IMPLICATIONS OF TERMINATION FOR CONVENIENCE CLAUSE IN CONSTRUCTION CONTRACT
ARC News • June 21, 2023
What is Termination for Convenience Clause?
Termination for convenience clause is relatively common in a construction contract in Malaysia. Generally, a termination for convenience clause allows a party to unilaterally terminate a contract without the default of the other party. In a construction contract, the right to terminate a contract for convenience is often granted to the employer to terminate contractor(s) solely on convenient reason and not due to the latter’s default in performing its obligations in the contract.
What is the Rationale for Having Termination for Convenience Clause?
There are several reasons for having termination for convenience clause in a construction contract. Do note that the list below is non-exhaustive.
1. Flexibility
In view that construction project is often subject to uncertainties such as change in business direction, cash flow issue and/or change in scope of works, the termination for convenience clause provides flexibility to the employer to terminate the contract due to unforeseen circumstance(s).
2. Risk Management
As construction project is dependent on external factors such as funding / financing or political reasons, the termination for convenience clause can mitigate potential risk associated with the projects and serves as a powerful exit strategy should there be substantial changes made to the projects.
3. Effective Dispute Resolution
In view that construction project may be complicated and involve numerous parties, termination for convenience clause may be used as an effective dispute resolution strategy in resolving dispute(s) between the parties. Parties are able to terminate the contract swiftly rather than engaging in time-consuming and expensive legal battles.
Is Termination for Convenience Clause Valid in Malaysia?
Generally, termination for convenience clause is valid and enforceable in Malaysia as long as such clause is clearly and unambiguously expressed in the contract. Whilst it is prudent for termination for convenience to be exercised in good faith, such position has not been affirmatively been decided in Malaysia and remains as a debatable point.
Implications of Termination for Convenience Clause
1. Employer
Generally, an employer would benefit from having the termination for convenience clause in a contract. The provision allows employer to strategically exit the contract without major legal and economic risks.
2. Contractor
On the other hand, a contractor would likely suffer from an adverse effect from termination for convenience clause as the contractor would lose the opportunity of earning the full contract price despite its satisfactory performance in the project. Although the contractor will generally be compensated for such termination, the compensation is often confined to works completed at the date of termination.
Key Takeaways
Whilst termination for convenience clause offers flexibility for employers to unilaterally terminate a contract, it is advisable for the discretion to be exercised in good faith. On the other hand, contractors should be aware of the implications arising from the termination for convenience clause and should negotiate to limit the circumstances in which such clause may be invoked.
This Article is written by Yeo Shu Pin (Partner) of Messrs. Afif Rahman & Chong
Disclaimer: Every attempt to ensure the accuracy and reliability of the information provided in this publication has been made. This publication does not constitute legal advice and is not intended to be used as a substitute for specific legal advice or opinions. Please contact the authors for a specific technical or legal advice on the information provided and related topics.
