A termination for convenience clause allows a party (generally the ‘hiring’ party) to terminate a contract or subcontract for any, or no, reason — where he or she believes the decision is most convenient for it (and it alone). The clauses were originally intended to provide public sector entities with the ability to terminate if the commitment is no longer in the interest of tax payers. They have, however, quickly moved into private sector contracts as well. Even though they generally provide that the ‘hired’ party will be paid for the services and materials provided to date, they can be problematic for the hired party — who may have turned down other work and made commitments to employees, overheads, subtrades and suppliers.
Questions abound over whether or not the hiring party can exercise the clause in bad faith. Can they be used to punish the hired party for relying on its contractual rights or to prefer another contractor after the ‘heavy lifting’ of pricing the job and completing more difficult tasks has been completed, for example? The U.S. courts have come down, to varying degrees, on different sides of the argument. In Ontario, our Court of Appeal has recently weighed in on the issue, in Atos IT Solutions and Services GMBH et al. v. Sapient Canada Inc. where a contractor terminated a subcontractor for cause (and not for convenience). The subcontractor successfully sued at trial over whether or not the termination for cause was proper, and was awarded over $6 million in damages.
The Ontario Court of Appeal reduced the award based on the “minimum performance principal”. This provides that if a party wrongfully terminates, its damages will be the minimum of what it would have had to pay had it not terminated. In this case, the minimum performance was what would have happened had the termination for convenience clause been exercised. The Court of Appeal held that bad faith was not a factor to be considered. It held that, although the Supreme Court of Canada had recognized “an overarching duty of good faith and honest performance of contracts” in Bhasin v. Hrynew, [ [2014] 3 S.C.R. 494 ] it’s own Court had already previously decided, in 2011, that “the application of the minimum performance principle did not depend upon good faith conduct by the breaching party”. It further held that “Bhasin did not purport to alter the existing principles concerning the proper measure of expectation damages in the event of a breach of contract”. The decision is favourable to those who hire contractors or subcontractors, and problematic for those on the receiving end of such clauses.