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Capital Safety, Inc. v. State of New Jersey, Division of Buildings and Construction

369 N.J. Super. 295, 848 A.2d 863 (App. Div. 2004)

CONTRACTS; TERMINATION—A contract’s termination for convenience provision is validly exercised if not done in bad faith.

The Division of Building and Construction (DBC) engaged a contractor to remove asbestos from a State building. Due to safety concerns, the Department of Labor (DOL) was required to evacuate all personnel and equipment from the affected area. The DOL encountered difficulty relocating its employees. Thus, the DBC issued an order directing the asbestos remediation company to suspend all work until the DOL could devise a workable relocation plan.

The contractor submitted a claim for the damages it had allegedly incurred as a result of the job suspension. The two parties made an agreement compensating the company. The agreement also allowed the State, at any time, to terminate the contract for convenience in the public interest, but provided that to do so was not a waiver of the contractor’s right to pursue a breach of contract action.

The DBC then issued an order vacating the suspension order and directed the contractor to proceed. However, due to continuing relocation problems and unsuccessful negotiations regarding adequate compensation for such delays, the DBC notified the contractor that it would exercise its right under the agreement to terminate the contract in the public interest. The DBC then entered into a new contract with another contractor to finish the job.

In response, the original contractor brought a breach of contract action. It asserted that the DOL’s inability to relocate its workers and its own unwillingness to accept the DBC’s proposals for additional compensation was not a valid basis for the DBC to invoke the termination for convenience provision of the contract. The lower court concluded that the DBC had not acted in bad faith and entered summary judgment dismissing the complaint. Specifically, it concluded that the State acted the way it did because it was in a situation where things were not unfolding properly. It held that the DBC’s decision was not made to injure the contractor, nor was it made in bad faith to get some form of advantage.

On appeal, the Appellate Division pointed out that courts have held the “termination for convenience” provision as properly exercised so long as there is no bad faith. Even plain error on the part of the government is insufficient to overcome the presumption of regularity inherent in the use of the termination for convenience. This is true even if, absent a “termination for convenience” provision, such an action would constitute a breach of contract. Furthermore, it was the contractor’s burden to prove that the government had acted in bad faith. To show bad faith, the contractor would need to prove that the government had an improper motive.

In this case, the evidence showed that the DBC terminated the contract for business reasons that were within the contemplation of the parties when they executed their agreement. At that time, the contractor’s work had already been delayed due to the relocation problem. Furthermore, a section of the agreement even stated that the DBC was uncertain whether it would be able to authorize the contractor to resume its duties, and if so, what the extent of the contractor’s duties would be. In addition, the agreement provided that if the State did not terminate the contract before a certain date, but failed to issue a notice to proceed because of the relocation problem, it would pay the contractor liquidated damages for each day up to the date of the issuance of a notice to proceed or of an order of termination. Therefore, the DBC clearly had a lingering uncertainty regarding its ability to provide the contractor with timely access to the work site.

Accordingly, the Appellate Division found no basis for concluding that the DBC’s decision was made in bad faith. Therefore, it affirmed the lower court’s decision and awarded summary judgment in favor of the State, dismissing the complaint.

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