Released in 1968, the lyrics from Steppenwolf’s psychedelic rock song blare out: "I like to dream, right between my sound machine…" Yep, you remember … the Magic Carpet Ride!
The Maryland Court of Appeals recently decided a construction case based upon a set of pre-contract discussions that Judge Harrell described as a "complicated series of events from which this appellate ‘magic carpet ride’ springs…" In Questar Builders v. CB Flooring, the court upheld the duty to act in good faith and deal fairly in construction contracts. The appellate court reversed and remanded the trial court’s decision for a determination of whether the contractor (Questar) acted in bad faith when it terminated for convenience the flooring subcontractor (CB Flooring).
Questar received bids from three subcontractors to install the "magic carpet" in the luxury midrise apartment and townhome complex. CB Flooring submitted a bid for $1.12 million and CTI submitted a bid for $1.24 million. Interestingly, the third subcontractor’s bid was so low that it left Questar with the impression that the subcontractor misunderstood the scope of the project. (…I wonder if all the low estimates being submitted on public contracts these days fall into this category? Certainly not! … Sarcasm … )
Ultimately, disputes arose between Questar and CB Flooring about design changes in the selection of the carpet and the resulting increases in the cost of work. Questar reportedly used CB Flooring’s original bid to obtain CTI’s agreement to perform the same work for $1,000 less than the original winning bid. Meanwhile, Questar terminated CB Flooring, alleging breach of contract, as well as a contractual right to terminate for convenience.
The trial court held that CB Flooring did not breach the subcontract agreement with Questar. The court also rejected Questar’s claim that it had a right to terminate for any reason. Based upon the evidence presented, the judge found that the subcontract was improperly terminated.
On appeal, the appellate court held that the termination for convenience clause "may" be enforceable, but that the trial court failed to determine whether the termination was made in good faith and in accordance with fair dealing. Therefore, the case was remanded to the trial court for a determination of that issue.
The opinion is a long read (…50 pages…), but sheds some light on the limitations inherent in a contractual right to terminate:
"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."
This point was highlighed by the American Subcontractors Association, which filed an amicus brief in the appellate proceedings. In its brief, ASA argued that an exception to the scope of the good faith and fair dealing covenant would "not only poison business relationships and eliminate business certainty, but also does great damage to the ability of subcontractors to rely on their signed contracts as a reliable indicator of future work and expected revenues" and would otherwise make subcontracts "illusory and meaningless."
This case provides a good warning to contractors: Beware of subcontractor shopping after you have already entered an agreement with another party. While you may have the contractural right to terminate for cause, do not make a decision in haste without adequate basis for the termination. These magic carpet ride cases often involve hotly disputed facts leading up to the termination and you may find yourself defending a lawsuit.