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Procurement Perspectives: Renewals and termination in municipal contracts

Stephen Bauld
Procurement Perspectives: Renewals and termination in municipal contracts

There is no special law relating to the termination of a municipal contract. Subject to any right reserved by a city to terminate a contract on notice to the other party, there is no right existing in greater favour of a municipality than any other contracting party to terminate the contract prior to the end of its term of the completion of performance.

Ordinarily, early termination without fault cannot occur except with the other party’s consent. A fully executed contract (i.e., one in which, for instance, properly has been bought or sold and all payments made) cannot be undone except in very unusual cases. A change of municipal administration (e.g., by way of election) does give rise to a right to terminate an executory or partly executory contract entered into by a previous administration, even where the critical issue in the election was the fact that the previous administration had entered into a contract improperly.

Note, however, the following exceptions to these general principles:

  • Where a contract is of an indefinite duration, it is terminable on reasonable notice. Accordingly, a new council may direct municipal staff to give notice of termination, to bring the contract to an end.
  • Where a contract is for a specified term, subject to possible renewal at the end of that term on mutual consent, the municipality is not obliged to renew, and may elect not to renew due to a change in policy, even though the other party has fully and well performed the contract during its previous term. However, such a right to walk away is not available where the other party has an “option” to renew at the end of the contract.
  • Some municipal contracts reserve an express right in favor of council not to provide necessary funding after the end of the current year’s budget. If no such funding is voted, then the contract will lapse by its express terms.

Occasionally, contracts may include an express right in favour of the municipality to terminate them on notice. The following is an example of such a clause:

The City may terminate the contract, or any part thereof, by written notice to Seller, for any or no reason, as the City may determine to be most convenient to it. Upon notice of termination, a Seller shall immediately stop all work and cause its suppliers or subcontractors to stop all work in connection with the Order.

If the City terminates for convenience, the city shall pay Seller for goods and services accepted as of the date of termination, and, subject to Section 8, for Seller’s actual, reasonable, out of pocket costs incurred directly as a result of such termination. The City shall have no responsibility for work performed after Seller’s receipt of notice of termination.

It will be noted that the above provision does not allow the municipality to get out of the contract at no cost. It must still pay the “breakage” costs of the supplier. These can be substantial. Such breakage costs include re-shelving costs, relevant worker severance or other termination payments, in all probability the full cost of redundant equipment, and supplies, and any other loss, cost, charge or expense incurred by the supplier in connection with early termination of the Agreement. Although breakage costs can be substantial, the municipality still saves in the area of variable cost, and the supplier’s anticipated profit margin.

Despite these general principles, municipal contracts frequently differ from most private sector contracts in relation to the term of such arrangements and the way they may be terminated.

Where a municipality attempts to impose a clause that gives it exceptional unilateral rights, the municipality is to a large extent contracting against its own interests.

 

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com.

Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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