Questar Builders, Inc. ("Questar") is a general contractor hired to construct a luxury midrise apartment and townhome complex known as Greenwich Place at Town Center ("Greenwich Place") in Owings Mills, Maryland. After receiving bids from three flooring subcontractors, Questar selected CB Flooring, LLC ("CB Flooring") to install carpeting at Greenwich Place for a total price of $1,120,000. Another bidder, Creative Touch Interiors ("CTI") submitted a proposal to complete the project for a total price of $1,240,000
The focal point of this litigation concerns Paragraphs 12 and 14 of the Subcontract. Paragraph 12 provided in pertinent part:
(italics added). Paragraph 14 provided:
Three additional provisions of the Subcontract are also relevant to this matter. First, Paragraph 7 provided:
Second, Paragraph 13 provided, in pertinent part:
Finally, Paragraph 16 expressed the parties' mutual agreement to arbitrate all disputes concerning amounts less than $50,000, as well as Questar's right to elect arbitration for disputes concerning amounts greater than $50,000.
The complicated series of events from which this appellate "magic carpet ride" springs began even before the Subcontract was signed. The architectural drawings that Questar supplied to CB Flooring, upon which CB Flooring based its bid, specified that Shaw Custom ("Shaw") "field" carpet was to be used in the corridors of Greenwich Place. The drawings did not indicate that "border" carpet would be installed in the corridors. Yet, the Subcontract, when drafted by Questar, plainly called for CB Flooring to install border carpet. The CB Flooring salesmen reviewing the draft Subcontract realized the discrepancy and sought to strike-out this proposed requirement; however, he
In its executed form, the Subcontract required CB Flooring to install field and border carpets in the corridors of Greenwich Place and specified that the carpeting would be the same as the carpeting at Russett at Concord Park ("Concord Park"), a similar residential complex developed by Questar. The parties now agree that the corridors of Concord Park were furnished with Shaw field carpet and Bigelow Preview II ("Bigelow") border carpet.
Matters became more complicated after execution of the Subcontract when the interior design firm working on the Greenwich Place project changed the carpets to be installed in the clubhouse and corridors from Shaw and Bigelow carpets to Bentley Prince Street ("Prince Street")
Before CB Flooring responded to either set of ID Drawings, however, Questar contacted CTI about installing carpeting at Greenwich Place, assertedly because it was "trying to keep CB Flooring honest" in the event that CB Flooring requested more money on account of the carpeting changes advanced by the interior designer. CTI submitted a new bid to Questar, proposing to install carpeting at Greenwich Place for $1,119,000; however, CTI's figures were based on the Shaw and Bigelow carpets used at the Concord Park project, not the Prince Street and New Stratford carpets specified by the ID Drawings. On 23 February 2006, CB Flooring, as anticipated, submitted a change order requesting an upward adjustment of $33,566 to the Subcontract price. Four days later, Questar sent an unexecuted subcontract to CTI, pursuant to which CTI would install carpeting at Greenwich Place in exchange for $1,120,000.
On 3 March, CB Flooring, citing a mathematical error, submitted a revised change order to Questar, changing its requested adjustment from $33,566 to $103,371 above the original Subcontract price. Shortly thereafter, Charles Bode, CB Flooring's Vice President, spoke by telephone with Donald Richards, Questar's Vice President and Production Manager, about the requested adjustment. Bode and Richards testified to quite different recollections of what transpired in that conversation. In any event, Bode asked Richards to call him back later in the week so that they could discuss the matter further, but Richards did not do so. Instead, in a letter dated 23 March 2006, Questar's Senior Vice President, Frank Maccherone, notified CB Flooring that Questar was terminating the Subcontract.
In the termination letter, Maccherone stated that the termination was for cause, charging that CB Flooring materially breached the Subcontract by refusing to
After terminating its agreement with CB Flooring, Questar entered a subcontract with CTI on 5 April 2006, pursuant to which CTI agreed to install the carpeting at Greenwich Place in exchange for $1,120,000 ($1,000 more than its February 2006 bid price). This subcontract permitted CTI to install Bigelow border carpeting in the corridors, as opposed to the New Stratford border described by the ID Drawings. Questar apparently did not seek the interior designer's approval before deviating from the interior designer's plans.
Alleging that Questar terminated the Subcontract wrongfully, CB Flooring initiated a breach of contract action against the general contractor in the Circuit Court for Baltimore County in April 2006.
Questar countered that Bode informed Richards during their March telephone conversation that CB Flooring would not perform under the Subcontract unless Questar agreed to a price increase. Questar determined that the price increase was not warranted under the circumstances. The general contractor also claimed that CB Flooring failed to attend weekly, on-site progress meetings as required by the Subcontract. Thus, so Questar's defense proceeded, it justifiably terminated the Subcontract for cause. Alternatively, Questar postulated that Paragraph 14 of the Subcontract gave it the right to terminate the agreement at its convenience. Questar claimed that this right was unlimited; however, it contended that, even if the court imposed some limitation on the exercise of the right, that limitation was satisfied because Questar lost confidence in CB Flooring's ability to perform its obligations in a satisfactory manner due to the subcontractor's absence from weekly on-site progress meetings and its delay in ordering carpeting.
In addition, CB Flooring's Senior Contract Administrator explained that Bigelow carpeting costs $7.29 per square yard. She averred, therefore, that CB Flooring should have lowered the Subcontract price if, like CTI, CB Flooring was permitted to install Bigelow, instead of New Stratford, as the border carpet in the corridors of Greenwich Place. She testified also that the lead times between ordering and delivery for all of the carpets was six weeks or less and, thus, CB Flooring would not have had difficulty performing in time for Questar to meet its Memorial Day deadline for Greenwich Place's Grand Opening.
Bode also testified for CB Flooring. He averred that he placed the call to Richards because he was concerned about rumors that Questar propositioned CTI about installing the carpeting at Greenwich Place after execution of the Subcontract; he emphatically maintained that he initiated the call, not Richards, as claimed by Questar. According to Bode's recollection of their conversation, he never refused to perform under the Subcontract; he merely informed Richards that "reasonable men can resolve these differences" and asked Richards to call him later in the week to discuss the matter further, which Richards did not do. Bode also stated that he informed Richards that CB Flooring could, if needed, substantiate its requested price increase.
Furthermore, Bode stated that Richards never conveyed to him during their conversation that Questar was losing confidence in CB Flooring's ability to perform its obligations in a satisfactory manner. Supporting Bode's assertion in that regard, CB Flooring's Field Supervisor testified that he occasionally visited the Greenwich Place site when he was in the area and no one from Questar ever expressed concern with CB Flooring's absence from weekly on-site progress meetings. The Field Supervisor asserted that he and others from CB Flooring ordinarily begin attending progress meetings approximately four weeks before commencing work at a job site.
CB Flooring also adduced testimony from a salesperson with CTI who recalled being contacted by Frank Maccherone of Questar in January 2006 about submitting a new bid for installing carpeting in the Greenwich Place project. She testified that Maccherone instructed her to "revise [her] pricing" from the earlier bid of $1,240,000 that she submitted in summer 2005; however, he authorized her to base the new bid on the Shaw and Bigelow carpets, as opposed to the Prince Street and New Stratford ones contemplated by the recently issued ID Drawings. She also averred that she felt "uncomfortable"
Questar called Frank Maccherone as its first witness in its defense case. When asked about CB Flooring's absence from weekly progress meetings, he testified:
He explained that he became even more concerned when he did not hear from CB Flooring after the subcontractor received the 70% ID Drawings and, therefore, he asked Questar's Senior Superintendent for the Greenwich Place project to contact CB Flooring. According to Maccherone, the Superintendent informed him that CB Flooring anticipated requesting an upward adjustment to the Subcontract price. That news caused him to question whether CB Flooring intended to use the carpeting change as an opportunity to take advantage of Questar.
Moreover, he became even more worried when Questar did not hear from CB Flooring in response to the 100% ID Drawings. He stated that custom commercial field carpets have a 12 to 16 week order-delivery lead time and, thus, he was concerned that Questar would not be able to finish installing the carpeting at Greenwich Place before the complex's scheduled Memorial Day Grand Opening. He averred further that, when CB Flooring finally submitted its change order for an upward adjustment of $103,000, he instructed Richards to request supporting documentation from the subcontractor. When CB Flooring did not provide it, Maccherone refused the adjustment. He directed Richards to inform CB Flooring of the refusal, and when Bode indicated to Richards that CB Flooring would not perform, he decided to terminate the Subcontract.
Maccherone also explained how Questar's subcontract with CTI came to permit CTI to install Bigelow border carpeting, as opposed to the New Stratford carpeting contemplated by the ID Drawings. According to him, he informed CTI's salesperson that the subcontract could call for Bigelow carpeting if she could substantiate that the carpets were comparable in price and quality; otherwise, he could not allow the subcontract to vary from the ID Drawings. He averred that the salesperson indicated to him that the quality was the same, but did not provide him with any information on the price. Nevertheless, he permitted the change because he understood the carpets to be of comparable price and the "blended" price that she quoted him for Prince Street and Bigelow carpets was within Questar's budget for the project.
Seeking to justify that CTI's January 2006 proposal was not based on the ID Drawings, Maccherone claimed that he did not ask CTI to base its bid on erroneous
CB Flooring's counsel's cross-examination of Maccherone also revealed a dispute over whether the draft subcontract that Questar sent to CTI on 27 February 2006 contained a provision allowing CTI to install the Bigelow border. CB Flooring sought to show that Maccherone's asserted efforts to reconcile the prices and qualities of the New Stratford and Bigelow carpets were nothing more than a ruse to justify, post hoc, Questar's allowing CTI to install the Bigelow. CB Flooring's counsel pointed out to Maccherone that the subcontract with CTI, although signed on April 5, was dated February 27 and contained the clause permitting the Bigelow border. Maccherone responded that Questar prepared the document on February 27, but substantial changes occurred between then and the subcontract's signing by CTI. One change was the substitution of Bigelow carpeting for New Stratford carpeting; however, the parties did not change the date of the document as they made revisions before signing.
In addition, CB Flooring's counsel reminded Maccherone of his earlier testimony that custom carpets generally have lead times of 12 to 14 weeks (which assertedly caused him to worry that CB Flooring would not be able to complete its project in time for Greenwich Place's Memorial Day opening). When questioned further about the project's timing, Maccherone acknowledged that a 12 to 14 week lead time would not have permitted CTI to finish the project in time, considering that CTI signed its subcontract in early April and its salesperson represented that CTI would not order any carpeting until the subcontract was signed.
Richards also testified for Questar as to his recollection of his telephone conversation with Bode. Richards averred that he called Bode, after Maccherone "absolutely" denied CB Flooring's change order. Bode was not in the office at the time, so he left a message for Bode. Bode later returned his call. Richards claimed that he informed Bode of the denial and asked him whether CB Flooring still would perform. He also stated that he informed Bode of Questar's general concerns about what it
Like Maccherone, Richards also testified that generally there is a 12 to 14 week lead time for custom commercial carpets. He averred that his concern over the lead time, on two occasions, prompted him to place a telephone call to CB Flooring's Field Supervisor and request the Field Supervisor's presence at weekly progress meetings, but that no one from CB Flooring ever attended.
As part of its defense case, Questar also adduced evidence that the there was no price difference between the Shaw and Prince Street carpets and that the combined price of Prince Street and New Stratford was comparable to the combined price of Shaw and Bigelow, contrary to CB Flooring's evidence. Additionally, the general contractor adduced evidence that, before it submitted its initial bid, CB Flooring performed a site inspection of the carpeting at the Concord Park project, thus putting the subcontractor on notice that border carpeting would be included in the Subcontract.
Finally, it was revealed that CB Flooring's change order included 100% of the costs associated with the Prince Street and New Stratford carpets, but subtracted only 90% of the costs associated with the Shaw carpeting. CB Flooring's Senior Contract Administrator sought to justify the discrepancy by claiming that a 90% credit is standard industry practice where the general contractor changes the materials initially contemplated; however, she acknowledged that the Subcontract did not contain a provision authorizing CB Flooring to add to its change order 10% of the costs of the Shaw carpeting. She also acknowledged that CB Flooring did not explain the 90% credit to Questar.
After closing arguments, the trial judge rendered her ruling orally from the bench. She observed that CB Flooring made a mistake in its summer 2005 bid, which translated to a mistaken belief as to its obligations under the Subcontract. She also recognized the possibility that CB Flooring might not have been entitled to its requested price increase, given the subcontractor's own error and the conflicting evidence adduced by both parties on the pricing of the carpets.
Penultimately, the trial judge found that CB Flooring did not breach the Subcontract.
With respect to Questar's alternative defense that Paragraph 14 conveyed a right to terminate the Subcontract for convenience, the trial judge rejected Questar's contention that it enjoyed a right to terminate the Subcontract for any reason. She considered and rejected Questar's assertion that its subjective loss of faith in CB Flooring's ability to perform satisfactorily (or for the agreed upon price) satisfied whatever implied limitations there might be on the exercise of the termination for convenience clause, noting that Questar's "gut feeling" was not sufficient.
The trial judge rejected much of the testimonies of Maccherone and Richards. Specifically, she observed:
Accordingly, the trial judge concluded that Questar improperly terminated the Subcontract and awarded more than $243,000 in expectation damages to CB Flooring.
Before argument in the intermediate appellate court, this Court, on its initiative, issued a writ of certiorari. Questar Builders, Inc. v. CB Flooring LLC, 406 Md. 744, 962 A.2d 370 (2008). For the reasons that follow, we hold that the "termination for convenience" clause in this case may be enforceable, subject to an implied obligation to exercise the right to terminate in good faith and in accordance with fair dealing. We also hold that, on the present record, it is not clear that the clause was inapplicable under the circumstances found by the trial court. Accordingly, we vacate the Circuit Court's judgment and remand the case to the Circuit Court to resolve the remaining, potentially relevant discrepancies in the parties' accounts of the events leading up to the termination of the Subcontract and to enter a judgment that is consistent with this Opinion.
Standard of Review
Under Maryland Rule 8-131(c),
"`The deference shown to the trial court's factual findings under the clearly erroneous standard does not, of course, apply to legal conclusions.'" Karsenty v. Schoukroun, 406 Md. 469, 502, 959 A.2d 1147, 1166 (2008) (quoting Griffin v. Bierman, 403 Md. 186, 195, 941 A.2d 475, 480 (2008)). We review the lower court's legal conclusions for legal error under a non-differential standard. Nesbit v. Gov't Employees Ins. Co., 382 Md. 65, 72, 854 A.2d 879, 883 (2004). "The interpretation of a contract ... is a question of law." Sy-Lene of Wash., Inc. v. Starwood Urban Retail II, L.L.C., 376 Md. 157, 163, 829 A.2d 540, 544 (2003).
Courts and commentators generally agree that the concept referred to here as
In United States v. Corliss Steam-Engine Co., 91 U.S. 321, 23 L.Ed. 397 (1874), a case often cited as the legal cornerstone of the federal government's right to terminate a contract for convenience,
Id. at 323.
Justified by Corliss, the federal government expanded its reliance on broad powers to terminate many of its contracts
Although most terminations of government contracts following the Armistice of 1918 were pursuant to statutes such as the Urgent Deficiency Appropriations Act, some agencies terminated their unneeded contracts under broadly worded, express contractual provisions. See Page, When Reliance is Detrimental, at 6. For instance, in Davis Sewing Machine Co. v. United States, 60 Ct.Cl. 201 (Ct.Cl.1925), the War Department ordered 75,000 pistols from a manufacturer in July 1918. The Department inserted a provision in the contract that provided:
60 Ct.Cl. at 203. Applying the rationale of Russell Motor Car Co., the Court of Claims resolved that the manufacturer could not recover expectation damages from the contract's termination because the contract's terms contemplated the possibility of lost profits. Id. at 216-17.
The winding-down of procurements after World War I also engendered the corollary concept of constructive termination for convenience. In College Point Boat Corp. v. United States, 267 U.S. 12, 45 S.Ct. 199, 69 L.Ed. 490 (1925), the Supreme Court held that a manufacturer of collision mats ordered by the U.S. Navy could not recover lost profits arising from the Navy's instructing the manufacturer to cease production.
The "direct predecessor of the modern termination for convenience clause" developed during the military build-up to World War II. Torncello, 681 F.2d at 765. Mandatory in all fixed-price supply contracts, the clause provided, in pertinent part:
Id. (quoting 10 C.F.R. § 81.324 (Cum. Supp. 1938-43)). While this clause introduced the word "convenience," the consensus remained that the government's right to terminate a contract was justified by the exigencies and uncertainties of armed conflict. See G.L. Christian & Assocs. v. United States, 160 Ct.Cl. 1, 15, 312 F.2d 418 (1963) (noting that "[r]egularly since World War I, it has been a major government principle, in times of stress or increased military procurement, to provide for the cancellation of defense contracts when they are no longer needed"); Torncello, 681 F.2d at 765 (noting that war-time contractors during World War II "risked losing the benefits of full performance but only for the exigencies of war").
During the 1960s, however, the federal government's use of similar termination for convenience clauses expanded beyond contracts needed to wage large-scale military operations; such provisions gained widespread use in civilian and peace-time military contracts. Torncello, 681 F.2d at 765. Indeed, by 1967, the Federal Procurement Regulation made termination for convenience clauses mandatory in most fixed price supply contracts and construction contracts. See CIBNIC, ADMINISTRATION OF GOVERNMENT CONTRACTS, at 1050. At present, the federal government includes these clauses in a myriad of supply, construction, and research and development contracts. See 48 C.F.R. § 49.502 (2009). In its modern form, the clause ordinarily provides that the government may terminate "if the Contracting Officer determines that a termination is in the Government's interest."
As noted by Professor Cibnic, the result of the federal government's expanded use of termination for convenience clauses is "that broad rights developed for war contracts have come to be applied to all types of contracts, civilian as well as military, in times of both peace and war." CIBNIC,
The first standard is the "changed circumstances" test articulated by a plurality of the U.S. Court of Claims in Torncello v. United States, 231 Ct.Cl. 20, 681 F.2d 756 (1982). In Torncello, the Navy entered a requirements contract
Sitting en banc, the Court of Claims reversed the Board. The plurality opinion started from the premise that an interpretation that renders a contract enforceable is preferable to one that renders it illusory. Id. at 761. The plurality then reasoned that accepting the government's asserted right to terminate a contract in order to exculpate itself from liability for breach would render the contract illusory. Relying on the origins of the government's right to terminate a contract for convenience, the plurality concluded that some change in circumstances must occur before the government may exercise that right
The second analytical paradigm is the "bad faith/abuse of discretion" test. Under this test, "[w]hen tainted by bad faith or abuse of discretion, a termination for convenience causes a contract breach." Krygoski Constr. Co., 94 F.3d at 1541. This test predates Torncello's "changed circumstances" test; however, since Torncello, the federal courts, for the most part, have returned to reviewing convenience terminations only for "bad faith/abuse of discretion."
More recent decisions, however, declare that Colonial Metals Co. was decided wrongly, recognizing that the government cannot terminate a contract for convenience simply to get a "better bargain from another source," thus adding some teeth to the "bad faith/abuse of discretion" standard. See Krygoski, 94 F.3d at 1541. Nevertheless, in a breach of contract action against the federal government, the party challenging the government's exercise of its right to terminate for convenience must show "`well-nigh irrefragable proof' that the Government acted in bad faith," in light of the strong presumption recognized in the federal cases that the government acts in good faith. Custom Printing Co., 51 Fed.Cl. at 734 (citations omitted); see also Krygoski Constr. Co., 94 F.3d at 1541.
As the present case evidences, termination for convenience clauses are included sometimes in contracts between private parties. Such clauses are popular in construction contracts. See David A. Senter, Role of the Subcontractor, in FUNDAMENTALS OF CONSTRUCTION LAW 133 (Carina Y. Enhada, et al. eds., American Bar Association
G.L. Christian & Assocs., 160 Ct.Cl. at 30, 312 F.2d at 426-27 (italics added).
We are also persuaded by the commentary of Professor Hadfield, who noted:
Gillian Hadfield, Of Sovereignty and Contract: Damages for Breach of Contract by Government, 8 S. CAL. INTERDIS. L.J. 467, 492-93 (1999) (italics added and footnotes omitted).
Accordingly, we decline to recognize for private parties the near carte-blanche power
Under Maryland law of contract, illusory contracts are unenforceable. Cheek v. United Healthcare of the Mid-Atlantic, Inc., 378 Md. 139, 148, 835 A.2d 656, 662 (2003). "An `illusory promise' appears to be a promise, but it does not actually bind or obligate the promisor to do anything. An illusory promise is composed of `words in a promissory form that promise nothing.'" Id. (quoting CORBIN ON CONTRACTS § 5.28 (2003)). A promise, therefore, is illusory if "`the promisor retains an unlimited right to decide later the nature or extent of his performance.'" Id. (quoting 1 WILLISTON, CONTRACTS, § 4:24 (4th ed. 1990)). An unlimited right to determine how to perform, or whether to perform at all, negates the promise to perform. Id.
This notwithstanding, courts generally "prefer a construction [of a contract] which will make the contract effective rather than one which will make it illusory or unenforceable." Kelley Constr. Co. v. Wash. Suburban Sanitary Comm'n, 247 Md. 241, 247, 230 A.2d 672, 676 (1967). To that end,
2 CORBIN ON CONTRACTS § 5:28 (1995).
Furthermore, Maryland contract law generally implies an obligation to act in good faith and deal fairly with the other party or parties to a contract. Clancy v. King, 405 Md. 541, 565, 954 A.2d 1092, 1106 (2008). That implied obligation governs the manner in which a party may exercise the discretion accorded to it by the terms of the agreement. Julian v. Christopher, 320 Md. 1, 9, 575 A.2d 735, 739 (1990). Thus, a party with discretion is limited to exercising that discretion in good faith and in accordance with fair dealing. Clancy, 405 Md. at 569, 954 A.2d at 1108; Julian, 320 Md. at 9, 575 A.2d at 739.
In this case, the Subcontract did not have a true termination for convenience "clause." The right to terminate for convenience, however, may be extrapolated by reading together Paragraphs 12 and 14. To that end, Paragraph 12 detailed Questar's rights in the event of a breach of the Subcontract by CB Flooring. Among other
Yet, Questar's contention that it was entitled to terminate the Subcontract for any reason whatsoever goes too far and is inconsistent with the terms of the Subcontract. To be sure, a right to terminate in the absence of the other party's breach does not equate necessarily with the right to terminate based on a whim. We shall not read into the Subcontract such unfettered power, where the instrument itself provided that the agreement was to "remain effective through [the] DURATION OF THE PROJECT." Cf. Towson Univ. v. Conte, 384 Md. 68, 80, 862 A.2d 941, 947 (2004) (noting that "by specifying the length or term of employment," an employment agreement is not "at will"). In that regard, we presume that the parties meant what their contract expressed. Nat'l Union Fire Ins. Co. v. David A. Bramble, Inc., 388 Md. 195, 208, 879 A.2d 101, 109 (2005). Moreover, if the Subcontract was terminable at will, the express term specifying the agreement's duration would be meaningless because the duration of an "at will" arrangement is, by definition, indefinite. See DIRECTV, Inc. v. Mattingly, 376 Md. 302, 320, 829 A.2d 626, 637 (2003) (reiterating cardinal principle of contract interpretation that courts will not disregard provisions of a contract unless there is no other sound way to interpret the contract); see also STEVEN J. BURTON & ERIC G. ANDERSON, CONTRACTUAL GOOD FAITH: FORMATION, PERFORMANCE, BREACH, ENFORCEMENT § 188.8.131.52 (Little, Brown & Co. 1995) (noting that a clause permitting termination "at will" is a "mechanism for ending an agreement of indefinite duration"). Therefore, we decline to accept Questar's invitation to declare that the right to terminate for convenience here was a right to terminate the Subcontract for any reason whatsoever, including a bad reason or no reason. Furthermore, the history of convenience termination clauses as a risk-allocating tool suggests that Questar's right was not exercisable arbitrarily.
Thus, where the right to terminate established by Paragraphs 12 and 14 left off, the implied obligation of good faith and fair dealing picks-up, thereby limiting the manner in which Questar was permitted to exercise its discretion. We agree with Corbin on Contracts, which provides further clarification on contract provisions that vest one party with broad discretion to determine whether and to what extent it will perform under the contract:
2 CORBIN ON CONTRACTS § 6.14.
This Court's opinion in Stamatiades v. Merit Music Service, Inc., 210 Md. 597, 124 A.2d 829 (1956), is illustrative. There, Stamatiades, a restaurant owner, entered a contract with Music Services, pursuant to which Music Service agreed to install and operate "coin-operated amusement devices" in the restaurant and Stamatiades agreed not to enter a similar arrangement with any of Music Service's competitors during the contract's duration. Stamatiades, 210 Md. at 602, 124 A.2d at 831. In pertinent part, the contract provided:
Id. at 602-03, 124 A.2d at 832. When Stamatiades disconnected Music Service's machines and had another company install similar machines in the restaurant, Music Service sued to enforce the contract. Id. at 603, 124 A.2d at 832.
In affirming the order of the Circuit Court for Baltimore City enjoining Stamatiades from contracting with Music Service's competitor, we rejected Stamatiades's assertion that the contract with Music Service was illusory. We observed:
Id. at 614-15, 124 A.2d at 838.
While the instant case concerns termination for convenience, not necessity, the right to terminate here similarly was not exercisable at the "mere wish or caprice" of Questar. See id. at 615, 124 A.2d at 838. As stated, our understanding of the right to terminate a contract for convenience is that it is a risk-allocating tool. Thus, Questar was permitted to terminate only if, in its discretion, it determined that continuing with the Subcontract would subject it potentially to a meaningful financial loss or some other difficulty in completing the project successfully. Questar's right to terminate the Subcontract for convenience, however, did not permit it to evade either its obligation to make a good faith (albeit unilateral) determination as to whether CB Flooring was entitled to an equitable adjustment to the Subcontract price under Paragraph 13(a) or its obligation to arbitrate disputes with CB Flooring under Paragraph 16. Likewise, Questar was required to act reasonably in ensuring that the Subcontract did not become inconvenient, and it certainly was not permitted to create an inconvenience in order to terminate the Subcontract.
Questar relies on Niagara Mohawk Power Corp. v. Graver Tank & Manufacturing Co., 470 F.Supp. 1308 (N.D.N.Y. 1979), for the proposition that a termination
Questar's second point is that other consideration supported its assertedly unfettered right to terminate the Subcontract. As this Court explicated, "an unlimited option to cancel does not invalidate a contract where it [otherwise] can be shown that it does not wholly defeat consideration." Stamatiades, 210 Md. at 613, 124 A.2d at 837. "[S]uch a power to terminate does not invalidate the contract ..., so long as the party reserving the power to terminate is irrevocably bound for any appreciable time or has materially changed any of his relations or otherwise rendered some performance capable of operating as a consideration." Acme Markets, Inc. v. Dawson Enters., Inc., 253 Md. 76, 87, 251 A.2d 839, 846 (1969); see also Foster-Porter Enters., Inc. v. De Mare, 198 Md. 20, 31, 81 A.2d 325, 331 (1951) (noting that a contract terminable at will upon 30 days written notice is "a contract terminable not wholly at will, but only upon 30 days written notice, which is a contract for at least 30 days").
Questar maintains that it was bound irrevocably by the Subcontract in at least one way—it was required to pay CB Flooring the reasonable value of CB Flooring's partial performance, if any, under Paragraph 14. This argument, however, shall not prevail. Because there was no appreciable period of time provided by the Subcontract, before which Questar was prohibited from exercising its right to terminate, interpreting the Subcontract to allow Questar to terminate it for any reason whatsoever would mean that Questar had absolute control over whether it paid any compensation to CB Flooring. Thus, under Questar's interpretation, it simply could have terminated the Subcontract before CB Flooring began performing (as apparently it did). Were that the case, the Subcontract would be illusory under this Court's opinion in Cheek v. United Healthcare of the Mid-Atlantic, Inc., 378 Md. 139, 835 A.2d 656 (2003).
Accordingly, we hold that termination for convenience rights, like that provided for in Paragraphs 12 and 14 of this Subcontract, may be enforceable, subject to the implied limitation that they be exercised in good faith and in accordance with fair dealing. Thus, we agree with the Circuit Court to the extent that it concluded that Questar's right to terminate the Subcontract for convenience was not unlimited. Although there are few reported opinions discussing what, if any, limitations there are on the exercise of a termination for convenience right by a private party, those recognize generally that the right must be exercised in good faith. See, e.g., Harris Corp. v. Giesting & Assocs., Inc., 297 F.3d 1270, 1272-73 (11th Cir.2002) ("Termination for convenience clauses may not be used to shield the terminating party from liability for bad faith or fraud."); EDO Corp. v. Beech Aircraft Corp., 911 F.2d 1447, 1453 n. 6 (10th Cir.1990) ("We concur in the district court's determination that Beech's exercise of its right to terminate [for convenience] must have been exercised in good faith.").
Furthermore, with specific regard to construction contracts, one commentator observed:
David A. Senter, Role of the Subcontractor, in FUNDAMENTALS OF CONSTRUCTION LAW 133 (italics added).
There undeniably is utility in including a broad termination right in contracts in the context of rapidly changing industries and in contracts for large, long-term build-out projects. Such a right to terminate for convenience may serve as an effective tool, protecting one party from the risk of loss in markets where there is a substantial risk due to changing technology or where loss, if it occurs, could result in a financial Waterloo, as in the construction industry. At the same time, the right to terminate for convenience, as we interpret it, provides adequate consideration for the other party to the contract, protecting that party's expectations in a binding enforceable agreement and prohibiting the terminating party from yanking out arbitrarily the carpet from underneath the agreement.
We now turn to whether the trial judge correctly found that Questar was not permitted to terminate the Subcontract for its convenience under the circumstances of this case. In reaching her conclusion, she rejected Questar's assertion that its subjective
"`[U]nder the covenant of good faith and fair dealing, a party [exercising discretion must] refrain from doing anything that will have the effect of frustrating the right of the other party to receive the fruits of the contract between them.'" Clancy, 405 Md. at 571, 954 A.2d at 1109 (quoting E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 184 (4th Cir.2000)). This means that each party must "do nothing to destroy the rights of the other party to enjoy the fruits of the contract and  do everything that the contract presupposes they will do to accomplish its purpose." Photovest Corp. v. Fotomat Corp., 606 F.2d 704, 728 (7th Cir.1979). In addition, the obligation to act in good faith and deal fairly prohibits a party from terminating its contract (or otherwise exercising its discretion) to "recapture" an opportunity that it lost upon entering the contract. Greer Props., Inc. v. LaSalle Nat'l Bank, 874 F.2d 457, 461 (7th Cir.1989); Piantes v. Pepperidge Farm, Inc., 875 F.Supp. 929, 938 (D.Mass. 1995). Upon entering a binding contract for a specified duration, the parties thereto "give up their opportunity to shop around for a better price." Greer Props., Inc., 874 F.2d at 461.
Where, as here, personal taste does not provide the basis for the exercise of discretion, an objective standard of what constitutes good faith and fair dealing applies. See Clancy, 405 Md. at 568-69, 954 A.2d at 1108 (noting difference between objective and subjective standards of good faith and applying subjective standard to author's decision on whether to withdraw his name from series of books published by partnership of which he was a partner). Stated otherwise, the obligation of good faith and fair dealing requires a party exercising discretion to do so in accordance with the "reasonable expectations" of the other party. BURTON & ANDERSON, CONTRACTUAL GOOD FAITH § 2.3.3. What constitutes a "reasonable expectation," of course, depends
Id. § 3.3.4.
Here, the trial judge specifically found that Questar "schemed" to contract with CTI to install carpeting at Greenwich Place, after it contracted with CB Flooring. She based that finding on Maccherone's sending the ID Drawings to CTI's salesperson, despite having an agreement already with CB Flooring, as well as on the testimony of CTI's salesperson that she felt uncomfortable when Maccherone later asked her to send him a fax stating that New Stratford and Bigelow carpets were of comparable price. The trial judge found that CB Flooring did nothing to jeopardize timely performance of the Subcontract. Moreover, she resolved that Questar never communicated to CB Flooring its belief (asserted at trial) that the subcontractor was taking too long to respond to the changes advanced by the ID Drawings or that it was in any other way dissatisfied with the subcontractor. She also found that CB Flooring was not using the change order as leverage against the general contractor. These findings are relevant to the bad faith inquiry; however, we think it appropriate to remand the matter to the Circuit Court because it is not clear on what guiding legal principles the trial judge relied when she concluded that the right to terminate for convenience did not apply under the circumstances. To that end, it is not patent that the trial judge actually found bad faith.
As already explained, the right to terminate a contract for convenience is a risk-allocating tool, which allowed Questar to terminate the Subcontract if, in its discretion, it determined that continuing with the Subcontract would subject it potentially to a meaningful financial loss or some other difficulty in completing the project successfully. On remand, the trial judge must be persuaded that Questar breached the Subcontract by exercising its right to terminate for convenience in bad faith, or, stated otherwise, by not exercising its discretion to terminate in accordance with the implied obligation of good faith and fair dealing. As the party with the discretion to terminate for convenience, Questar was entitled to decide whether continuing with the contract would subject it to an unnecessary risk. It is not the court's role to make that decision for Questar; the court's role is to determine only whether Questar's determination was consistent with the reasonable expectations of CB Flooring, in light of the terms of the Subcontract.
CB Flooring may prevail if the trial court is convinced that Questar's asserted basis for the termination—a deterioration in its business relationship with CB Flooring—was not commercially reasonable under the circumstances, and therefore inconsistent with CB Flooring's reasonable expectations. Additionally, if the trial judge were to conclude that Questar sought to recapture a better bargain with CTI or that Questar did not make reasonable
Supplemental fact-finding may aid the Circuit Court in applying this Opinion on remand. Our review of the record revealed the following unresolved factual conflicts that potentially may be relevant to the ultimate conclusion whether Questar acted in bad faith.
Third, it also may be relevant whether Questar included, in its February 2006 draft subcontract with CTI, a provision allowing CTI to install Bigelow border carpeting at Greenwich Place. Maccherone claimed that it did not, that the provision was added later during negotiations with CTI, and that the document's February date was never changed. The trial judge's findings on this point are not clear on the current state of the record
The trial judge's comments suggest that she found that the provision allowing the Bigelow carpeting existed in the February draft subcontract with CTI; however, she did not mention it during her final ruling from the bench. The issue of whether Questar decided to permit CTI to install the Bigelow carpeting seems significant potentially in determining whether Questar was permitted to terminate the Subcontract for convenience. As we shall explain later, the trial court will get an opportunity to revisit this point on remand.