Termination for convenience doesn’t happen often but it is on the rise with Owners increasingly rethinking major capex 
projects based on macro-economic factors and / or geopolitical realties.
‘Termination for convenience’ is often dressed up as ‘termination for breach’ but the thorny issue of ‘wrongful termination’ could be the subject of an entire article on its own. Here we are going to focus on key issues to tackle to minimise disputes arising when the parties attempt to value the work performed and settle the final account.
Act Quickly
From a valuation perspective, the period immediately following termination is critical. The practical steps taken in the first days and weeks will often determine whether the termination account is resolved commercially or develops into a dispute. Under FIDIC style contracts, the contractual mechanics are usually clear. The difficulty is rarely the clauses themselves – it is the practical exercise of valuing the project at the moment termination occurs.
Understanding the Reason for Termination
Before focusing on the mechanics of the final account, it is important to understand why the Employer has exercised the right to terminate.
Where termination is driven by a strategic change or project cancellation, the Employer is often motivated to reach a practical settlement and close the project efficiently. However, where termination is driven by financial distress or lack of funding, the environment is very different. In those circumstances the Employer may have little incentive (or ability) to engage constructively in the termination process. Cooperation may be limited and access to information or the site may become difficult.
The Importance of a Joint Survey
One of the most important practical steps following termination is the preparation of a joint survey of the works. The objective is to create a documented record of the project status (on site and off site) at the moment termination takes effect. This normally includes:
- physical progress of the permanent works
- materials delivered to site
- materials stored off site
- partially completed work elements
- fabrication status of major equipment
- engineering deliverables completed to date
Where this exercise is undertaken jointly and documented properly e.g. with photographs, measurement records and supporting documentation -it becomes the foundation for the final account valuation.
If the Employer refuses to participate in a joint survey, the Contractor should formally request that the Engineer carry out the exercise. As a last resort, the Contractor may need to arrange for an independent third party survey to record the status of the works. While not ideal, independent surveys can become important evidence if disputes arise later.
Site Access Challenges
In some termination scenarios, particularly those involving financial distress or commercial conflict, access to the site or storage areas may become restricted. This can create significant difficulties for recording the status of the works.
Contractors should therefore act immediately to document site conditions and material inventories while access is still available. Where access restrictions occur, the Contractor should maintain clear written records of requests for access and any refusals. These records can become important evidence if disputes arise regarding the valuation of work or materials.
Off Site Materials and Procurement
Off site materials and equipment can often represent a major portion of the final account, particularly on EPC projects.
Employers will usually require clear evidence that these items were specifically manufactured for the project and cannot reasonably be diverted elsewhere. Supporting records typically include purchase orders, fabrication records, inspection reports and storage documentation.
Engineering and Design Progress
Engineering progress can be one of the most difficult elements to quantify following termination.
Key records typically include document registers, engineering schedules, submission logs and revision histories. Without these records it can be difficult to demonstrate the true level of engineering completion at the time of termination.
Status of Variations and Claims at the Point of Termination
Termination does not erase the project history. In many cases the project may already have been in delay or disruption due to claimable events prior to termination. Extension of Time claims, variations and other claim entitlement issues may still be unresolved when termination occurs.
These claims remain relevant. They may affect the valuation of work completed, prolongation costs incurred prior to termination, or the Contractor’s overall financial position on the project.
A careful record of the status of claims and entitlement issues at the date of termination should therefore be maintained and pursued.
Retention and Final Account
Retention handling following termination is frequently overlooked but can quickly become contentious. Where retention has been deducted from interim payments, the parties must determine how it should be treated when the works will never reach completion.
The answer will depend on the contract provisions and applicable law. In practice, retention is often addressed as part of the termination account settlement rather than being tied strictly to existing completion mechanisms.
Records Determine the Outcome
Termination for convenience may appear straightforward from a contractual perspective. In reality, it converts the project into a detailed accounting exercise. The quality of records will usually determine whether the termination account can be resolved efficiently.
For Contractors operating under FIDIC style contracts in Saudi Arabia and the wider GCC, the practical lesson is simple: start surveying and recording immediately the termination notice arrives.
davidbrodiestedman@dispute-iq.com
Disclaimer
This article is provided for general information and discussion only. It does not constitute legal advice, expert advice, or professional opinion on any specific matter. Views expressed are those of the author and not necessarily those of DisputeIQ or its experts. Readers should seek appropriate professional advice before acting on any issue discussed.
