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Court Tightens Rules on Subcontractor Termination

Friday, September 4, 2009

In a major victory for opponents of bid shopping, the Maryland Court of Appeals has ruled that contractors must act in good faith and deal fairly with subcontractors when terminating them “for convenience.”

“A right to terminate in the absence of the other party’s breach does not equate necessarily with the right to terminate based on a whim,” the court ruled Aug. 25 in Questar Builders Inc. v. CB Flooring LLC. “We shall not read into the Subcontract such unfettered power.”

In the case, contractor Questar and subcontractor CB Flooring signed a subcontract for carpet and flooring work “through [the] duration of the project.” The subcontractor had been the low bidder on the $1.1 million contract, but design changes led the subcontractor to submit a change order.

After submitting the design changes to the next lowest bidder and receiving a price of $1,000 less, Questar replaced CB Flooring, citing a “termination for convenience” clause.

The concept of “termination for convenience” originally developed so that the federal government could cancel or change defense contracts based on wartime needs.

Such clauses are now common in construction contracts. But the Maryland court ruled that private parties do not have the federal government’s sweeping power to terminate contracts for convenience.

It also noted that Maryland law “generally implies an obligation to act in good faith and deal fairly with the other party or parties to a contract.”

“Questar’s contention that it was entitled to terminate the Subcontract for any reason whatsoever goes too far and is inconsistent with the terms of the Subcontract,” the court ruled.

The American Subcontractors Association, ASA of Baltimore and the D.C. Metropolitan Subcontractors Association jointly filed an amici curiae, or “friends of the court,” brief on Feb. 17, arguing that a breach “of the good faith and fair dealing covenant would not only poison business relationships and eliminate business certainty, but also do great damage to the ability of subcontractors to rely on their signed contracts as a reliable indicator of future work and expected revenues."

ASA tapped its Subcontractors Legal Defense Fund to pay the fees associated with this case. The SLDF supports ASA’s critical legal activities to protect the interests of all subcontractors. For more information, contact ASA at (703) 684-3450, ext. 1333, or email SLDF@asa-hq.com.