NH Supreme Court Upholds “Termination-for-Convenience” Clause in Contract

Can a contract validly give one party the right to terminate the contract “for convenience,” including finding a better price from another vendor? The New Hampshire Supreme Court recently addressed this issue in its order in the matter of Hate to Paint LLC v. Ambrose Development, LLC (November 13, 2024). (Although the Court issued an order rather than an “opinion” and thus carries no precedential authority, it can provide guidance on how a New Hampshire court might rule if presented with similar facts.)

Background

Hate to Paint, LLC, a painting contractor, entered into a contract in August 2019 with Ambrose Development, LLC to paint an apartment project in Somersworth. John Flatley owned the project and Ambrose was the developer. (The order defines “Ambrose” as both Ambrose Development and John Flatley, and that term will have the same meaning here.)

The contract included a "termination-for-convenience" clause giving Ambrose the power to terminate the contract upon three days’ notice.  If invoked, Hate to Paint would receive reimbursement for labor and materials up to the date of termination but no lost profits.

Before work on the project began, Ambrose terminated the contract in January 2020 per the termination-for-convenience clause. Ambrose stated that an internal audit had flagged the project's cost as too high compared to a similar project the parties were working on in another town. Hate to Paint received $1,360 for paint already purchased for the project.

Following termination, Ambrose invited Hate to Paint to rebid the project, stating that rebidding was required. Hate to Paint submitted three successively lower bids, all of which Ambrose rejected. Ambrose eventually hired another contractor.  Hate to Paint filed suit alleging, among other claims, breach of contract.

Superior court decision

Hate to Paint moved for summary judgment (judgment without a trial) on the liability portion of its breach of contract claim. The superior court ruled that Ambrose had violated the implied covenant of good faith and fair dealing by terminating the contract for a better price. The termination-for-convenience clause could not be exercised solely to secure a better price, as this would render the agreement illusory. After a bench trial, the court awarded Hate to Paint $219,200 in damages.

Supreme Court decision and reasoning

The Supreme Court held that the express terms of the contract permitted Ambrose to terminate the agreement for convenience with three days' notice. It emphasized that "convenience" in this context broadly includes actions suitable to a party’s purposes or needs, such as conserving resources or seeking a better price. The court concluded that obtaining a better price was within Ambrose’s contractual rights and consistent with the termination clause's plain language.

The Court stated that courts cannot rewrite or improve contracts to make them more fair or less harsh than the parties agreed. It found that by ruling against Ambrose, the superior court effectively rewrote the contract to impose limits on termination that the agreement did not specify. This, the Supreme Court stated, is not the role of the judiciary.

The Supreme Court acknowledged that an implied covenant of good faith exists in every contract, requiring parties to act with decency, fairness, and reasonableness; however, the court found no evidence that Ambrose acted in bad faith. Specifically, the trial court made no findings that Ambrose intended to exploit Hate to Paint by securing a locked-in price while soliciting other bids. Ambrose’s decision to terminate before Hate to Paint had incurred significant costs appears to have been a factor in the Court not finding bad faith.

While some courts in other jurisdictions have held that terminating a contract for convenience to secure a better price violates good faith, the Supreme Court found these cases unpersuasive in the context of this dispute. The clear language of the contract placed Hate to Paint on notice that Ambrose could terminate for convenience, including cost-saving measures. The burden of proving bad faith lay with Hate to Paint, and the record did not support such a finding.

The Supreme Court reversed the superior court’s partial summary judgment ruling and damage award, holding that Ambrose acted within its contractual rights.

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