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The SJC Rules on the Scope of Termination for Convenience Clauses

In a case decided May 2, 2018, the Massachusetts Supreme Judicial Court confirmed that broad termination for convenience clauses will be interpreted and enforced in accordance with the contract’s plain language and without grafting additional protections for contractors or subcontractors. The decision is notable to because it (1) highlights the importance of contractors and subcontractors carefully reviewing, and where feasible, negotiating narrower and more favorable termination provisions; (2) reaffirms that Massachusetts’ courts interpret each contract based only on its plain meaning; and as it pertains to litigation,(3) states that the implied covenant of good faith and fair dealing cannot be breached when the parties follow the clear terms of their contract despite actual harm caused.

In A.L. Prime Energy Consultant, Inc. v. Massachusetts Bay Transportation 1 , the SJC held that the broad termination for convenience provision in a fuel sourcing contract permitted the awarding authority to terminate for the sole reason of securing cost savings with another vendor. In doing so, the SJC declined to adopt the blanket Federal rule allowing a governmental contractor to challenge its termination for convenience based on allegations of bad faith or an abuse of discretion. Previously, it had been widely believed, based on federal court rulings and a dearth of local precedent, that an awarding authority’s decision to terminate a contract for convenience could be so challenged in Massachusetts. 2 The SJC, however, declined to superimpose this legal standard onto Massachusetts contracts, instead interpreting the parties’ obligations based only on the plain language contained in each contract.

The dispute in A.L. Prime arose out of a competitively bid contract for A.L. Prime Energy Consultant, Inc. (“Prime”) to sell fuel to the MBTA in 2015. The contract provided that the MBTA had “sole discretion” to terminate the contract “for its convenience and/or for any reason” with 30 days’ notice and payment of certain limited costs, including demobilization and contract closeout costs. 3 Around the same time, the Legislature created the Fiscal and Management Control Board (“FMCB”) to financially stabilize the MBTA. A year into Prime’s contract, the FMCB determined that the MBTA could achieve costs savings by purchasing fuel through a separate preexisting contract the Commonwealth entered to supply fuel to executive branch agencies. The MBTA notified Prime in writing that it was terminating the contract to secure a lower price, pursuant to the termination for convenience provision.

Prime brought suit against the MBTA arguing that the MBTA terminated the contract in bad faith, as seeking a better price after having competitively bid the contract deprives Prime of the “fruits of the contract.” Prime argued, using supporting Federal law, that Massachusetts’ courts should restrict terminations for convenience to when an awarding authority or owner faced a lack of funding or had other similar changes in circumstance. The MBTA moved to dismiss Prime’s complaint contending that the contract did not limit its reasons for termination, and following the Federal standard was contrary to Massachusetts law. The trial court denied the MBTA’s request for dismissal of the lawsuit.

The SJC took the case, recognizing the lack of precedent in the Commonwealth. First the SJC reviewed the development of the Federal standard requiring a court to evaluate whether an awarding authority acted in bad faith or abused its discretion in terminating for its convenience. Importantly, the Federal standard grew out of a body of law interpreting required standard provisions contained in all Federal contracts of that type. The SJC noted that in Massachusetts, courts look to a contract’s plain language to define the parties’ rights. Since termination for convenience language in Massachusetts public contracts is not standardized and often varies from the Federal provisions, applying a single additional standard would be unworkable. Therefore, the SJC refused to superimpose additional restrictions on public contracts.

The contract in A.L. Prime allowed the MBTA to terminate “for its convenience and/or for any reason.” The SJC held that as long as the MBTA had “a reason” then it could terminate. Terminating to secure better pricing was sufficiently “a reason.” Responding to Prime’s argument that the MBTA breached the implied covenant of good faith and fair dealing by depriving Prime of the “fruits of the contract,” the SJC held that the implied covenant does not create rights and duties not already present in contractual relationship.  Since the contract provided that the MBTA could terminate for “any reason,” the MBTA could not have violated the covenant of good faith and fair dealing by following the contract despite financially damaging Prime.

A.L. Prime does, however, present unusual facts in that the MBTA was not rebidding the contract to seek lower bids, but merely terminating its own contract and joining the Commonwealth’s competitively bid collective purchasing agreement. The SJC “le[ft] for another day the question whether a public entity may terminate a contract for its convenience in order to rebid the contract in search of a lower price.” 4 Previously, the Appeals Court has prohibited such rebids as contrary to the public interest under G.L. c. 30, § 39M. 5 The longevity of this prohibition may now be in doubt.

Going forward contractors and subcontractors should recognize that courts will enforce broad termination for convenience provisions in public contracts. More attention should be paid to these provisions during the contracting phase with an emphasis on narrowing the grounds for termination and/or including better recourse such as permitting “the recovery of reasonable overhead and profit on Work not executed” as was standardized in the AIA A201-2007. 6

1 A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transportation Authority (SJC 12370) (May 2, 2018).

2 See,e.g. Ahern III, Charles F. “Termination for Convenience: How Can I Be Fired When I Did Nothing Wrong?” The Professional Contractor, Summer 2015: Pages 10 – 11.

3 “Termination for Convenience. The [MBTA] may, in its sole discretion, terminate all or any portion of this Agreement or the work required hereunder, at any time for its convenience and/or for any reason by giving written notice to the Contractor thirty (30) calendar days prior to the effective date of termination of such other period as is mutually agreed upon in advance by the parties. If the Contractor is not in default or in breach of any material term or condition of this Agreement, the Contractor shall be paid its reasonable, proper and verifiable costs in accordance with generally accepted government contracting principles as set forth in the Federal Acquisition Regulations, including demobilization and contract closeout costs, and profit on work performed and Accepted up to the termination to the extent previous payments made by the [MBTA] to the Contractor have not already done so. Such payment shall be the Contractor’s sole and exclusive remedy for any Termination for Convenience, and upon such payment by the [MBTA] to the Contractor, the [MBTA] shall have no further obligation to the Contractor. The [MBTA] shall not be responsible for the Contractor’s anticipatory profits or overhead costs attributable to unperformed work.”

4 Fn. 11.

5 See Petricca Constr. Co. v. Commonwealth, 37 Mass. App. Ct. 392, 395 – 296 (1994).

6 The updated AIA A201-2017 includes a termination fee in lieu of “reasonable overhead and profit on the Work not executed.”

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