Termination Clauses that Provide Profit for Breaching Party Void as Against Public Policy

Saxon Constr. & Mgmt. Co. v. Masterclean of N.C., Inc., 641 A.2d 1056, 273 N.J. Super. 231 (N.J. Super. Ct. App. Div. 2004)

In this case, the court found a termination clause void as against public policy.  The plaintiff, Saxon, a general contractor was awarded a contract to renovate a building owned by the Veterans Administration.  Saxon entered a subcontract with defendant, Masterclean, for asbestos abatement and removal.  Masterclean defaulted and Saxon terminated the contract. The termination clause of the contract provided that if the subcontractor defaulted and the unpaid contract value was less than the expense of finishing the project, then the subcontractor was entitled to the difference.  Saxon was able to procure a substitute contractor at a price lower than Masterclean’s initial contract price.  Masterclean, therefore, invoked the clause to claim the difference between its contract price and the amount paid to the new contractor.  The court found that that type of termination clause violated public policy because it permitted a defaulting party to profit by its breach and discouraged the non-breaching party to minimize its losses.