Beware of Termination for Convenience Clauses

Termination for Convenience clauses were first introduced during the American Civil War and were used in government contracts.  Such provisions in contracts with the Federal government allowed the government to terminate contracts related to military procurements that were no longer necessary as a result of changing technology or the cessation of hostilities.  Termination for Convenience clauses continued to gain greater favor with the Federal government through WWI and WWII and today almost every government contract, be it related to military service/goods or not, contain the termination provision.  As such, we are seeing a trend of including the provisions in private party contracts.  Recently, a matter involving such a clause in a private party contract was heard on appeal by the Florida Second District Court of Appeal in Vila & Son Landscaping Corp. v. Posen Construction, Inc., 2012 WL 4093545 (Fla. App. 2 Dist.), 37 Fla. L. Weekly D2228.

In Vila, Posen had entered into a contract with the Florida Department of Transportation.  Posen then subcontracted with Vila to perform the landscaping and irrigation portions of Posen’s work on the project.  The subcontract entered into between Posen and Vila contained a Termination for Convenience clause which stated in pertinent part:

The performance of the Work may be terminated at any time in whole, or from time to time in part, by the 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.

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 to date of the Notice of Termination shall be reimbursable unless it relates to carry out the unterminated portion of the Work . . .  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 . . .

After execution of the subcontract Posen sought and obtained a better price for the work Vila had contracted for and subsequently entered into a contract with the second subcontractor for the work and notified Vila that their subcontract was being canceled under the Termination for Convenience clause.

Vila filed suit against Posen claiming wrongful termination in breach of the contract and obtained a jury verdict in its favor for lost profits.  Posen moved for a judgment notwithstanding the verdict as to both liability and damages.  Posen claimed that the Termination for Convenience clause gave it the right to terminate the contract with or without cause and the contract further prohibited the Vila from making a claim for lost profits.  The trial court granted a new trial.  Both parties appealed the order granting a new trial as neither party had requested a new trial.  On appeal the Second District Court of Appeal (“Second DCA”) reviewed the issue of the application of Termination for Convenience clause de novo.

The Second DCA noted that Vila made three main arguments in support of its claims against Posen; specifically that by terminating the contract solely to obtain a better price, Posen acted in bad faith and therefore could not rely on the Termination for Convenience clause; second that by terminating the contract solely to obtain a better price, Posen breached the implied covenants of good faith and fair dealing; and finally that without the imposition of good faith limitations, the Termination clause reduces the contract to an illusory promise, lacking in consideration.  Vila relied on several cases related to the Federal government’s use of Termination for Convenience clauses which the Second DCA noted were no longer good law on many points and were factually inapposite to the current matter.  The court went on to note that in invoking the Termination for Convenience provision in the contract, Posen followed the procedures provided under the contract, including supplying Vila with written notice and providing payment for any work already done on the project.  The court further stated, “[a]ssuming those procedures were adequate to supply consideration for the parties’ contract, there is no need to impose any additional limit, such as bad faith [on a party’s exercise of the provision].”

The court did not accept Vila’s argument that without a bad faith limit, the provision reduces the contract to an illusory promise lacking in consideration.  The court noted that the argument failed under well settled Florida law which holds that a provision requiring written notice, which the subject Termination provision contained, prevents the promise made by the party with the right of termination from being found as illusory in nature.  See Wright & Seaton, Inc. v. Prescott, 420 So.2d 623 (Fla. 4th DCA 1982); see also 1 Williston on Contracts § 105.

Finally, the court addressed Vila’s claim that Posen breached the implied covenants of good faith and fair dealing when it terminated the contract solely to obtain a better price.  The court again noted Vila’s reliance on insufficient case law and also noted that Vila did not address the standard which is to be applied in regards to determining if the implied covenants were breached, “namely that the party to a contract has acted contrary to the reasonable expectations of the parties in performing the contract.”  Vila, at *5; see also QBE Ins. Corp. v. Chalfonte Condo. Apt. Ass’n, 94 So.3d 541 (Fla. 2012).  The court went on to conclude that the plain language of the subcontract allowed Posen to exercise the Termination for Convenience provision, even if its sole purpose for doing so was to obtain a better price for the previously contracted for services, so long as the procedures proscribed in the provision were followed.  If the provisions were followed the court noted that Posen’s actions were not, “contrary to the reasonable expectations of the contracting parties.”  Vila, at *5.  Thereafter, the Second DCA rejected Vila’s arguments and ordered the trial court to enter judgment in favor of Posen on the issue of liability for breach of the contract.

Following this decision, both contractors and subcontractors alike must pay close attention to the inclusion of such Termination for Convenience clauses in contracts.  To protect subcontractors it would be beneficial to include a caveat in such clauses that the provision cannot be used for the sole purpose of obtaining a lower price.  General Contactors would certainty prefer the provision at issue in Vila, and would be well served to include such provisions in future contracts.  As always, I will continue to monitor the progress of the decision and report any challenges or appeals and the results of same.