Obtaining a new contract can seem like a boon for a business, particularly if it’s a government contract. This kind of agreement often represents a new and dependable source of income. However, if the contract contains a termination for convenience clause, it may not as reliable as you first thought.
What is termination for convenience?
Under the normal laws of contracts, when two parties bind themselves to a contract, they must abide by its terms for the life of that contract. Substantial failure to do so can result in a breach of the contract, subjecting the breaching party to a lawsuit. But government agencies retain the authority to cancel a contract for their convenience – and it’s an option that is also making more appearances in private contracts.
For government agencies, what is considered convenient is a concept that is construed broadly. If it is in the government’s interest to prematurely terminate a contract, it is also likely to fall within the parameters of a termination for convenience clause. An agency may choose to handle the contracted goods or services in-house or it may decide that it no longer needs them. If the relationship between the agency and the contractor sours, this too can lead to termination for convenience.
Does the contractor have a remedy?
Termination for convenience will not result in a breach of the contract unless there was some malfeasance involved. For instance, if an agency entered into the contract knowing it would terminate early, a breach of contract suit may still be an option, despite the termination for convenience clause.
However, the contractor is entitled to a settlement, even if there is no breach. The agency must give notice of its intent to terminate for convenience, so that the contractor can mitigate its losses. The contractor is then entitled to recover any losses which could not be avoided as a result of the early termination.