Ok. I’ll admit it. I have a bee in my bonnet about clauses which allow termination at will or termination for convenience.
Essentially, a termination at will clause allows one party to simply change its mind about wanting to continue with the scope of the contract, and tell the other it has had enough. Neither rhyme nor reason are required.
The argument (and one used in the Abbey v PP Brickwork case) is that if a contract includes a change procedure, that may include a right to limit the scope of the work. This may be by omitting works or not ordering provisional items.
In this case, the main contractor accepted that ‘ordinarily a power to omit work would probably not entitle an employer to remove work from a contract in order to give it to another contractor at a cheaper price’; but said that the express terms of the contract were wide enough to allow any omissions without putting the main contractor in breach.
Talk about having your cake and eating it! This, as my blog noted previously, cuts through the right to finish.
Summarising the issues
The Abbey decision notes that omitting works is tantamount to terminating at will. It considers previous cases to review the issues:
- “It is self-evident that the building owner must permit the contractor to carry out the whole of the work… It is implict in most contracts that an owner who exercises a power to omit work must genuinely require the work not to be done at all.” (Tancred Arrol v The Steel Company of Scotland, 1890)
- “…a power… to hand over at will any part of the contract to another contractor would be a most unreasonable power, which very clear words would be required to confer.” (Carr v JA Berriman Pty Ltd, 1953)
- “… an arbitrary withdrawal of the work by the architect in order to give it to a third party other than [the contractor].” (Amec Building Limited v Cadmus Investments Co Limited, 1996)
The court confirms that an employer cannot use the omissions clause to get out of a bad bargain and have the work done by another contractor at a lower cost. Similarly, a provision for termination at will needs clear words because otherwise it is an ‘intrusion into the contractor’s right to finish the work’.
The court noted that “there is no principle of law that says that in no circumstances may work be omitted and given to others without incurring liability to the original contractor for loss of profit et cetera.” It recognised a right to omit works based on express terms, but not as a free pass!
The court confirmed that a right to terminate at will without compensating the contractor for its losses including loss of profit on the remaining works risked being unenforceable as unconscionable. Just because you can do, you need to think carefully about whether your clause is grossly unfair!
What should you do?
If you are the (sub)contractor, do not agree any contract which permits wide omissions or termination at will without compensating you for your loss profits.
If you are the client, ensure you only contract for works you need. You can add to the scope of work, but subtracting works could leave you in default if you prevent the contractor finishing the scope you both contracted for.