Mb Oil Ltd. v. City of Albuquerque

• Court: Court of Appeals of New Mexico
• Writing for the Court: VANZI, Judge.
• Citation: Mb Oil Ltd. v. City of Albuquerque, 382 P.3d 975 (N.M. App. 2016)
• Decision Date: 25 July 2016
• Docket Number: NO. 34,493,34,493
• Parties: Mb Oil Ltd., Co., Plaintiff–Appellee, v. The City of Albuquerque, Defendant–Appellant.

382 P.3d 975

Mb Oil Ltd., Co., Plaintiff–Appellee,

v.The City of Albuquerque, Defendant–Appellant.

NO. 34,493

Court of Appeals of New Mexico.

Filing Date: July 25, 2016

Certiorari denied, September 20, 2016, No. S-1-SC-36053

Conditional cross petition denied, September 20, 2016, No. S-1-SC-36053

Rehearing Denied October 13, 2016

Michael L. Danoff & Associates, P.C., Michael L. Danoff, Brett J. Danoff, Albuquerque, NM, for Appellee.

SaucedoChavez P.C., Christopher T. Saucedo, Albuquerque, NM, Lorenz Law, Alice T. Lorenz, Albuquerque, NM, City of Albuquerque, Robert I. Waldman, Assistant City Attorney, Albuquerque, NM, for Appellant.

OPINION

VANZI, Judge.

{1} The City of Albuquerque (the City) appeals from a judgment awarding nearly four million dollars in anticipatory profits for the wrongful termination of a supply contract (Contract) that was expressly terminable for cause or convenience. Because we conclude as a matter of law that the contract was not wrongfully terminated, we reverse and remand for entry of judgment in favor of the City.

BACKGROUND

{2} The following factual background is derived from the district court's findings of fact, to which we generally defer, see State v. Munoz , 1998–NMCA–140, ¶ 14, 125 N.M. 765, 965 P.2d 349, and from the terms of the Contract itself, which we can interpret as well as the district court. See Krieger v. Wilson Corp. , 2006–NMCA–034, ¶ 12, 139 N.M. 274, 131 P.3d 661 (“In the absence of ambiguity, the interpretation of language in a contract is an issue of law which we review de novo.”).

{3} MB Oil Ltd., Co. (Plaintiff) is a wholesale fuel distributor that contracted with the City to be the primary supplier of certain fuels to the City's Fleet Management Division. The Contract provided that the quantities of fuel to be delivered would vary depending on the City's needs. During the contract period, Plaintiff would treat the City as a “preferred customer,” delivering requested fuel within twelve hours of any order and always assigning first priority to the City's requirements. In exchange, the City would treat Plaintiff as its primary fuel supplier, ordering from Plaintiff first at prices agreed upon in the Contract before turning to secondary and tertiary suppliers in the event Plaintiff could not meet the City's needs.

{4} Section 26 of the request for bids, which was later merged into the Contract, gave the City the right to terminate the agreement for default, after giving notice to cure, if Plaintiff failed to fulfill its delivery obligations “in a timely and proper manner[.]” Immediately following the termination for default clause, Section 27 then provided an alternative basis for termination, which is the subject of this Opinion:

Termination for the Convenience of the City:

The City may terminate [the C]ontract ... at any time by giving at least thirty (30) days' notice in writing of such termination to [Plaintiff]. In such event, [Plaintiff] shall be paid under the terms of the [C]ontract for all goods/services provided to and accepted by the City, if ordered or accepted by the City prior to the effective date of termination.

A termination for convenience clause is generally understood to be a risk-allocating tool, intended to permit a government to “terminate a contract, even in the absence of fault or breach by the other party, without incurring the usual financial consequences of breach.” Mark Dunning Indus. v. Cheney , 934 F.2d 266, 267 n.1 (11th Cir.1991) (per curiam) (internal quotation marks and citation omitted). It has become a standard term in federal procurement contracts. See Krygoski Constr. Co. v. United States , 94 F.3d 1537, 1541 (Fed.Cir.1996) ; see also 48 C.F.R. § 49.502 (2007) (noting the types of contracts that utilize a termination for convenience by the government clause). Like other municipalities —and even some private parties—the City has apparently taken the federal government's lead and begun including the clause in its own contracts. See, e.g. , Old Colony Constr., LLC v. Town of Southington , 316 Conn. 202, 113 A.3d 406, 408 n.1 (Conn.2015) ; Vila & Son Landscaping Corp. v. Posen Constr., Inc. , 99 So.3d 563, 566–68 (Fla.Dist.Ct.App.2012). It does so because, as the Director for Finance and Administration for the City of Albuquerque testified at trial, the City needs to be able to cancel its contracts if operational reasons require it to change course.

{5} Plaintiff submitted its bid in October 2009—its first time bidding on a city contract. An exhibit admitted at trial indicates that it offered to charge the City a paltry delivery price of $148,660.46 compared to the second lowest bidder, which proposed a price nearly six times higher. Not surprisingly, the City ultimately awarded the primary supply Contract to Plaintiff, and Plaintiff began performing in March 2010.

{6} There were then various occasions throughout the summer of 2010 where Plaintiff was unable to timely deliver fuel or unable to deliver fuel at all due to what the district court later concluded was a lack of availability of fuel to deliver. The district court also concluded that in each of the instances when fuel was unavailable to Plaintiff, the City was forced to turn to its backup vendors to provide the fuel. It is thus apparent that the fuel that was unavailable to Plaintiff was in fact available to other suppliers, including the City's backup vendors.

{7} On multiple occasions, beginning in July 2010, the City notified Plaintiff in writing that fuel requirements were not being met. Specifically, a letter dated July 12, 2010, informed Plaintiff that it was in default. That letter also stated that Plaintiff had been unable to provide unleaded fuel to the City for a month. And a second letter, dated August 31, 2010, explained that Plaintiff's failure to provide fuel when ordered “creates problems for the City and is in violation of the [C]ontract requirements.” The City finally terminated the contract for default and/or convenience on September 9, 2010, citing Plaintiff's failure to “provid[e] fuel within the delivery time requirements of the [C]ontract, i.e., within [twelve] hours of order placement [.]” The cancellation letter also noted that Plaintiff made partial deliveries, and “on several occasions,” actually refused to provide fuel.

{8} Plaintiff filed suit alleging various tort claims that have since been dismissed and leaving two contract claims that went to trial. Count I's breach of contract claim essentially alleged a bait-and-switch scheme: that the City's request for bids misrepresented the amounts and types of fuel the City would order to the detriment of vendors who relied on those estimates in formulating their bids. Of particular importance was the City's failure to accurately estimate requirements of E85 (85% ethanol-blended fuel), which was the basis for Plaintiff's profit margin in the Contract. To Plaintiff's detriment, the City “cancell[ed]” all orders of that fuel type early in the Contract term.

{9} Count IV similarly alleged only that the City “breached the covenant of good faith and fair dealing by knowingly and intentionally breaching the contractual agreements with [Plaintiff].” All told, the Complaint was directed at the City's alleged conduct in soliciting bids and making untimely payments and such—behavior that Plaintiff alleged caused it various damages.

{10} Following a bench trial, the district court entered its findings and conclusions ruling in favor of Plaintiff and awarded substantial damages. Liability was not premised on the complaint's bait-and-switch allegations, its late payments theory, or on the alleged cancellation of E85. Instead, the district court concluded that the City wrongfully terminated the Contract for default because the failed and untimely deliveries did not constitute a substantial impairment to the City's benefits under the Contract, and also wrongfully terminated it for convenience, since Plaintiff showed “an absence of valid grounds for invocation of the termination for convenience clause.” The court awarded costs plus $378,672.23 in “preparatory damages” and $3,805,840.46 in anticipatory profits “arising directly from the [C]ontract.” The City appealed, and we now reverse the district court.

DISCUSSION

{11} The district court in this case found it “difficult to evaluate the City's invocation of the termination for convenience clause” because “[n]either the September 9, 2010 letter nor the evidence at trial specifically identify any ‘convenience’ other than perhaps the grounds identified for invocation of” the clause allowing termination for default. The court then concluded, for this reason, that Plaintiff carried its burden of persuasion by showing the absence of “persuasive facts” to support the City's right to terminate the Contract for convenience.

{12} But the City was not required to have any good cause or persuasive reason for terminating the Contract. The plain wording of Section 27 allowed the City to unilaterally invoke the clause for its convenience at any time by giving at least thirty days' notice in writing to Plaintiff.

{13} A clause that allows a party to terminate a contract for convenience, as opposed to default, is typically treated as a provision allowing termination “without cause[,]” Harris Corp. v. Giesting & Assocs. , 297 F.3d 1270, 1273 (11th Cir.2002), which is the functional equivalent of an agreement for an indefinite period, terminable at will. See Lopez v. Kline , 1998–NMCA–016, ¶ 10, 124 N.M. 539, 953 P.2d 304 (“An at-will employer-employee relationship is subject to termination at any time, with or without cause.”). Clauses of this sort are not limited to employment relationships; they have been applied according to their terms in cases, like this one, that are governed by the Uniform Commercial Code. See, e.g. , Smith v. Price's Creameries, Div. of Creamland Dairies, Inc. , 1982–NMSC–102, ¶¶ 13–23, 98 N.M. 541, 650 P.2d 825.

{14} For example, the termination clause in Smith...