Its Wise Up Wednesday! “Termination for Convenience” – Court’s Decision Could Cost You Dearly!
This week’s “Wise Up Wednesday” is all about one of the onerous clauses that you definitely need to avoid as a Specialist Contractor, and it’s one I see a lot of in contracts that are offered to my Clients.
Before you moan and groan about “bloody contracts – I hate contracts – why can’t we just get on with the job”, or any other negative response about the chore of checking the terms of the contract, please answer this simple question;
Q – At the end of the job does the QS ever try and “negotiate” your final account down, not pay your final application properly, or come up with some “contractual” arguments as to why you are entitled to less?
Of course they do. So here’s my next question;
Q – If the contract is being used against you to knock off several £thousands, wouldn’t it have been worth spending a little more time over that contract so that at the end of the job you could keep those extra £thousands?
The return on the investment of a little time or money can be huge!
So here’s one of those onerous clauses you need to watch out for and not accept.
Termination for Convenience Clauses
A recent decision in the Commercial Court spells real danger for Specialist Contractors in respect of construction contracts containing termination for convenience clauses.
The decision means such clauses will prevent or significantly limit your claims for loss of profit even in the cases involving a repudiatory breach of contract by the Contractor!
The decision in Comau UK Limited v Lotus Lightweight Structures Limited  EWHC 2122 (Comm) provides an unwelcome limitation of liability and the extent to which the clause may be relied upon to reduce damages which might otherwise be recoverable under the contract.
The decision concerned a contract for the supply of goods and services by Comau (part of the Fiat group) relating to the installation of a new production line at a factory owned by the Lotus group.
Lotus delayed in making certain payments under the contract and Comau sought to terminate under the contract and at common law for repudiatory breach. Comau brought proceedings to recover the profit it would have earned had the contract been performed by Lotus.
Here’s The Kick In The Teeth!
Lotus argued that Comau’s claim for loss of profit ought to fail due to a “termination for convenience clause” included in the contract (which provided no entitlement to recover loss of profit).
Lotus argued that it could have terminated the contract at any time and Comau therefore had no right to earn a profit for the full duration of the contract (Comau therefore had an insufficient “expectation interest” to sustain a claim for loss of profit).
What? How can that be?
But, because of the clause, the court agreed with Lotus, and applied established legal principles which require a court, when assessing damages for breach of contract, to assume that a contract-breaker will perform a contract in the least onerous way possible.
The court therefore proceeded on the assumption that Lotus would have exercised its right to terminate for convenience.
The court noted that, “any other assumption ignores the limited nature of Comau’s ‘expectation interest’ – that Comau was never entitled to profits on the whole of the goods and services to be supplied pursuant to the Agreement but was only ever entitled to such profit as it might have gained prior to any ‘termination for convenience’.”
The Scariest Aspect of the Decision
For me the scariest aspect of the court’s reasoning is the apparent absence of any need by Lotus to show that it would have exercised its right to terminate for convenience had Comau not terminated the contract.
The mere existence of the termination for convenience clause appears to have been sufficient without evidence of causation as to whether or not the clause would – as a matter of fact – have impacted upon the profits which Comau would have derived from the contract.
So Watch Out For Onerous Terms And Don’t Accept Them!
And if work is picking up, then not only should you be negotiating better prices you should be negotiating better terms too!
I hope you enjoyed my Wise Up Wednesday blog post and that it gave you some food for thought, and I sincerely hope to speak with you soon.
In the meantime if you need any help checking contracts, or with any of your business issues, please don’t hesitate to pick up the phone and give us a call.
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