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A.L. Prime Energy Consultant, Inc. v. Massachusetts Bay Transportation Authority

Supreme Judicial Court of Massachusetts, Suffolk

May 2, 2018

A.L. PRIME ENERGY CONSULTANT, INC.
v.
MASSACHUSETTS BAY TRANSPORTATION AUTHORITY.

          Heard: January 5, 2018.

         Civil action commenced in the Superior Court Department on September 6, 2016. A motion to dismiss was heard by Mitchell H. Kaplan, J., and a question of law was reported by him to the Appeals Court.

         The Supreme Judicial Court granted an application for direct appellate review.

          Kevin P. Martin (Joshua J. Bone also present) for the defendant.

          Michael P. Murphy for the plaintiff.

          Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.

          LENK, J.

         This case concerns the proper construction of the termination for convenience clause in a contract between the 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, 847 F.2d 1549, 1552 (Fed. Cir. 1988). Termination for convenience clauses originated in Federal procurement contracts, and have given rise to a body of Federal case law defining Federal entities' termination rights. Some State and municipal procurement contracts also contain termination for convenience clauses, but the case law interpreting them is sparse. As a result, some State courts have looked to Federal precedent for guidance when construing a termination for convenience clause in a State or municipal procurement contract.

         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, 423 Mass. 1410 (1996), and we allowed the MBTA's motion for direct appellate review.

         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 State or municipal entity may terminate a procurement contract for its 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, 468 Mass. 379, 382 (2014), as well as relevant "matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint" (citation omitted). Schaer v. Brandeis Univ., 432 Mass. 474, 477 (2000) .

         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 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.

         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.

         In October, 2016, the MBTA moved to dismiss the complaint pursuant to Mass. R. Civ. P. 12 (b) (6), 365 Mass. 754 (1974). In March, 2017, a Superior Court judge denied the motion. The judge's decision was based on Federal case law interpreting termination for convenience clauses in Federal procurement contracts. The judge reasoned that, under that precedent, Prime could show that the MBTA acted improperly if Prime proved that the MBTA had terminated the contract solely to obtain a better price from another contractor.

         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 ...


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