Unilateral Termination for Convenience of a Turnkey Construction Contract by the Employer: Legal Consequences

Legal framework

Article 1594 of the Spanish Civil Code provides that the employer (owner of the works) may terminate a contract for work at any time, unilaterally and without cause.

This is an exceptional feature of Spanish law: the employer does not need to justify its decision. However, such termination is not without cost. The employer must compensate the contractor not only for the expenses incurred and work performed up to termination, but also for the profit the contractor would have earned had the works been fully completed.

Termination for convenience vs. termination for breach

Spanish Supreme Court case law has consistently drawn a clear distinction between:

• termination for convenience by the employer (Article 1594), and
• termination for breach (Article 1124 of the Civil Code)

These are legally distinct mechanisms, with different requirements and consequences.

Where the employer exercises its right under Article 1594, the contractor’s entitlement to compensation does not depend on the reasons for termination. This has been repeatedly confirmed by the Supreme Court.

Scope of compensation

Once the employer decides to terminate the contract under Article 1594, the legal consequences are fixed by the provision itself.

The contractor is entitled to compensation for:

• expenses incurred,
• work performed, and
• profit foregone.

This regime is autonomous and cannot be equated with damages arising from contractual breach.

In practice, courts often rely on expert evidence to determine the amount of compensation, particularly in complex construction projects where partial performance and interim payments must be assessed.

Loss of profit (“industrial profit”)

A key issue in practice is how to quantify the contractor’s loss of profit (traditionally referred to in Spanish law as industrial profit).

Spanish case law has not adopted a single rigid formula, but certain guiding principles are well established:

• Loss of profit corresponds to the profit the contractor would have obtained if the works had been fully completed.
• Any amounts already received for partial performance must be deducted.
• Primary reference should be given to the contractual terms.
• In their absence, courts may rely on industry practice.

The Supreme Court (Judgment No. 208/2016, 5 April) confirms this approach and clarifies that:

• General corporate overheads should not be included in this calculation, and
• Reference percentages (such as 15%) are indicative only, not binding.

Is loss of profit always subject to strict proof? Not necessarily.

While Spanish law generally requires strict proof of loss of profit, case law recognises an important exception: such proof is not required where the loss is inherent to the economic activity.

In construction contracts, profit is not speculative—it is an intrinsic part of the contractor’s business model. For that reason, courts accept that profit loss arises naturally from early termination.

Applicable benchmarks

In the absence of contractual guidance, courts may consider sector benchmarks.

Traditionally, Spanish case law has referred to a 15% margin as a general indicator of industrial profit. However, this figure is not fixed and must be assessed in light of the specific circumstances.

Other relevant references include:

• Article 246.4 of Law 9/2017 on Public Sector Contracts, which sets a 6% benchmark for unperformed works
• Technical standards and cost databases, such as those published by:
  • CAATEEB (Barcelona Association of Building Surveyors)
  • CGATE (General Council of Technical Architecture of Spain)
  • ITeC (BEDEC database)

These sources typically place industrial profit within a range of 6% to 10%, and are frequently relied upon as expert evidence.

Key takeaway

Under Spanish law, the employer’s right to terminate a construction contract at will is balanced by a robust compensation regime.

Even in the absence of breach, termination triggers an obligation to place the contractor—economically—in the position it would have been in had the contract been fully performed.