Is the governments’ right to terminate for convenience written in stone?

Termination for convenience clauses in contracts, particularly those involving local government entities such as cities, counties, and states, are governed by specific conditions that vary depending on the jurisdiction, the language of the contract, and the applicable legal framework. Based on the provided context, the following principles and conditions typically govern such clauses: 

1. Unilateral Right to Terminate Without Cause: Termination for convenience clauses generally allow one party, often the government entity, to terminate the contract without needing to establish fault or breach by the other party. This is intended to provide flexibility for the government to adapt to changing circumstances or policy priorities. For example, in Mb Oil Ltd. v. City of Albuquerque, the court upheld the city's right to terminate a contract for convenience, emphasizing that such clauses are designed to allow government entities to limit expenditures and adapt to new priorities without binding successor administrations to prior obligations.¹ 

2. Good Faith and Abuse of Discretion: While termination for convenience clauses grant broad discretion, courts often require that the government entity exercise this right in good faith and not in an arbitrary or capricious manner. Bad faith or abuse of discretion can invalidate the termination. For instance, in Handi-Van, Inc. v. Broward Cnty.,² the court noted that bad faith is a key limitation on the exercise of termination for convenience clauses, though proving bad faith “requires well-nigh irrefragable proof to induce the court to abandon the presumption of good faith dealing”.³ 

3. Changed Circumstances: Some jurisdictions or cases have required a showing of changed circumstances to justify the invocation of a termination for convenience clause. This principle was discussed in Torncello v. United States⁴, where the court suggested that termination for convenience should be limited to situations where there is a substantial change in circumstances from the original contract expectations. However, subsequent cases, such as Krygoski Construction Co. v. United States⁵, have moved away from this standard, focusing instead on the absence of bad faith. 

4. Compensation for Work Performed: Contractors are typically entitled to compensation for work performed up to the date of termination, as well as reasonable costs incurred because of the termination. For example, in Linan-Faye Const. v. Housing Authority6, the court highlighted that termination for convenience clauses often limit damages to reasonable costs and profits for work completed prior to termination, rather than allowing recovery for lost profits or other consequential damages. 

5. Contractual Language and Federal Standards: The specific language of the termination for convenience clause in the contract is critical. In some cases, federal regulations or funding requirements may mandate the inclusion of such clauses, as seen in A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transp. Auth.⁷, where federal funding required the inclusion of a termination for convenience clause, but state law governed its interpretation. Similarly, in Linan-Faye Const. v. Housing Authority⁶, federal regulations required the inclusion of a termination for convenience clause in contracts funded by federal grants. 

6. Limitations on Retroactive Termination: Courts have generally disallowed the retroactive application of termination for convenience clauses to avoid liability for breaches that occurred prior to the termination. For instance, in Maxima Corp. v. United States⁸, the court held that the government could not retroactively invoke a termination for convenience clause after the contractor had completed its obligations. 

In summary, termination for convenience clauses in contracts with local government entities are governed by principles of good faith, the specific language of the contract, and applicable legal standards. These clauses provide flexibility for government entities but are subject to limitations to prevent abuse or bad faith conduct. The contractor's right to compensation for work performed and costs incurred is typically preserved, and courts may scrutinize the exercise of such clauses to ensure compliance with contractual and legal obligations.

1. Mb Oil Ltd. v. City of Albuquerque, 382 P.3d 975 (N.M. Ct. App. 2016)
2. Handi-Van, Inc. v. Broward Cnty., 116 So. 3d 530 (Fla. Dist. Ct. App. 2013
3. T & M Distribs., 185 F.3d at 1285 (quoting Kalvar,543 F.2d at 1301–02
4. Turncello v. United States, 681 F.2d 756 (Ct. Cl. 1982
5. Krygoski Construction Co. v. United States, 94 F.3d 1537 (Fed. Cir. 1996)
6. Linan-Faye Const. v. Housing Authority, 847 F. Supp. 1191 (D.N.J. 1994)
7. A.L. Prime Energy Consultant, Inc. v. Mass. Bay Transp. Auth., 479 Mass. 419 (Mass. 2018)
8. Maxima Corp. v. United States, 847 F.2d 1549 (Fed. Cir. 1988)