Bad Faith Termination for Convenience

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Snell & WilmerMany construction contracts include a clause that allows an owner to terminate a contractor’s remaining work on a project at the owner’s convenience. And during a global pandemic and these turbulent economic times, termination for convenience clauses are receiving renewed attention, including under what circumstances an owner may not terminate for convenience.

At the outset, some courts have at times viewed termination for convenience clauses suspiciously because such clauses typically confer an unfettered right to terminate only upon the owner. To some courts, this lack of mutuality appears to constitute an “illusory promise” lacking consideration, and thus, a provision some courts may not enforce. To remedy this issue, some courts have required an owner to have good faith reasons when exercising the termination for convenience clause. If an owner acts in bad faith when terminating for convenience, the owner will have violated the implied duty of good faith and fair dealing. See generally 5 Bruner & O’Connor Construction Law § 18:47.

But when does an owner act in bad faith when terminating for convenience? Few Arizona courts have analyzed termination for convenience clauses, let alone explained the limitations on exercising such provisions. However, in Arizona’s Towing Professionals, Inc. v. State, the Arizona Court of Appeals held that the owner of the contract acted in bad faith when it invoked its “cancellation for convenience” provision to thwart administrative or judicial review of a state’s decision in awarding contracts after the bidding process. More recently, the Arizona Court of Appeals held that the City of Avondale did not act in bad faith or abuse its discretion in terminating for convenience its contract with a towing company when the owner of the towing company was arrested for two felony counts stemming from his involvement with a prior town business for which he had been general manager. Go Services, LLC v. City of Avondale, 1 CA-CV 16-0482, 2017 WL 6328004 (App. Dec. 12, 2017).

Beyond Arizona, other courts have held that a party acts in bad faith when it terminates a contract for convenience simply to acquire a better bargain from another source. See, e.g., Krygoski Constr. Co. v. United States, 94 F.3d 1537, 1541 (Fed. Cl. 1996). For instance, in Greer Properties, Inc. v. LaSalle National Bank, the Seventh Circuit held that a party could not terminate a contract for convenience “to shop around for a better price.” The Seventh Circuit explained: “When the [defendant] entered a contract with [the plaintiff and] agreed to pay them a specific price for the property, [the defendant] gave up their opportunity to shop around for a better price. By using the termination clause to recapture that opportunity, [the defendant] would have acted in bad faith.”

Although few Arizona courts have explored the limitations on termination for convenience clauses, precedent from federal appellate courts indicate that an owner acts in bad faith when it terminates for convenience simply because the owner got a better deal. To avoid potential allegations of bad faith, an owner may want to confer with counsel before deciding to exercise its termination for convenience rights simply because the owner found a better bargain elsewhere.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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