The developing right to terminate for convenience under FIDIC

By Mark Pantry, Partner, and Caitlin Binns, Trainee

A termination for convenience clause will give one party, usually the employer, the right to terminate an agreement at its discretion. For parties contracting under the FIDIC suite of contracts, a termination for convenience clause is often included as standard.

Termination for convenience has evolved under FIDIC across the various versions and forms of conditions. In this article, we will review how the wording of the termination for convenience clause has changed in the FIDIC Red, Yellow and Silver Books, and how those changes can be interpreted. 

FIDIC Orange Book 1995

One of the earliest inclusions of a termination for convenience clause within FIDIC’s standard forms was within the Conditions of Contract for Design-Build and Turnkey (Orange Book 1995). Sub-Clause 2.4 gives the employer the entitlement to terminate the contract “at the Employer’s convenience, at any time after giving 56 days’ prior notice to the Contractor”. The termination for convenience is subject to the following limitation: “After such termination, execution of the Works shall not be recommenced within a period of six years without the Contractor’s consent”.

The limitation above effectively restricts the employer’s operation of the termination for convenience clause to circumstances where the project is no longer continuing or will not continue for at least six years after the date of termination. The limitation is included as, under the Orange Book, the contractor is not entitled to be paid any loss of profit following the contract being terminated for convenience. This principle was further developed in the FIDIC Red, Yellow and Silver Books 1999.

FIDIC Red, Yellow and Silver Books 1999

In the FIDIC Red, Yellow and Silver Books 1999, the employer has the entitlement, at Sub-Clause 15.5, to “terminate the Contract, at any time for the Employer’s convenience, by giving notice of such termination to the Contractor”. The termination has effect 28 days after the later of the date on which the contractor receives the notice and the date on which the employer returns the contractor’s performance security. 

The entitlement to terminate for convenience also contains an additional caveat that the “Employer shall not terminate the contract under this Sub-Clause in order to execute the Works himself or to arrange for the Works to be executed by another Contractor”. This follows the principles established in the Orange Book, preventing the employer from using termination for convenience to switch contractors or complete the works without the contractor. The intention of the clause is to limit the ability to terminate for convenience in circumstances where the works are no longer proceeding. It is not clear whether the employer could instruct another contractor to complete part of the works or a modified version of the works and, if the employer did so, what the contractor’s remedies would be.

Following termination of the contract for convenience, the contractor is required to cease work and promptly remove its equipment from the site. On termination, the contractor is also paid its costs, including the amounts payable for work carried out, cost of plan and materials ordered and any other cost which was reasonably incurred by the contractor in the expectation of the completion of the works. The contractor is also entitled to be repaid for the cost of removal of temporary works and equipment, and the cost of repatriation of the contractor’s staff and labour engaged in connection with the works at the date of termination.

The contractor is not entitled to claim for loss of profit as a result of such termination for convenience. The reasoning behind this must be that the additional caveat mentioned above prevents the employer from completing the works and effectively brings the project to a close. As there is no further profit to be had in the project for the employer, it is perhaps more reasonable for a contractor to accept a position where there is no ability to claim its loss of profit following a termination for convenience provided that the contractor is paid those additional costs it incurs, such as repatriation and other costs. 

FIDIC Red, Yellow and Silver Books 2017

The 2017 suite of contracts revised and expanded the termination for convenience provision (Sub-Clause 15.5). As with the 1999 suite, the employer has the entitlement to terminate the contract at any time for the employer’s convenience by giving notice to the contractor. Issuing a notice of termination triggers a number of restrictions on the employer:

• the employer has no right to further use any of the contractor’s documents, except for those which the contractor has received payment or for which payment is due;
• the employer has no right to allow the continued use of any of the contractor’s equipment or temporary works, facilities, services, etc.; and
• the employer must make arrangements to return the performance security to the contractor.

Termination takes place 28 days after the later of the date on which the contractor receives the notice and the date on which the employer returns the contractor’s performance security.

Sub-Clause 15.5 also provides that, unless and until the contractor has received payment of the amount due to it under its termination account, the employer “shall not execute (any part of) the Works or arrange for (any part of) the Works to be executed by any other entities”. Unlike the 1999 version, the 2017 versions allow the contractor to claim the “amount of any loss of profit or other losses and damages” suffered by the contractor as a result of the termination for convenience. 

The amendments between the 1999 and 2017 versions reflect the frequent amendments made to the FIDIC Red, Yellow and Silver Books in the period to remove the effective restriction in the termination for convenience provided that the contractor is allowed to recover its loss of profit following such termination. 

Conclusion 

The evolution of the termination for convenience drafting within the FIDIC versions provides an insight into how termination for convenience has been adapted to suit usage and the requirements of the employer. Initial versions of the clause were limited in scope but did not allow the contractor to claim for loss of profit following termination for convenience. The FIDIC Red, Yellow and Silver Books 2017 introduced an unlimited right for the employer to terminate for convenience with the corollary being the payment of loss of profit to the contractor. 

Unrestricted termination for convenience clauses with clear consequences and prohibitions should provide comfort for contractors in that they will be able to claim for their loss of profit and other costs in result of termination. Amendments to these standard clauses should be treated with caution to prevent the consequences of termination being radically changed. 

Parties are, therefore, advised that they should be clear of the consequences of what is being agreed and to be aware of variations across standard forms when considering the inclusion of a termination for convenience clause within a contract. 

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