Contracts I, Pages 84–103

Questar Builders, Inc. v. CB Flooring, LLC

Maryland Court of Appeals, 2009

Facts:

Defendant was a contractor hired to build a complex. After receiving bids from three flooring subcontractors, defendant selected plaintiff to install carpeting at the complex for $1,120,000. Another bidder, CTI submitted a proposal to complete the project for $1,240,000, but defendant rejected that in favor of plaintiff's lower bid. On September 29, 2005, defendant and plaintiff entered an agreement pursuant to which plaintiff agreed to furnish all labor, materials, equipment, and services necessary for and incidental to the execution and completion for all carpet and flooring for the project in exchange for the money. The subcontract said that the agreement was to remain through the duration of the project.

In the case of a breach, the subcontract provided the contractor to take any tools, equipment, materials, and supplies of the subcontractor's to complete the work, and that the subcontractor would be liable for costs in excess of the original sum. If terminated for convenience, the subcontractor was entitled to the portion of the price that was the reasonable value of the authorized materials, equipment, and incidentals furnished and delivered, properly stored, or purchased beforehand. The contractor was allowed to make unilateral changes at any time, with the subcontractor receiving an equitable adjustment. Disputes were to to be decided by the contractor in good faith. All disputes under $50,000 were to be arbitrated, as well as those over at defendant's discretion.

The drawings specified Shaw carpet to be used but did not indicate border carpet was needed, yet the subcontract later required Bigelow border carpet of plaintiff. The CB Flooring salesmen reviewing the draft Subcontract realized the discrepancy and sought to remove this requirement but failed to notice his proposed change was not incorporated in the final draft. The carpet was eventually furnished.

However, after execution of the subcontract, the interior design firm working on the complex changed the carpet models to Prince Street field carpet and New Stratford border carpet. The plans were issued by the designer, but only 70% complete and not specifying the border carpet. A month later, another plan was given with the border carpet updated to be New Stratford. Before plaintiff responded to either set, defendant contacted CTI about installing the carpeting in case plaintiff requested more money for the changes. CTI submitted a new bid for $1,119,000 based on the 70% done revised plans. Plaintiff then requested $33,566 to switch carpets, to which defendant responded by sending an unexecuted subcontract to CTI to do it for $1,120,000. Plaintiff then revised its order to be $103,371 above the original price. Plaintiff's Vice President Bode then spoke by telephone with Richards, defendant's Vice President and Production Manager, about the adjustment. Bode asked Richards to call him back later in the week, but Richards did not. Instead, defendant's Senior Vice President Maccherone sent a letter notifying that defendant was terminating the subcontract.

The termination was claimed to be for cause, saying the plaintiff breached the subcontract by refusing to perform. Maccherone also claimed that defendant also had a right to terminate for convenience entitling plaintiff to no compensation. The letter also accused plaintiff of acting in bad faith using the interior designer's changes to seek an unwarranted increase in price.

Defendant and CTI then entered an agreement for $1,120,000, permitting CTI to install Bigelow border carpeting, apparently because defendant did not seek the designer's approval.

Alleging that defendant terminated the subcontract wrongfully, plaintiff initiated a breach of contract action against the general contractor in the Circuit Court for Baltimore County in April 2006.

Procedural History:

Trial judge ruled orally that plaintiff made a mistake in its initial bid, which led to a mistaken belief as to its obligations. She also recognized that plaintiff might not have been entitled to its requested price increase given its own error and conflicting evidenced from the parties on the pricing of the carpets. The trial judge found that plaintiff did not breach the subcontract. She didn't believe Richards told Bode he was ordering to proceed as directed. Plaintiff's absence from weekly meetings did not constitute a material breach of the subcontract, noting that people from defendant visited without complaining of their absence. Finally, the judge found that plaintiff did not attempt to use the change order as leverage and din't jeopardize the timely performance of the subcontract. She rejected that defendant had an unlimited right to terminate, noting that defendant's "gut feeling" was not sufficient and that defendant did not try to contact the plaintiff about any of the issues.

Issue:

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  1. Whether a “termination for convenience” clause contained in a contract between private parties is enforceable under Maryland Law[?]
  2. Whether the trial court erred by holding, as a matter of law, that the parties’ “termination for convenience” clause was inapplicable and did not allow Questar to terminate the parties’ Subcontract without cause[?]

Plaintiff's Arguments:

  • Although it requested an upward price adjustment, it did not refuse to perform its contractual obligation to install carpeting.

  • The termination for convenience clause did not apply under the circumstances because defendant acted in bad faith by invoking the clause after scheming to hire CTI and allowing them to bid based on the cheaper carpets and install one cheaper as well.

Defendant's Arguments:

  • Bode informed Richards over the telephone that plaintiff would not perform under the subcontract unless defendant agreed to a price increase, which defendant determined was not warranted.

  • Plaintiff also failed to attend weekly progress meetings as required by the subcontract.

  • Defendant's right to terminate the subcontract at its convenience was unlimited. Defendant lost confidence in plaintiff's ability to perform its obligations in a satisfactory manner due to plaintiff's absence from the weekly meetings and its delay in ordering carpet.

Rule:

Illusory promises are unenforceable.

Reasoning:

The federal government has the power to make termination for convenience clauses, but such rules do not apply to private parties. While courts prefer to not find promises illusory, Maryland law generally implies an obligation to act in good faith and to deal fairly with others in a contract. While the contract allowed a termination, defendant's contention that it was entitled to terminate the subcontract for any reason goes too far. The right to terminate without a breach is different than the right to terminate on a whim. If it were, the duration would be meaningless because the duration would be infinite by definition.

Defendant was only allowed to terminate the contract to avoid financial loss or other difficulty in completing the project. Defendant was required to make a good faith determination as to whether plaintiff was entitled to an equitable adjustment to the subcontract price or its obligation to arbitrate disputes. Defendant was required to act reasonably in ensuring that the subcontract did not become inconvenient; it was certainly not allowed to create an inconvenience in order to terminate the contract.

Holding:

  1. A termination for convenience may be enforceable under Maryland law if exercised in good faith, although it is not unlimited in scope.
  2. The trial court did not make an express or implied finding on whether the general contractor acted in bad faith by terminating the subcontract.

Judgment:

Remanded for further proceedings consistent with this opinion; costs to abide the result.