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Beware of Termination for Convenience Clauses 10 25 12

Beware of Termination for Convenience Clauses 10 25 12

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Published by: JimersonCobb on Oct 25, 2012
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12/04/2012

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Beware of Termination for Convenience ClausesBy Matthew F. Havice, Esq.Termination for Convenience clauses were first introduced during the American Civil War andwere used in government contracts. Such provisions in contracts with the Federal government allowedthe government to terminate contracts related to military procurements that were no longer necessaryas a result of changing technology or the cessation of hostilities. Termination for Convenience clausescontinued to gain greater favor with the Federal government through WWI and WWII and today almostevery government contract, be it related to military service/goods or not, contain the terminationprovision. 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 FloridaSecond District Court of Appeal in Vila & Son Landscaping Corp. v. Posen Construction, Inc., 2012 WL4093545 (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 Convenienceclause 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. Anysuch 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 whichtermination becomes effective.In the event of such termination, there shall be an equitable reductionof the Subcontract Sum to reflect reduction in Work, and no costincurred after the effective date to date of the Notice of Terminationshall be reimbursable unless it relates to carry out the unterminatedportion of the Work . . . In no event shall Subcontractor be entitled tolost or anticipated profits, incidental or consequential damages, or lostoverhead 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 hadcontracted for and subsequently entered into a contract with the second subcontractor for the work andnotified 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 andobtained a jury verdict in its favor for lost profits. Posen moved for a judgment notwithstanding theverdict as to both liability and damages. Posen claimed that the Termination for Convenience clausegave it the right to terminate the contract with or without cause and the contract further prohibited theVila from making a claim for lost profits. The trial court granted a new trial. Both parties appealed theorder 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 againstPosen; specifically that by terminating the contract solely to obtain a better price, Posen acted in badfaith and therefore could not rely on the Termination for Convenience clause; second that byterminating the contract solely to obtain a better price, Posen breached the implied covenants of goodfaith and fair dealing; and finally that without the imposition of good faith limitations, the Terminationclause reduces the contract to an illusory promise, lacking in consideration. Vila relied on several casesrelated to the Federal government
s use of Termination for Convenience clauses which the Second DCAnoted 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 noticeand providing payment for any work already done on the project.
The court further stated, “*a+ssumingthose procedures were adequate to supply consideration for the parties’ contract, there is no need toimpose 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 underwell settled Florida law which holds that a provision requiring written notice, which the subjectTermination provision contained, prevents the promise made by the party with the right of terminationfrom being found as illusory in nature.
See
Wright & Seaton, Inc. v. Prescott, 420 So.2d 623 (Fla. 4thDCA 1982);
see also
1 Williston on Contracts § 105.
Finally, the court addressed Vila’s claim that
Posen breached the implied covenants of goodfaith and fair dealing when it terminated the contract solely to obtain a better price. The court again
noted Vila’s reliance o
n insufficient case law and also noted that Vila did not address the standard whichis 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 theTermination for Convenience provision, even if its sole purpose for doing so was to obtain a better pricefor the previously contracted for services, so long as the procedures proscribed in the provision werefollowed. If the provisions were followed the court noted th
at Posen’s actions were not, “contrary tothe 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 tothe inclusion of such Termination for Convenience clauses in contracts. To protect subcontractors itwould be beneficial to include a caveat in such clauses that the provision cannot be used for the solepurpose of obtaining a lower price. General Contactors would certainty prefer the provision at issue in

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