|
Construction contracts commonly include termination for
convenience clauses. Generally speaking, a termination for
convenience clause permits the owner to terminate its contractor
(or a contractor to terminate its subcontractor) at its
discretion. Although courts have long recognized the validity
of termination for convenience clauses in public contracts,
courts have not always upheld such clauses in contracts
between private parties. When courts have not upheld
them, the reason has typically been that the power of one of
the parties to escape its obligations under the contract means
that the party with the power of termination has not made a
binding promise to do anything, but only an illusory promise,
and thus the contract must fail for want of consideration.
The law of private contracts is, of course, governed by state
law. Recently, the Maryland Court of Appeals issued an
important ruling on the validity of termination for convenience
clauses in private construction contracts, holding in
Questar Builders, Inc. v. CB Flooring, LLC, 978 A.2d 651
(Md. 2009) that such clauses in private contracts “may be
enforceable, subject to an implied obligation to exercise the
right to terminate in good faith and in accordance with fair
dealing.”
Questar Builders, Inc. (“Questar”) was the general contractor
for the construction of an apartment and townhome complex
in Owings Mills, Maryland. It solicited bids for carpeting,
and CB Flooring, LLC (“CB”) was the low bidder. As
the project progressed, a dispute arose over the type of carpeting
to be installed, with Questar demanding a more expensive
carpet than that upon which CB had based its bid.
CB sent a proposed change order to Questar seeking an adjustment
in the contract value of approximately
$100,000.00. Questar refused to adjust the contract and,
instead, announced that CB had breached the subcontract
and purported to terminate CB for cause. CB subsequently
filed suit against Questar.
The trial court determined that there had been no breach of
the subcontract by CB. On appeal, however, Questar argued
that the subcontract’s termination for cause language contained
a fallback provision that converted termination for
cause into a termination for convenience if a court or arbitrator
determined that the termination for cause was improper.
Questar reasoned that it should escape liability
|
because the termination for convenience language effectively
converted the termination to one for convenience.
The Court of Appeals focused its attention on whether the
termination for convenience clause in the subcontract transformed
a promise to perform into an illusory promise. The
court first noted that Maryland courts prefer interpretations of
contracts that make the contract effective rather than illusory.
The court further noted that one means by which the court
can accomplish this objective is to place a general obligation
of good faith and fair dealing on all parties to the contract. If
the contractor cannot exercise its right to termination for convenience
at its absolute discretion, but instead must act reasonably,
the contractor has made a real promise that limits its
rights.
Accordingly, the court viewed the termination for convenience
clause in the Questar/CB contract not as “the right to
terminate based on a whim,” but rather as a tool for allocating
economic risk reasonably. Thus, “Questar was permitted to
terminate only if, in its discretion, it determined that continuing
with the Subcontract would subject it potentially to a
meaningful financial loss or some other difficulty in completing
the project successfully.”
continued on page 2
|
