The risks surrounding termination at will clauses
23 October 2020
During our recent webinar The Sub-Contract Games – Ten Key Clauses to Watch Out For, we received many questions from sub-contractors concerning how they can best protect themselves when they are negotiating sub-contracts. In this article we look at the risks surrounding termination at will clauses.
What is a termination at will clause?
Sometimes also called a ‘termination for convenience clause’, a termination at will clause provides a right to terminate the contract without any cause or reason, (usually) at the sole discretion of the contractor. There is no need for the party terminating the contract to prove that the other party is in breach, the termination is simply at the discretion of the party providing notice.
There is no automatic right at law to terminate for convenience, but the Courts will normally uphold express clauses permitting such action as a bargain struck between the contracting parties. Courts are generally loathed to interfere with commercial agreements, no matter how potentially unfair.
A termination at will clause in a sub-contract will be a clause that enables a main contractor to terminate the sub-contract at any time and for any reason at their sole discretion. Following such termination, the sub-contractor will be required to leave site, without any right or redress to claim for any loss of profit for the works that it did not have the opportunity to complete. The sub-contractor will only be entitled to be paid for its work done up to the date of termination.
Termination at will clauses are found in many different forms and can often be subtly worded to catch out the unsuspecting.
What to consider when agreeing to a termination at will clause
If a main contractor refuses to delete a termination at will clause from the sub-contract, the sub-contractor must consider the following:
There is no guarantee that the sub-contractor will be able to complete the job as planned and so the sub-contractor has no guarantee of work, and no guarantee of any profit under the sub-contract. This therefore provides a high commercial risk for the sub-contractor when entering into such an agreement.
Sub-contractors should try to negotiate as long of a notice period as possible within the termination at will clause. For example, the main contractor may agree to give 28 days’ notice if it is terminating for convenience. This will give the sub-contractor an opportunity to secure other works.
Sub-contractors should ensure that any sub-sub-contracts contain similar back-to-back clauses, which enable the sub-contractor to terminate the sub-sub-contract at will. Otherwise, the sub-contractor may be exposed to a loss of profit claim from the sub-sub-contractor which is irrecoverable from the main contractor.
What to consider if a termination at will clause is exercised
In the absence of sufficient wording it may be a breach of the sub-contract if the main contractor exercises a termination at will clause simply for the main contractor to obtain a better price to complete the works from another sub-contractor.
This may constitute wrongful termination, which in turn may enable the sub-contractor to claim for loss of profit. The key will be the precise wording of the clause in question. It is therefore always important to ascertain why the sub-contract is being terminated.
In the webinar we discussed nine other clauses to watch out for. For more information, please watch the video.
If you would like to discuss any sub-contract issues further, please contact a member of our Construction and Engineering Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at October 2020.