Massachusetts Governmental Agency May Terminate Contract for Cost Savings

Massachusetts Governmental Agency May Terminate Contract for Cost Savings

May 18, 2018

Termination for convenience clauses are common in construction contracts with governmental entities and provide the government with disproportionate power over whether a contractor will be able to fully perform its contract.  Certain Federal procurement contracts require termination for convenience language that permit the governmental agency to terminate a contract when it is "in the Government's interest." For Federal contracts, a termination for convenience generally is proper if the governmental agency does not terminate in bad faith or if the agency does not abuse its discretion.  

A recent Massachusetts Supreme Court decision ruled that contractual language allowing termination for convenience "for any reason” at the governmental agency's "sole discretion" allows a governmental agency to terminate a contract for cost savings. See, A.L. Prime Energy Consultant, Inc. v. Massachusetts Bay Transportation Authority, 479 Mass. 419 (2018).  Massachusetts declined to follow the Federal Court rule that requires a bad faith or abuse of discretion analysis and instead ruled that a termination for convenience clause should be read according to “general contract principals” that require parties to be bound by the unambiguous terms of a contract.

Here, plaintiff A.L. Prime Energy Consultants, Inc. ("Prime") entered into a two year fuel supply contract with the Massachusetts Bay Transportation Authority ("MBTA").  The Prime’s contract with the MBTA included a termination for convenience clause that permitted the MBTA to terminate the contract with 30 days' notice for "any reason" at the MBTA's sole discretion.  Less than a year into the contract the MBTA terminated Prime's contract because it could obtain fuel at a lower price from another source.  The Massachusetts Supreme Judicial Court ruled that the plain language of the contract, which allowed the MBTA to terminate the contract for any reason, did not prohibit the MBTA from terminating the Prime contract to obtain fuel from another source at a lower cost.