Maryland’s Highest Court Rules That Termination for Convenience Clauses Must be Exercised in Good Faith and Fair Dealing
The Subcontractor Advocate September 1, 2009
In a victory for subcontractors, suppliers, and construction firms that rely on their executed contracts as reliable indicators of future work, Maryland's highest court unanimously ruled on August 25, 2009, that private parties must act with good faith and in fair dealing when using a termination for convenience clause to end a contract. Questar Builders, Inc. v. CB Flooring, LLC, Case No. 03-003688. Because the decision interprets a common contract 'termination' clause, it should have persuasive impact far beyond Maryland state lines
In the case, Questar Builders ("General Contractor") was hired to build a luxury midrise apartment building and townhome complex. The General Contractor and CB Flooring ("Subcontractor") executed a contract to install carpeting based on the Subcontractor's bid price of $1.12 Million. One year into the Project, but before the carpeting work had started, the General Contractor terminated the Subcontractor after it had negotiated a better price with the second low bidder.
The General Contractor claimed that the Subcontract termination for convenience clause gave it an "absolute" right to terminate at any time for any or no reason. In response, Subcontractor and the American Subcontractors Association —ASA filed an amicus [friend of the court] brief in this case— argued that the implied duty of good faith and fair dealing applies to all contract clauses, including private contract termination for convenience clauses, and that to hold otherwise would render such contracts illusory and have a host of negative public policy ramifications.
In a 7-0 decision the Maryland Court of Appeals (Maryland's highest court) unanimously agreed with ASA and Subcontractor. The Court stated that termination for convenience clauses must be interpreted and applied "according to the common law of contract as interpreted by this Court, which does not require [the federal contracting standard urged by the General Contractor of] 'well-nigh irrefragable proof' of wrongdoing to establish bad faith."
The High Court found that the General Contractor went "too far" when it argued that it could terminate "for any or no reason" because such interpretation would render the Subcontract illusory. The High Court then held that "a party with discretion is limited to exercising that discretion in good faith and in accordance with fair dealing." The High Court added that contracting parties "give up their opportunity to shop around for a better price" once they execute a binding contract for a specified duration.
This ruling by Maryland's Highest Court is welcome news to construction contractors and firms, particularly lower-tiers. Indeed, if the Court had endorsed the General Contractor's arguments, the resulting decision would have encouraged a host of anti-competitive practices such as 'bid shopping' after the signing of a contract and the subsequent pressuring of contractors and suppliers into either lowering their bids or agreeing to perform extra work without compensation at the risk of being terminated. In the current environment of declining prices —and increased competition for the work that is available— the Court's unanimous and well-reasoned decision should give private contractors and owners a powerful disincentive to terminate for reasons of price alone.