Bad Faith Termination for Convenience

November 28, 2020 5:00 am Published by |

Many construction contracts include a clause that allows an owner to terminate a contractor’s remaining work on a project at the owner’s convenience. And during a global pandemic and these turbulent economic times, termination for convenience clauses are receiving renewed attention, including under what circumstances an owner may not terminate for convenience.

At the outset, some courts have at times viewed termination for convenience clauses suspiciously because such clauses typically confer an unfettered right to terminate only upon the owner. To some courts, this lack of mutuality appears to constitute an “illusory promise” lacking consideration, and thus, a provision some courts may not enforce. To remedy this issue, some courts have required an owner to have good faith reasons when exercising the termination for convenience clause. If an owner acts in bad faith when terminating for convenience, the owner will have violated the implied duty of good faith and fair dealing. See generally 5 Bruner & O’Connor Construction Law § 18:47.

But when does an owner act in bad faith when terminating for convenience? Few Utah courts have analyzed termination for convenience clauses, let alone explained the limitations on exercising such provisions.

Beyond Utah, other courts have held that a party acts in bad faith when it terminates a contract for convenience simply to acquire a better bargain from another source. See, e.g., Krygoski Constr. Co. v. United States, 94 F.3d 1537, 1541 (Fed. Cl. 1996).

Although few Utah courts have explored the limitations on termination for convenience clauses, precedent from federal appellate courts indicate that an owner acts in bad faith when it terminates for convenience simply because the owner got a better deal. To avoid potential allegations of bad faith, an owner may want to confer with counsel before deciding to exercise its termination for convenience rights simply because the owner found a better bargain elsewhere.

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