Appellate Decision Accepts Contractor’s Use of Termination for Convenience Clause to Obtain Better Price with Another Subcontractor

The recent decision by the Second District Court of Appeal in the case of Vila & Son Landscaping Corporation v. Posen Construction, Inc. addressed the issue of whether a contractor can use the termination for convenience clause in its contract with a subcontractor to terminate the subcontract and enter into another subcontract with a different subcontractor at a lower price.

In this case, Posen, the contractor, terminated its subcontract with Vila, the subcontractor, after it obtained a lower price for the same work from another subcontractor. Vila sued, arguing that Posen was obligated to exercise its right to terminate for convenience in good faith, and terminating the contract solely because it found a lower bidder for the work constituted bad faith and, therefore, a breach of contract. Without the imposition of good faith limitations, Vila argued, the termination for convenience provision reduces the contract to an illusory promise, lacking consideration.

The appellate court rejected these arguments. It noted in its decision that it found Vila’s reliance on case law discussing a termination of convenience clause in a federal contract of limited value when interpreting a contract between private parties. Instead, the court looked to common law contract principles as articulated by Florida’s courts. As to Vila’s argument that the promise made by the party with the right of termination is illusory in nature, the court held that because the termination for convenience provision requires written notice, valid consideration exists and the promise is not illusory. It found that Posen invoked the termination for convenience provision of its subcontract with Vila and followed the agreed upon procedures by supplying written notice. While the consideration may be thin, it is sufficient if a party is required to do something that it is not legally bound to perform.

The appellate court also found that Vila failed to recognize the standard that is required to determine whether the implied covenant of good faith and fair dealing has been breached, namely that a party to a contract has acted contrary to the reasonable expectations of the parties in performing the contract. Given the plain language of the subcontract and its termination for convenience clause, the court was unable to find how Posen’s decision to use the termination for convenience provision to obtain the services for a better price is contrary to “the reasonable expectations of the contracting parties.”

The court concluded that because Vila did not establish that Posen wrongfully terminated the subcontract, the trial court erred when it failed to enter a judgment in Posen’s favor on Vila’s claim for breach of contract.

This decision has further clarified how contractors can terminate subcontracts by exercising their rights under a termination for convenience clause. Our South Florida construction law attorneys will continue to monitor and write about important decisions such as this for the construction industry in Florida, and we encourage industry followers to enter their email address in the subscription box at the top right of the blog in order to receive all of our future articles.