Termination for Convenience - You May Not Have a Deal!

But I Thought We Had A Deal?

A Lesson In Termination for Convenience

By: Ian T. Kravitz, Esquire

 

So you enter into a subcontract to furnish improvements for a set cost, everyone agrees, and then your subcontract is terminated for no reason, except that the general contractor has found someone who is willing to perform at a cheaper cost. Is that bad faith? Can the general contractor just cast you aside without repercussion? If your subcontract contains a termination for convenience clause, they most likely can.

In Vila & Son Landscaping Corporation v. Posen Construction, Inc., Florida Second District Court of Appeals, (2D10-5582) September 19, 2012, this is precisely what occurred. Posen Construction ("Contractor") was hired by the Florida Department of Transportation (FDOT") to furnish construction improvements. In turn, Posen hired Vila & Son Landscaping Corporation ("Subcontractor") to furnish as portion of the work required of Contractor under the prime contract with FDOT. The subcontract was reviewed and approved by FDOT, and all parties began preparation to work accordingly.

Contractor then sought another subcontractor to perform Subcontractor's work at a lower cost, and proceeded to terminate the Subcontract with Subcontractor for convenience. The Subcontract provided under the "Termination for Convenience" provision that

[t]he performance of the Work may be terminated at any time in whole, or from time to time in part, by Contractor for its convenience. Any such termination shall be effected by delivery to Subcontractor of written notice ("Notice of Termination") specifying the extent to which performance of the Work is terminated and the date upon which termination becomes effective.

After receipt of a Notice of Termination, and except as otherwise directed by Contractor, Subcontractor shall, in good faith, and to the best of its ability, do all things necessary, in the light of such notice and of such requests in implementation thereof as Contractor may make, to assure the efficient, proper closeout of the terminated Work . . . .

In the event of such termination, there shall be an equitable reduction of the Subcontract Sum to reflect reduction in Work, and no cost incurred after the effective date of the Notice of Termination shall be reimbursable unless it relates to carry out the unterminated portion of the Work, or taking required closeout measures. In no event shall Subcontractor be entitled to lost or anticipated profits, incidental or consequential damages, or lost overhead for portions of the Work Subcontractor did not complete[.]

Subcontractor sued Contractor arguing that Contractor could only exercise the Termination for Convenience provision in good faith, and that exercising that provision soley because Contractor found someone to perform cheaper was a bad faith breach of the Subcontract. Subcontractor claimed this was therefore a wrongful termination, allowing Subcontractor to recover the profits lost that would have been earned had Subcontractor been allowed to perform as agreed. Contractor countered that the Termination for Convenience provision was an unambiguous right for Contractor to terminate Subcontractor at any time and for any purpose. Regardless of Contractor's reasons for doing so.

The case was submitted to a jury who found that Contractor had wrongfully terminated Subcontractor and that Subcontractor was entitled to the lost profits that would have been earned had such wrongful termination of the Subcontract not taken place. Contractor asked the Trial Court to enter judgment in favor of Contractor despite the jury award. Contractor maintained its position that the Subcontract specifically allowed Contractor to terminate Subcontractor for any reason without any liability for Subcontractor's lost profits. The Trial Court instead ordered a new trial, and this appeal ensued.

The appellate court reasoned that all Contractor did was exercise a clear provision of the Subcontract, and within the procedures called for in the Subcontract regarding the exercise of that provision. The appellate court went further to explain that there is no need to impose an additional limitation on Contractor's ability to do so, such as requiring any such decision to be made in good faith.

Subcontractor argued that if Contractor could simply terminate the contract at any time and for any reason, that the Subcontract was a mere illusory promise for which Contractor could never be mutually bound. The appellate court disagreed holding that as long as the Subcontract required written notice procedures for such a provision to be carried out, such provision would not fail as an illusory promise or for lack of adequate consideration.

Subcontractor's final argument was that Contractor's decision to terminate the Subcontract solely to obtain a better price elsewhere had violated the implied covenant of good faith and fair dealing. This covenant is an implied covenant read into ever contract that the parties will act fairly and in good faith in carrying out the agreement. The appellate court however, held that such covenant only seeks to "protect the reasonable expectations of the contracting parties." Since the parties should have reasonably expected that Contractor could terminate the Subcontract for any reason and at any time pursuant to the clear terms of the Subcontract, actually doing so did not violate the reasonable expectations of the parties.

Accordingly, the appellate court reversed the decision below and ordered the trial court to enter judgment in favor of Contractor. The moral of this story is to make sure that all contracts are reviewed in detail before execution, and that qualified construction law counsel advises you as to the import of the various contractual provisions. Failure to do so may put you in a position where you simply are not entitled to what you thought you had bargained for.