A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transportation Authority
A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transportation Authority
Opinion
**419
This case concerns the proper construction of the termination for convenience clause in a contract between the
**420
Massachusetts Bay Transportation Authority (MBTA) and A.L. Prime Energy Consultant, Inc. (Prime), a private fuel supplier. A termination for convenience clause permits a contracting public entity, under certain circumstances, to cancel a procurement contract without exposure to liability for breach of contract. See
Maxima Corp
. v.
United States
,
We are asked to determine first, whether, in Massachusetts, a termination for convenience clause in a State or municipal procurement contract should be construed according to Federal precedent; and second, if not, whether Massachusetts law permits a State or municipal public entity to invoke a termination for convenience provision solely to obtain a more favorable price. This dispute began when the MBTA terminated the MBTA-Prime contract (contract), in order to procure fuel more economically through an existing Statewide contract with a different vendor. Prime filed a complaint against the MBTA for breach of contract and breach of the implied covenant of good faith and fair dealing, claiming that the MBTA's termination must be evaluated according to Federal case law. Prime further argued that, under Federal precedent, a public entity may not invoke a termination for convenience clause solely to secure a lower price. A Superior Court judge agreed, and denied the MBTA's motion to dismiss Prime's complaint. The judge then granted the MBTA's motion to report the case for interlocutory review pursuant to Mass. R. Civ. P. 64, as amended,
The Federal standard for construing a termination for convenience provision in a governmental procurement contract departs from the general rule that contracts must be enforced according to their plain meaning. We decline to import this Federal case law, which conflicts with Massachusetts precedent indicating that basic contract principles determine the proper construction of a termination for convenience clause. We conclude that a *551 State or municipal entity may terminate a procurement contract for its **421 convenience in order to achieve cost savings, where, as here, the contractual language permits, and in the absence of contrary applicable law. As a result, we conclude further that the Superior Court judge erred in denying the motion to dismiss on the ground that a public entity may not invoke a termination for convenience clause in a State or municipal public procurement contract in order to secure a lower price.
1.
Background
. We summarize the facts alleged in the plaintiff's complaint,
Polay
v.
McMahon
,
In January, 2015, the MBTA issued an invitation for bids to supply it with ultra low sulfur diesel fuel (ULSD) for two years. The MBTA's procurement of the ULSD was supported with Federal assistance awarded by the Federal Transit Administration. See note 10, infra . The MBTA attached to its invitation for bids the entire contract that the successful bidder would sign with the MBTA. This contract included the following provision, entitled "Termination for Convenience":
" 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 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 **422 Contractor's anticipatory profits or overhead costs attributable to unperformed work." (Emphasis supplied.)
In July, 2015, the MBTA awarded the ULSD contract to Prime, and agreed that the contract would take effect in September of that year. 1 July, 2015, also saw the creation of the Fiscal and Management Control Board through legislative enactment. See St. 2015, c. 46, §§ 199-208. This body is charged with, among other things, securing the fiscal stability of the MBTA. See St. 2015, c. 46, § 200 ( f ).
Separately, in May, 2015, the Commonwealth issued a request for response (RFR) seeking bids for a Statewide supply of ULSD for executive branch agencies. Dennis Burke, Inc. (Burke), was the successful bidder, and executed a contract with the Commonwealth in June, 2015.
*552 Almost one year later, in April, 2016, the MBTA told Prime that the MBTA could achieve cost reductions by opting into the Statewide ULSD contract with Burke. On July 12, 2016, the MBTA notified Prime in writing that it intended to terminate the contract, pursuant to the termination for convenience provision, effective August 15, 2016. Later that month, Prime demanded that the MBTA rescind its termination of the contract. The MBTA replied in August that its termination was proper, and would allow the MBTA to "utiliz[e] economies of scale available through the Commonwealth's existing blanket fuel contract," and encouraged Prime to submit a termination claim. 2
In September, 2016, Prime filed a complaint against the MBTA in the Superior Court. The complaint asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing, and sought "compensatory damages, costs of suit, reasonable attorney[']s fees, interest, and such further relief as the court may deem just and equitable." Although Prime's complaint suggests that the MBTA incorrectly calculated its potential cost savings, its claims rest on the premise that the MBTA terminated the contract in order to secure a lower price for ULSD through the Statewide contract.
**423
In October, 2016, the MBTA moved to dismiss the complaint pursuant to Mass. R. Civ. P. 12 (b) (6),
In April, 2017, the MBTA filed a motion for reconsideration or, in the alternative, to report the case for interlocutory review pursuant to Mass. R. Civ. P. 64. The judge denied the motion for reconsideration but allowed the rule 64 motion. The judge stayed all proceedings in the Superior Court pending interlocutory appeal, and reported the following question to the Appeals Court:
"May a government agency [ 3 ] invoke a termination for convenience clause contained in a procurement contract for the purchase of goods for the sole reason that it has learned of an opportunity to purchase the same goods at a lower price from another vendor?"
We allowed the MBTA's application for direct appellate review. 4
2.
Discussion
. We are asked to determine, as a matter of first impression, whether to construe a termination for convenience clause in a State or municipal public procurement contract according to
*553
Federal case law concerning such clauses in Federal procurement contracts. We first discuss this precedent, which provides that a court must evaluate whether a Federal government entity acted in bad faith or abused its discretion in terminating for its convenience. See, e.g.,
Krygoski Constr. Co
. v.
United States
,
In this case, the contract unambiguously vests the MBTA with the discretion to terminate "for any reason," a phrase which necessarily includes the decision to cut costs. We identify nothing in Massachusetts law to indicate that this, standing alone, is an impermissible reason to terminate a contract for convenience. Nor does construing the termination for convenience provision as written render the contract illusory, because the contract required the MBTA to provide Prime with valuable consideration, and placed certain restrictions on the MBTA's termination right. As a result, we conclude that Prime has not alleged sufficient facts to demonstrate that the MBTA committed a breach of the contract or the implied covenant of good faith and fair dealing. The Superior Court judge therefore erred in denying the MBTA's motion to dismiss on the ground that Prime had not stated a viable claim upon which relief could be granted.
a.
Standard of review
. We review an order on a motion to dismiss de novo. See
Galiastro
v.
Mortgage Elec. Registration Sys., Inc
.,
b. Applicable law . We first must determine whether to construe the termination for convenience provision according to Federal precedent. Certain background is helpful in understanding Prime's argument that Federal law should guide our analysis.
In general, a termination for convenience clause permits a contracting public entity, under certain circumstances, to cancel a procurement contract without exposure to liability for breach of contract. See
Maxima Corp
.,
Judicial interpretation of this language has evolved along with the changes in statutory and regulatory requirements, primarily in the United States Court of Appeals for the Federal Circuit and the Court of Claims, which was the predecessor to the United States Court of Federal Claims.
6
See
Krygoski
,
**426
The United States Court of Appeals for the Federal Circuit's precedent as to abuse of discretion "suggest[s] that [the] court will avoid a finding of abused discretion when the facts support a reasonable inference that the contracting officer terminated for convenience in furtherance of statutory requirements for full and open competition." See
id
. at 1544, citing
Caldwell & Santmyer, Inc
. v.
Glickman
,
Our own precedent concerning termination for convenience clauses in public procurement contracts is far less extensive. We
**427
have had one previous occasion to construe such a clause. See
Morton St
.,
In
Morton St
., the parties did not raise, and the court did not address, the question whether to import Federal precedent when construing a termination for convenience provision. See
id
. at 490-494,
The Federal standard, by contrast, is a gloss that has settled on the uniform language found in certain Federal termination for convenience clauses, informed partly by Federal procurement requirements that have no application to State or municipal agencies. See
Krygoski
,
Our precedent instructs courts to examine how a contract, by its plain language, defines the parties' rights. See
Schwanbeck
v.
Federal-Mogul Corp
.,
Prime's argument that, by referencing the Federal acquisition regulation, the contract incorporates Federal case law, is unavailing. The contract states that, in the event of termination for convenience, "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." This language does no more than provide that, once the
**429
MBTA terminates for its convenience, Prime's reimbursement is to be determined under the principles provided by the Federal acquisition regulation. See, e.g.,
Neither Prime's additional contention that a termination for convenience clause-construed according to its plain language-would deprive a contractor of any consideration, nor the fact that certain other States have adopted the Federal standard, persuades us that we should import Federal precedent that would conflict with State law. Prime suggests that, in order to ensure that public procurement contracts provide contractors with real consideration, we must adopt the Federal standard. We recognize that Federal case law might represent "an effort to [rein] back on the government's non-negotiable, statutorily-conferred entitlement to terminate its contracts as it pleases." See
Handi-Van, Inc
. v.
Broward County
,
We recognize that some State courts have consulted Federal precedent in construing a termination for convenience clause in a State or municipal contract. See, e.g.,
Krygoski
,
In sum, in light of the incompatibility between the Federal standard and our own jurisprudence, we are not persuaded that Federal law should supplant Massachusetts precedent in determining the proper construction of a termination for convenience clause in a State or municipal public procurement contract. Having concluded that the termination for convenience clause must be construed according to Massachusetts law, we turn to Prime's **431 claims against the MBTA.
c.
Proper construction
. i.
Breach of contract
. Prime alleges that the MBTA's decision to terminate the contract in order to secure a better price or contract terms from another vendor "rendered the competitive bidding process meaningless" and was a breach of the contract. In order to determine whether Prime has alleged sufficient facts to show that the MBTA's termination was impermissible, we analyze the contract according to the principle that "[w]hen contract language is unambiguous, it must be construed according to its plain meaning."
Balles
v.
Babcock Power Inc
.,
The language of a contract is unambiguous unless "the phraseology can support a reasonable difference of opinion as to the meaning of the words employed and the obligations undertaken" (citation omitted).
Bank
v.
Thermo Elemental, Inc
.,
The termination provision further provides that the MBTA may terminate the contract "for its convenience and/or for any reason." As we concluded in
Morton St
.,
The word "any" is defined as "one, no matter what one: every." Webster's Third New International Dictionary 97 (2002).
*559
The phrase "for any reason" thus unambiguously includes the MBTA's reason for termination: achieving cost savings. See
Insurance Brokers W. Inc
. v.
Liquid Outcome LLC
.,
Prime argues that, under
Morton St
., only a funding loss or other change of circumstances could justify invocation of a termination for convenience clause, but
Morton St
. contains no such limitation. Indeed, in that case we concluded that "challenging decisions" forced by budget constraints may motivate a public entity to terminate a contract. See
Morton St
.,
The Legislature's decision to create the Fiscal and Management Control Board in order to secure the MBTA's fiscal stability indicates that the MBTA's budget is under pressure. See St. 2015, c. 46, § 200 (
f
). Moreover, the contract language in this case contains a broader authorization of discretion than was at issue in
Morton St
.,
*560
**433
Finally, construing the termination clause as written does not, as Prime argues, render the contract unenforceable for lack of consideration. The contract here bound the MBTA to provide certain valuable consideration to Prime. See
Graphic Arts Finishers, Inc
.,
ii.
Breach of the implied covenant of good faith and fair dealing
. Prime's complaint also asserts that the MBTA terminated the contract "in order to undercut the [c]ontract price set through the competitive bidding process, thereby depriving Prime
**434
of the fruits of the [c]ontract," and therefore committed a breach of the implied covenant of good faith and fair dealing. The MBTA's broad latitude under the contract does not immunize it against such an allegation. See
Robert & Ardis James Found
. v.
Meyers
,
"The covenant of good faith and fair dealing ... provides 'that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.' ... 'A breach occurs when one party violates the reasonable expectations of the other' " (citations omitted)
Weiler
v.
PortfolioScope, Inc
.,
Prime has not alleged sufficient facts to show that the MBTA's decision to terminate "injured" its right to "receive the fruits of the contract," which, as discussed,
*561
included payment for ULSD delivered, as well as thirty days' written notice and reimbursement for certain costs in the event of termination. Nor do Prime's allegations state a claim that the MBTA violated its "reasonable expectations." "The plaintiff cannot have misunderstood the broad discretion on the part of" the MBTA.
Eigerman
,
On the facts provided, this is not a case in which one party leveraged its discretion to "recapture opportunities forgone on contracting" or "to refuse 'to pay the expected costs of performance.' "
**435
See
Anthony's Pier Four, Inc
.,
Simply put, "the implied covenant of good faith and fair dealing cannot create rights and duties that are not already present in the contractual relationship."
Eigerman
,
3. Conclusion . We construe the reported question as asking whether the MBTA's motion to dismiss properly was denied. We conclude that the Superior Court judge erred in denying the motion on the ground that a public entity may not invoke a termination for convenience clause in a public procurement contract in order to secure a lower price. The matter is remanded to the Superior Court for further proceedings consistent with this opinion.
So ordered .
The Massachusetts Bay Transportation Authority (MBTA) initially had awarded the contract to a different bidder. A.L. Prime Energy Consultant, Inc. (Prime), appealed from this decision on the ground that it was based on incorrect price calculations, and subsequently was awarded the contract.
The record is silent as to whether the MBTA paid Prime the reimbursement costs required in the event of a termination for convenience, but Prime has not alleged that the MBTA failed to provide this payment.
Although the MBTA is a political subdivision akin to "a county, a regional school district, or a fire, improvement, or incinerator district," see
Massachusetts Bay Transp. Auth
. v.
Boston Safe Deposit & Trust Co
.,
Although the trial judge's report takes the form of a question of law, we evaluate the propriety of the judge's decision denying the MBTA's motion to dismiss. See
Maher
v.
Retirement Bd. of Quincy
,
The Federal acquisition regulation provides uniform termination for convenience clauses for seven different types of procurement contracts. See
The United States Court of Appeals for the Federal Circuit is a specialized court that hears appeals from the United States Court of Federal Claims, which has jurisdiction to review appeals of most decisions by Federal contracting officers. See
The United States Court of Appeals for the Federal Circuit has concluded that the requirement for "well-nigh, irrefragable proof" approximates the "clear and convincing evidence" standard. See
Am-Pro Protective Agency, Inc
. v.
United States
,
The Court of Federal Claims held in
TigerSwan, Inc
. v.
United States
,
A claim that a Federal public entity has invoked a termination for convenience clause in bad faith also is distinct from a claim for breach of the implied duty of good faith and fair dealing under Massachusetts law. See discussion, infra .
Although Prime does not discuss this fact, we note that the MBTA's procurement of fuel under section 6.1.1 of the contract is supported by Federal funding awarded by the Federal Transit Administration (FTA). The Federal acquisition regulation, however, does not apply to procurements conducted with Federal assistance by non-Federal entities, such as the MBTA. See
We leave for another day the question whether a public entity may terminate a contract for its convenience in order to rebid the contract in search of a lower price. See
Petricca Constr. Co
. v.
Commonwealth
,
See discussion, infra , concerning consideration provided by the MBTA-Prime contract in the event of termination.
See
Mb Oil Ltd. Co
. v.
Albuquerque
,
As noted, although Prime's complaint asserts that the MBTA incorrectly calculated its potential cost savings, the complaint does not allege that the MBTA's stated reason for terminating the contract concealed another, illegitimate one.
In its brief, Prime suggests that the MBTA's decision to terminate the contract runs afoul of Massachusetts public bidding laws that are aimed at fostering equitable competition. We observe that, as a recipient of Federal assistance, the MBTA both must comply with applicable State law and must ensure that "procurement transactions be conducted in a manner providing full and open competition."
To the extent that Prime argues that the contract, construed according to its plain language, is unenforceable as contrary to the public policy of treating bidders fairly and equally, we reject this claim. " 'Public policy' in this context refers to a court's conviction, grounded in legislation and precedent, that denying enforcement of a contractual term is necessary to protect some aspect of the public welfare."
Feeney
v.
Dell Inc
.,
Prime contends, in addition, that the obligation of good faith imposed by the Uniform Commercial Code (U.C.C.) is applicable here. For the reasons discussed, the MBTA has not violated this obligation. See G. L. c. 106, § 1-304 ;
Knapp Shoes, Inc
. v.
Sylvania Shoe Mfg. Corp
.,
Reference
- Full Case Name
- A.L. Prime Energy Consultant, Inc. v. Massachusetts Bay Transportation Authority.
- Cited By
- 54 cases
- Status
- Published