Construction Alert: Massachusetts SJC Issues Ruling Concerning Termination for Convenience

Preti Flaherty Construction Alert

On May 2, 2018, the Massachusetts Supreme Judicial Court issued a ruling clarifying that

(i) Massachusetts courts will apply Massachusetts law, and not federal procurement law, when evaluating a termination for convenience;
(ii) The court will enforce a termination for convenience under the specific language of the parties’ contract; and
(iii) The court will not apply the implied covenant of good faith and fair dealing to import or create rights or duties that are not already present in the parties’ contract.

In A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transportation Authority (SJC 12370) (May 2, 2018), the Massachusetts Bay Transportation Authority (MBTA) and A.L. Prime Energy Consultant, Inc. (Prime) entered into a fuel procurement contract, which included a clause allowing the MBTA to terminate the contract for convenience, and stating that in that event, Prime would receive its costs and profit through termination, but would not receive any anticipated profits or overhead.  The MBTA later exercised the clause after it found that it could procure fuel at less cost from other suppliers.  Prime sued contending that the terminating the contract to obtain a better price deprived Prime of the benefit of its bargain and that the MBTA should not be permitted to terminate under such circumstances, and offered examples of federal procurement case law in support of its argument.  

The SJC rejected Prime’s approach, and held that Massachusetts law, and not federal procurement law controls, and that Massachusetts law requires a plain language construction of the contract’s language.

The Court further rejected Prime’s argument that the MBTA committed a breach of the implied covenant of good faith and fair dealing by terminating the contract "in order to undercut the [c]ontract price set through the competitive bidding process, thereby depriving Prime of the fruits of the [c]ontract." In rejecting Prime’s argument, the Court ruled that the MBTA had merely exercised the rights allowed under the contract, and that Prime could not claim that it had a “reasonable expectation” of recovery where the contract expressly included a right of termination that could prevent such a result.