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The SJC Weighs in on Termination for Convenience

Despite the prevalence of termination for convenience clauses in construction contracts, there has been little caselaw in Massachusetts addressing such provisions.  That needle moved on May 2, 2018, when the Massachusetts Supreme Judicial Court discussed termination for convenience rights in detail in A.L. Prime Energy Consultant, Inc. v. Massachusetts Bay Transportation Authority, 479 Mass. 419 (2018) (“A.L. Prime Energy”).  In short, valid convenience termination provisions are generally enforceable in accordance with their plain meaning.

The decision in A.L. Prime Energy arose out of the MBTA’s procurement of ultra-low sulfur diesel fuel for a two-year period.  The bid documents included a copy of the contract, which included a termination for convenience provision.  The termination for convenience provision stated that the MBTA may, in its “sole discretion,” terminate “all or any portion” of the contract “at any time” for the MBTA’s “convenience and/or for any reason.”  The MBTA awarded the contract to A.L. Prime Energy in July of 2015 and the contract took effect that September.

Meanwhile, the Commonwealth had separately sought bids for a statewide supply of ultra-low sulfur diesel fuel for executive branch agencies.  Under that procurement, the Commonwealth executed a contract with another contractor in June of 2015.

Roughly a year after awarding its contract to A.L. Prime Energy, the MBTA advised A.L. Prime Energy that it could achieve cost savings by opting into the Commonwealth’s separate statewide contract.  The MBTA then formally notified A.L. Prime Energy that it was terminating the contract for convenience, prompting A.L. Prime Energy to file an action.  The question for the SJC was whether the MBTA could terminate its contract with A.L. Prime Energy simply to obtain cost savings.  The SJC answered “yes.”

A.L. Prime Energy urged the Court to follow federal law indicating that a public agency cannot terminate a contract for convenience simply to obtain a lower price.  The Court declined to do so, noting that Massachusetts courts enforce contracts in accordance with their clear and plain meaning.  According to the SJC, the right to terminate the contract “for any reason,” necessarily included the MBTA’s decision “to cut costs.”  And because the contract provided for payment to the contractor in the event of a convenience termination, the clause did not enable the MBTA to freely abandon the contract; there was consideration for the MBTA’s right to terminate for convenience.  There were no other facts to suggest that the MBTA had acted in bad faith.  As a result, the Supreme Judicial Court concluded that A.L. Prime Energy’s claims against the MBTA should have been dismissed.

The Court’s decision focused largely on the specific language of the MBTA’s termination for convenience provision.  The language was clear, afforded the contractor a remedy in the event of a convenience termination, and granted the MBTA broad discretion to terminate.  Notably, the Court rejected an argument that the termination for convenience clause conflicted with principles of public bidding, stating that “[i]f a contract clearly defines the public entity’s right to terminate, the bidders are equally on notice of such a possibility.”

To a degree, the decision is not all that surprising in light of established principles of contract interpretation in Massachusetts.  But the SJC’s decision is important because it confirms that termination for convenience clauses are generally enforceable in the world of public contracts so long as they are supported by consideration and clearly establish the framework for termination.

Published in the June 2018 edition of UCANE's Construction Outlook.