95 N.E.3d 547
Mass.2018Background
- MBTA awarded a two-year contract to A.L. Prime (Prime) in July 2015 to supply ultra low sulfur diesel (ULSD); the contract included a termination-for-convenience clause allowing the MBTA to terminate "in its sole discretion" and "for any reason."
- The Commonwealth separately awarded a Statewide ULSD contract to Burke in June 2015; in April 2016 the MBTA decided it could save money by opting into that Statewide contract.
- The MBTA gave Prime written notice in July 2016 terminating the contract effective August 15, 2016, citing cost savings; Prime demanded rescission and then sued in September 2016 for breach of contract and breach of the implied covenant of good faith and fair dealing.
- The Superior Court denied the MBTA’s Rule 12(b)(6) motion to dismiss, relying on federal precedent that a government may not invoke a termination-for-convenience solely to obtain a lower price; the MBTA sought and obtained direct appellate review.
- The Supreme Judicial Court considered (1) whether Massachusetts courts should adopt federal law for construing termination-for-convenience clauses in state/municipal contracts, and (2) whether a public entity may terminate to obtain a lower price.
- The SJC held that Massachusetts law controls, the MBTA’s contract unambiguously authorized termination "for any reason" including cost savings, and Prime failed to state claims for breach or for breach of the implied covenant.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Should federal jurisprudence govern construction of termination-for-convenience clauses in state/municipal procurement contracts? | Federal law should apply because termination clauses and FAR principles are relevant and some state courts follow federal precedent. | Massachusetts law and general contract principles govern; federal FAR-based gloss conflicts with Massachusetts contract law. | Held for MBTA: Massachusetts law controls; federal standard not imported. |
| May a public entity terminate a procurement contract solely to obtain a lower price? | Prime: Under federal precedent a termination solely to obtain lower price is improper and may be bad faith/abuse of discretion. | MBTA: Contract allowed termination "for any reason" and expressly granted sole discretion, including cost savings. | Held for MBTA: Yes—if contract language permits and no contrary law; termination to secure lower price is permissible here. |
| Did Prime plead breach of contract based on the MBTA's termination? | Prime: Termination to pursue a lower-priced vendor frustrated the competitive process and breached the contract. | MBTA: Contract unambiguously authorized termination in its sole discretion; termination complied with notice and reimbursement terms. | Held for MBTA: No plausible breach alleged; clause unambiguous and encompassed cost-saving termination. |
| Did Prime plead breach of the implied covenant of good faith and fair dealing? | Prime: Termination deprived Prime of contractual "fruits" and violated reasonable expectations. | MBTA: Broad contractual discretion meant Prime could not reasonably expect protection from such termination; no bad faith alleged. | Held for MBTA: No viable claim; implied covenant cannot create rights beyond contract terms. |
Key Cases Cited
- Maxima Corp. v. United States, 847 F.2d 1549 (Fed. Cir. 1988) (describing termination-for-convenience concept and remedies)
- Krygoski Constr. Co. v. United States, 94 F.3d 1537 (Fed. Cir. 1996) (federal rule: termination proper absent bad faith or abuse of discretion)
- Morton St. LLC v. Sheriff of Suffolk County, 453 Mass. 485 (Mass. 2009) (Massachusetts applied general contract principles to termination-for-convenience)
- Torncello v. United States, 681 F.2d 756 (Ct. Cl. 1982) (federal discussion of bad-faith standard under termination-for-convenience)
- Caldwell & Santmyer, Inc. v. Glickman, 55 F.3d 1578 (Fed. Cir. 1995) (federal cases treating termination decisions in light of procurement competition requirements)
- Schwanbeck v. Federal-Mogul Corp., 412 Mass. 703 (Mass. 1992) (contract construction: enforce unambiguous agreements according to plain terms)