or termination for convenience constituted alternative mode of performance, giving the parties different ways of concluding the contract.
The presence of the termination for convenience clause would shape and constrain the parties’ reasonable expectations concerning the damages payable for services rendered.
A principle of common law stipulates that, when a contract allows for multiple methods of performance, damages will be calculated on the basis of the mode of performance least burdensome to the defaulting party and least profitable to the non-breaching party (called the minimum performance principle).
The Court of Appeal further found that the principle of good faith established in Bhasin did not bar the application of the minimum performance principle. Rather, the Court of Appeal suggested that both principles operate in conjunction, allowing for the application of the minimum performance principle in spite of Sapient’s potential bad faith.
In light of the presence of clauses allowing termination for cause and termination for convenience, the Court calculated damages based on the least onerous amount payable by Sapient, in this case, the amount foreseen in event of termination for convenience. The award for the breach was therefore reduced from $2,404,000 to $1,344,275.
As application for leave to appeal Atos IT Solutions v. Sapient Canada Inc. is currently before the Supreme Court of Canada, the law on this matter is far from settled. The lawyers in the construction law practice area at MLT Aikins are available to assist you in drafting, interpreting or resolving disputes relating to all manner of construction contracts.
This article first appeared in Build Manitoba, a publication of the Winnipeg Construction Association.
UPDATE – July 2019:
At the time this blog was published, the decision was subject for leave to appeal to the Supreme Court of Canada; that application has since been dismissed. While no reasons were given by the Supreme Court for not hearing the appeal, the dismissal confirms that, in the event of termination for convenience, a Court will award damages based on the minimum performance principle, which award will be the least burdensome to the defaulting party and the least profitable to the non-breaching party.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.