A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transport Auth., 479 Mass. 419 (May 2, 2018)

In a case of first impression, the Massachusetts Supreme Court held that general contract principles, and not federal case law, govern the treatment of termination for convenience clauses in state procurement contracts.

In January 2015, the Massachusetts Bay Transportation Authority (“MBTA”) issued an invitation for bids for the supply of ultra-low sulfur diesel fuel for a two year term.  Following bidding, the MBTA awarded the contract to A.L. Prime Energy Consultant, Inc. (“Prime”) in July 2015.  The contract included a termination for convenience clause that provided:

The [MBTA] may, in its sole discretion, terminate all or any portion of this Agreement . . . 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. . . . (emphasis added).

Approximately a year later, the MBTA determined that it could acquire its fuel supply from a different supplier at a lower price.  Accordingly, the MBTA notified Prime of its intent to terminate the contract for convenience.

Prime sued the MBTA, asserting breach of contract and breach of the covenant of good faith and fair dealing.  Prime argued that the MBTA’s termination had to be evaluated in accordance with federal precedent and, under those decisions, a public entity could not terminate for convenience solely to secure a lower price.  The MBTA moved to dismiss, arguing that the termination was in accordance with the terms of the termination for convenience provision.

The lower court denied the MBTA’s motion.  Relying on federal case law, the court held that if Prime could establish that the MBTA terminated the contract solely to obtain a better price from another contractor, the termination was improper.  In light of the novelty of the issue, the court granted the MBTA an immediate appeal to the Massachusetts Supreme Court.

On appeal, the Supreme Court concluded that the lower court erred by denying the MBTA’s motion to dismiss.  Specifically, the Court held that federal precedent controlling termination for convenience provisions could not be reconciled with general contract principles provided under Massachusetts law and that, therefore, Massachusetts law governed the dispute.

Applying Massachusetts contract law principles, the Court concluded that the language of the provision was unambiguous.  Specifically, the Court explained that “[t]he contract at issue vests the MBTA with ‘sole discretion’ to terminate’” and that “[t]he termination provision further provides that the MBTA may terminate the contract ‘for its convenience and/or for any reason.’”  Given this language, the Court held that the MBTA could properly terminate the agreement with Prime in order to obtain a better price.

This decision is a reminder that although termination for convenience provisions have evolved in the context of federal contracts and federal law, some state courts might not accept federal precedent when interpreting those clauses in disputes arising from state procurement contracts.

To view the full text of the court’s decision, courtesy of Lexis®, click here.