Does termination for convenience preclude the owner from entitlement to liquidated damages? Old Colony Construction LLC v. Town of Southington. Supreme Court of Connecticut (2015), by Hugh Anderson

Summary: A termination for convenience typically results in the contractor walking away from the project with payment for work rendered, and no concerns about further liability to the owner. The EJCDC standard termination for  convenience clause does not mandate the freedom from further liability; to the contrary it intentionally reserves Owner’s other rights and remedies. In the Old Colony case, the Supreme Court of Connecticut concluded that this preserved owner’s right to liquidated damages.

The case involves a complicated factual context and several issues of interest, including delays, concurrent delays, extensions of time, change order procedures, notice of claims, differing site conditions, and underground utilities. This summary will focus on the termination for convenience clause and its impact on liquidated damages.

The project scope was demolition of a sewer pump station and construction of a new wet well, pump station, and garage. Although the published decision does not cite EJCDC by name, it appears clear from the quoted clauses that the construction contract was based at least in part on EJCDC® C-700, Standard General Conditions of the Construction Contract, and EJCDC® C-520, Agreement between Owner and Contractor (Stipulated Sum).

As the court put it, “from the outset, the project was plagued by delays.” The delays continued until the contract time for substantial completion had passed, and beyond. The town warned the contractor of the possibility of a termination for cause, but ultimately terminated for convenience. This was beneficial to the contractor because it relieved it of responsibility for the owner’s cost to have another contractor complete the work—a primary feature of a termination for cause. However, the termination for convenience did not shield the contractor from other obligations to the owner. By its terms, the clause states that the termination for convenience is “without cause and without prejudice to any other right or remedy [of the town].” Based on this reservation of rights, when the contractor sought final payment in the wake of the termination for convenience, the owner levied against the payment a set-off for liquidated damages that had accrued up to the date of termination. This levy was supported by trial court, and one of the subjects of appeal.

Decision: The Connecticut Supreme Court affirmed the town’s right to liquidated damages based on the express terms of the contract. The court held that the reservation of rights was broad and did not contain any limitations. The court rejected an argument by the contractor that allowing liquidated damages would make the distinction between the termination for cause and termination for convenience “illusory,” noting the major distinction that the contractor is shielded from project completion costs under a termination for convenience.

Comment: The “reservation of Owner’s rights” wording in the EJCDC termination for convenience clause is important for rights other than collecting liquidated damages for delay in completion. For example, if latent defects in construction are uncovered, or damage done to a neighboring property comes to light, the terminated contractor cannot escape liability by citing the termination for convenience.

The decision also supports the point that liquidated damages do not need to be the subject of an owner Claim, as that term is used in the EJCDC documents. The Connecticut court mentions that owner’s right to liquidated damages “arose as soon as the substantial completion date passed and continued to accrue until termination….”