Filed: August 25, 2009
Opinion by Judge Glenn T. Harrell, Jr.
Held: Contract clauses allowing one party to terminate for "convenience" may be enforceable, subject to the implied obligation that the terminating party exercise its discretion in accordance with the implied obligations of good faith and fair dealing.
Facts: A contractor took bids from three subcontractors to install carpet in an apartment complex and entered into a contract with one of them. The contract provided that the contractor could terminate the contract for "convenience." When a dispute arose between the parties, the contractor terminated the subcontractor and hired one of the other bidders. As grounds for termination, the contractor alleged that it had cause - based on a failure to perform - as well as the right to terminate for convenience. The subcontractor objected, stating that it had not breached the contract and the contractor did not have an unfettered right to terminate.
At trial, the Circuit Court of Maryland for Baltimore County found that the subcontractor did not breach the contract. Regarding the contractor's right to terminate for convenience, the trial court rejected the contention that the contractor enjoyed a right to terminate for any reason. It rejected the contractor's assertion that its subjective loss of faith in the subcontractor satisfied whatever implied limitations there might be. Accordingly, the trial court concluded that the contractor terminated the contract improperly and awarded damages to the subcontractor. The contractor appealed.
Analysis: Before argument in the Court of Special Appeals, the Court of Appeals took the matter on its own initiative. The Court started with the principle that "illusory" contracts are not enforceable. A contract is illusory if "the promisor retains an unlimited right to decide later the nature or extent of his performance.”
The law prefers, however, to interpret contracts in a way that will render them effective rather than illusory. In addition, Maryland law implies an obligation to act in good faith and deal fairly with other parties to a contract. Accordingly, a party must exercise its rights in good faith and in accordance with fair dealing.
Consistent with this, the Court held that the contractor was not entitled to terminate for any reason whatsoever. Where the written right to terminate for no cause left off, "the implied obligation of good faith and fair dealing picks-up, thereby limiting the manner in which [the contractor] was permitted to exercise its discretion." The Court stated succinctly: "[The contractor] was permitted to terminate only if, in its discretion, it determined that continuing with the subcontract would subject it potentially to a meaningful financial loss or some other difficulty in completing the project successfully."
*The case contains an informative explication of the history and evolution of the concept of "termination for convenience."
The full opinion is available in PDF.