Massachusetts Supreme Judicial Court Issues Favorable Ruling in Connection with Procurement Contracts

On May 2, 2018, the Massachusetts Supreme Judicial Court (the “Court”) held that public entities may terminate a procurement contract for convenience, without exposure to liability for breach of contract, solely to obtain a more favorable price, where the contractual language permits, and in the absence of contrary applicable law.  See A.L. Prime Energy Consultant, Inc. v. Massachusetts Bay Transportation Authority, 479 Mass. 419 (2018).

In A.L. Prime, the Court was asked to determine: (1) whether a termination for convenience clause in a state or municipal procurement contract should be construed according to federal precedent; and (2) if not, whether Massachusetts law permits a state or municipal public entity to invoke a termination for convenience clause solely to obtain a lower price.

A.L. Prime Energy Consultant, Inc. (“Prime”), a private fuel provider, brought a civil action against the Massachusetts Bay Transportation Authority (“MBTA”), alleging that MBTA breached a contract for the purchase of diesel fuel, when MBTA terminated the contract for convenience in order to procure fuel more economically through an existing statewide contract with a different vendor.

Prime argued that federal precedent should apply to the contract because the contract referenced federal acquisition regulations and under federal precedent, a public entity may not invoke a termination for convenience clause solely to secure a lower price.

At the outset of its decision, the Court noted that case law on the topic of termination for convenience in Massachusetts public procurement contracts is sparse.  Indeed, the Court noted that this case asked it, as a matter of first impression, to determine whether to construe a termination for convenience clause in a public procurement contract according to federal case law.  Under federal precedent a court must evaluate whether a federal government entity acted in bath faith or abused its discretion in terminating for convenience.  The Court compared that standard to Massachusetts jurisprudence which indicates that termination for convenience clauses should be interpreted under general contract principles and the plain meaning of the language should be evaluated.  Because the two standards cannot be reconciled, the Court held that Massachusetts law determines proper construction.

The Court discussed the interesting background of the concept of terminating a procurement contract for the federal government’s convenience, which developed in federal procurement contracts during the Civil War as a way to avoid military procurement costs following the completion of a war effort.  A.L. Prime, 479 Mass. at 425, citing  Krygoski Constr. Co. v. United States, 94 F.3d 1537, 1540 (Fed. Cir. 1996).   By the end of the 20th Century, the principle had been extended beyond the military context, and federal law required that many federal procurement contracts contain a termination for convenience clause. See Id. and 48 C.F.R § 49.502.

Nevertheless, the Court declined to follow federal case law, noting that the mere reference in the contract between Prime and MBTA to federal acquisition regulations was insufficient to incorporate the federal standard for interpreting a termination for convenience clause.  .Applying Massachusetts precedent instead, which requires that an unambiguous agreement be enforced according to its terms, the Court held that the contract unambiguously vested MBTA with sole discretion to terminate and its reason for doing so (i.e., to obtain a better price) was permissible.

The contract language at issue between MBTA and Prime was as follows:

“Termination for Convenience. The [MBTA] may, in its sole discretion, terminate all or any portion of this Agreement or the work required hereunder, at any time for its convenience and/or for any reason by giving written notice to the Contractor thirty (30) calendar days prior to the effective date of termination or such other period as is mutually agreed upon in advance by the parties. If the Contractor is not in default or in breach of any material term or condition of this Agreement, the Contractor shall be paid its reasonable, proper and verifiable costs in accordance with generally accepted government contracting principles as set forth in the Federal Acquisition Regulations, including demobilization and contract closeout costs, and profit on work performed and Accepted up to the time of termination to the extent previous payments made by the [MBTA] to the Contractor have not already done so. Such payment shall be the Contractor’s sole and exclusive remedy for any Termination for Convenience, and upon such payment by the [MBTA] to the Contractor, the [MBTA] shall have no further obligation to the Contractor. The [MBTA] shall not be responsible for the  Contractor’s anticipatory profits or overhead costs attributable to unperformed work.”  A.L. Prime, 479 at 422 (emphasis supplied).

The Court noted that this language permitted MBTA to terminate in its “sole discretion” i.e., unilaterally; that the phrase “for any reason” unambiguously included MBTA’s reason for termination: achieving cost savings; and that certain restrictions were placed on MBTA’s right to terminate, including 30 days written notice and reimbursement for certain costs in the event of termination.  Because this language was unambiguous and the contract provided for valuable consideration, the Court declined to find that MBTA’s termination for convenience to achieve costs savings constituted a breach of contract.

In light of this decision, it would behoove Massachusetts public entities to review the termination for convenience language in their procurement contracts to ensure they too will be enforceable and so that public entities may take advantage of the possibility of achieving cost savings.