Termination for Convenience Under the Uniform Commercial Code

March 10, 2014 Published Work
ABA, Commercial Law Newsletter, Joint Newsletter of the Commercial Finance and Uniform Commercial Code Committees

© 2014 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Between suppliers and manufacturers, planning for the termination of a supply agreement during its negotiation may seem counterintuitive, awkward, or perhaps insignificant. Termination discussions often take a back seat in the conference room where the negotiating energy is spent primarily on price, quality, and delivery terms. As one court observed, termination is typically "of little interest or concern to the parties" so long as they execute the agreement and are "getting along."1 Why then should commercial parties burden their negotiations with ominous talk of termination related events? Does it make sense to even review that peculiar "termination for convenience" clause located at the end of a standard boilerplate agreement?

Not only are termination for convenience provisions enforceable, they are becoming increasingly popular in supply agreements across diverse markets. Commercial parties have invoked them to reduce inventory, switch suppliers, and address plant shutdowns. Thus, before you agree to the possibility of being terminated for convenience, or have occasion to enforce a convenience provision, we consider how courts treat these terms and why addressing the end of a business relationship even at its beginning is sound business planning.

Termination for Convenience, Historically

Essentially, in an "at will" business agreement, termination for convenience permits "one party to terminate a contract, even in the absence of fault or breach by the other party, without suffering the usual financial consequences of breach of contract."2 The Union Government first used these clauses when unilaterally terminating vendor contracts during the Civil War in response to changing battlefield strategies.3 In World War II, the government used them in its standard fixed-price military supply contracts, utilizing the following contract language: Termination for the Convenience of the Government. (a) The Government may, at any time, terminate this contract, in whole or in part by a notice in writing from the Contracting Officer to the Contractor that the contract is terminated under this Article.4 After World War II, the government expanded convenience clauses beyond war time exigencies and they are now widely incorporated into federal military and civilian contracts.5

Termination for Convenience, Service Agreements

Private parties soon realized the benefits of convenience clauses and began using them in the construction and service industries. In deciding how they should be treated under the common law, the majority of courts have chosen not to extend the government's "near carte-blanche power to terminate".6 The rationale behind these decisions is that while the government's broad ability to terminate may be seen as incidental to its sovereign immunity, a more stringent limitation on the right of private parties to terminate is required to render a contract non-illusory.7 Accordingly, courts – in service cases – have held that termination for convenience clauses must be exercised in accordance with implied contractual obligations of good faith and fair dealing.8 Exactly what constitutes good faith and fair dealing in the service context is defined largely by the agreement and underlying state law. For example, a Maryland state appellate court held that a contract is rightfully terminated for convenience if continuing with the contract would result in meaningful financial loss or other similar difficulty; on the other hand, termination merely to "recapture" an opportunity that the terminating party voluntarily lost constitutes bad faith.9

By contrast, Florida state courts have broadly held that convenience clauses may be exercised after reasonable notice, for nearly any reason, including the existence of profitable business relationships elsewhere.10

Termination for Convenience, the UCC

Courts have addressed termination for convenience clauses differently under the UCC than in the service context. At the outset, Section 2-309(2) of the UCC provides that contracts of indefinite duration are terminable at will by either party, even if not explicitly set forth in the agreement.11 This section further states that when a contract is terminable at will (whether by operation of the code or explicit agreement of the parties), the terminating party has the right to terminate, for any reason, so long as it provides "reasonable" advance notification.12 As set forth in comment 8 to Section 2-309, the rule requiring reasonable notification recognizes that good faith and sound commercial practice normally call for advance notification.

Based on these provisions, courts have enforced a reasonable notification requirement in UCC cases, but have not imposed the additional obligation of terminating in good faith.13 In short, the general rule is that, as long as reasonable notification under Section 2-309 is provided, broad termination for convenience clauses under the UCC allow one party to arbitrarily and unilaterally terminate a contract at will.14
1 Corenswet, Inc. v. Amana Refrigeration, Inc., 594 F.2d 129, 132 (5th Cir.1979).
2 Harris Corp. v. Giesting & Assocs., Inc., 297 F.3d 1270, 1272-73 (11th Cir. 2002).
3 See generally United States v. Speed, 75 U.S. 77 (1868); Torncello v. United States, 681 F.2d 756, 764 (Ct. Cl. 1982).
4 Torncello, 681 F.2d at 765.
5 Tigerswan, Inc. v. United States, 110 Fed. Cl. 336, 344 (Fed. Cl. 2013).
6 Questar Builders, Inc. v. CB Flooring, LLC, 978 A.2d 651, 669-70 (Md. 2009).
7 See, e.g., id.
8 E.g., Questar, 978 A.2d at 674; EDO Corp. v. Beech Aircraft Corp., 911 F.2d 1447, 1453, fn 6 (10th Cir. 1990); but see Handi-Van, Inc. v. Broward Cnty., 116 So. 3d 530, 539 (Fla. Dist. Ct. App. 2013) (holding that private parties have a unilateral right to cancel a contract under an expressly agreed upon termination for convenience provision as long as there was consideration since the "courts may not rewrite a contract or interfere with the freedom of contract or substitute their judgment for that of the parties thereto in order to relieve one of the parties from the apparent hardship of an improvident bargain.").
9 Questar, 978 A.2d at 675. Notably, the Questar opinion suggests that a party may be allowed to exercise its power to terminate even more broadly if the specific contract language at issue explicitly allowed termination "at any time for any reason." Id. at 673 (citing Niagara Mohawk Power Corp. v. Graver Tank & Mfg. Co., 470 F. Supp. 1308 (N.D.N.Y. 1979).
10 Vila & Son Landscaping Corp. v. Posen Constr., Inc., 99 So.3d 563, 569 (Fla. Dist. Ct. App. 2012). The termination for convenience clause at issue stated:

TERMINATION FOR CONVENIENCE. The performance of the Work may be terminated at any time in whole, or from time to time in part, by Contractor for its convenience. Any such termination shall be effected by delivery to Subcontractor of written notice specifying the extent to which performance of the Work is terminated and the date upon which termination becomes effective.

11 See U.C.C. § 2-309 (2) ("Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.").
12 Id. § 2-309(3) states "Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable."
13 See, e.g., Grand Light & Supply Co. v. Honeywell, Inc., 771 F.2d 672, 679 (2d Cir. 1985).

14 Id.; Corenswet, 594 F.2d at 132.