First Department Affirms Contractual Termination Conversion Clause

Earlier, we reported on a Commercial Division case, Minelli Construction Corp. v. WDF Inc., et al., N.Y. Co. Index No. 105989/2011, in which a trial court upheld the commonly found clause in construction contracts which allows a party who terminates a contractor or sub-contractor for cause to automatically convert the termination into one for convenience if proper cause for the termination is not later found by a Court. (“Contractual Termination Conversion Clause Upheld,” 4/22/15.) We noted that the plaintiff had appealed from the ruling, which struck its lost profits claim from the case, and stated that we would update the post after the appeal was heard and decided. That day has come.

On December 15, 2015, a First Department panel unanimously upheld the lower court’s grant of summary judgment dismissing the lost profits cause of action. 2015 WL 8687654, 2015 N.Y. Slip Op. 09205. The First Department held that both clauses relied upon by the defendant, the termination for convenience clause and the termination conversion clause, were enforceable. Moreover, the First Department noted that termination for convenience clause, when exercised, was enforceable “without regard to [plaintiff’s] good faith, or lack thereof”. Thus, whether or not the defendant engaged in bad faith in terminating the plaintiff from the project for cause, the existence of the conversion clause in the contract meant that plaintiff could not recover lost profits for a wrongful termination of the contract. Rather, pursuant to the clear and unambiguous terms agreed to by the parties, if a termination for cause was found not to be valid, the termination would automatically convert to a termination for convenience and the terminated party would be limited solely to seeking payment for work already performed.

The decision appears to be the first clear New York State Court decision interpreting the interplay of both clauses in construction contracts when challenged by a claim that the termination had been an alleged exercise of extreme bad faith. While other cases had interposed a good faith requirement for a conversion, those cases did not involve contract clauses and were based on common-law concepts. Thus, the instant opinion is now dispositive on the issue of the validity of such clauses where they are clear and unambiguous.

The decision reinforces strong and long-held New York case law that, absent certain well-recognized exceptions, contracts should be enforced as written. Accordingly, it is incumbent on all general contractors to review and/or revise their contracts to ensure that they are protected by these express clauses in contracts allowing for conversions to terminations of convenience to occur in the event of a mistaken termination for cause.