Contractual Termination Conversion Clause Upheld

It is a general proposition of New York law (and elsewhere) that contracts should be enforced as they are written. That basic proposition served as the deciding factor in a recent decision which filled in some gaps in case law regarding contractual termination conversion clauses.

In Minelli Construction Corp. v. WDF Inc., et al., N.Y. Co. Index No. 105989/2011, a trial court recently 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. The difference in the nature of the termination is significant. New York law provides that a wrongfully terminated party may pursue a large range of damages, including lost profits for unperformed work, while a party terminated for convenience is typically limited to being paid for work already performed. Thus, if a conversion clause is held not to apply, a finding of a wrongful termination will open the door to damage claims which the owner or general contractor may not have anticipated.

In the Minelli case, plaintiff opposed a summary judgment motion seeking to dismiss its lost profits claim by arguing that a termination conversion required findings that the terminating party acted without bad faith and that the terminated party did not change its position in reliance on the termination for cause. The Court, however, agreed with the defendants (represented by this firm) that the case law cited by plaintiff dealt only with common-law conversions and did not apply to a case where the conversion was a bargained-for part of the contract between the parties. Instead, where the conversion was expressly made a part of the contract, the Court held that “fairly bedrock New York law” required the contract to be enforced as written. Consequently, the Court granted summary judgment dismissing plaintiff’s lost profits claim.

We will continue to follow this case through any appeal, and we will report back on any further developments. However, the Minelli Court’s decision is proof that, at least where a contract specifically addresses the termination conversion issue, you get exactly what you bargained for.

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