Finding No Bad Faith, Court Enforces Termination for Convenience and Conversion Provisions Included in Parties’ Contract

Stony Brook Constr. Co. v. Coll. of N.J., 2008 WL 2404174 (N.J. Super. Ct. App. Div. June 16, 2008)

This appeal arose out of a lawsuit filed by a contractor, Stony Brook Construction Co. and its surety, Fidelity & Deposit Company of Maryland (F & D), against The College of New Jersey (TCNJ), in connection with the construction of a new three-story building on the TCNJ campus.  In August 1998, TCNJ entered into multiple prime contracts for the construction.  TCNJ retained Stony Brook to perform the general construction work for its bid price of $3,783,565.  The anticipated completion date for the project was August 17, 1999.  TCNJ retained a construction management firm, CMM, to coordinate and schedule the project.  Two TCNJ employees (Rogers and Bressler) were also designated as project supervisors.  Due to numerous delays and disagreements between the parties, the project remained unfinished as of the anticipated completion date.

In October 1999, TCNJ terminated its contract with Stony Brook for nonperformance.  On November 5, 1999, TCNJ and F & D executed a takeover agreement, by which F & D agreed to complete the work in exchange for the unpaid balance of the contract price.  Problems continued, and in September 2000, F & D ceased performance, claiming that TCNJ breached the takeover agreement.  TCNJ hired another contractor to complete the general construction.

In January 2001, Stony Brook and F & D filed an eleven-count complaint against TCNJ, CCM, and Rogers alleging, among other things, that TCNJ wrongfully terminated its contract with Stony Brook and that it breached its takeover agreement with F & D.  In responsive pleadings, TCNJ counterclaimed against Stony Brook and F & D for breach of contract.  At the time, many of Stony Brook’s subcontractors and suppliers had filed complaints against Stony Brook and F & D in courts throughout the state.  These were consolidated with the main action.

The matter was submitted to a retired appellate judge, as an umpire, for alternative dispute resolution.  The umpire’s recommendations were substantially adopted by the Law Division judge, who entered judgment against TCNJ in the amount of $1,371,652, plus prejudgment interest, for a total of $1,880,427.91.

TCNJ appealed, arguing that (1) the court lacked jurisdiction to award prejudgment interest, since the contract fell under the Contractual Liability Act (“CLA”) and at the time the cause of action accrued, the CLA barred awards of prejudgment interest on construction contract claims against public entities; and (2) the court erred in failing to deduct from the amount of the judgment in favor of Stony Brook the sum of $365,000 that TCNJ paid to F & D to perform work required under the contract between TCNJ and Stony Brook.  TCNJ argued that its payment of $365,000 to F & D under the takeover agreement was to be applied to the performance of the same work required to be performed by Stony Brook under Stony Brook’s contract with TCNJ.  F & D failed to complete the work required under the Stony Brook contract, as evidenced by the undisputed fact that $250,000 worth of work remained incomplete after F & D left the job.  Therefore, TCNJ argued that because its $365,000 payment to F & D was for the work required under the Stony Brook contract, failure to credit TCNJ with that amount results in a double payment of that sum by TCNJ.

Stony Brook and F & D cross-appealed, arguing that (1) the court erred in finding that TCNJ’s wrongful termination for cause should be converted to a termination for convenience, and in refusing to find that TCNJ and its agents acted in bad faith, (2) the court erred in failing to award Stony Brook reimbursable costs and a termination fee, (3) the court improperly rejected the portions of the umpire’s award to Stony Brook regarding its claims for extra costs for the revised roof leader detail and for excessive clean-up costs, (4) the court erred in finding that TCNJ was not responsible for submitting a flood insurance claim on behalf of Stony Brook, and (5) the court improperly found that TCNJ was not liable to Stony Brook for its costs incurred in defending subcontractor claims.

The appellate court agreed with the arguments presented by TCNJ.  The court remanded the case for entry of an amended judgment that (1) deleted prejudgment interest and (2) reduced the judgment by $365,000.

The appellate court rejected Stony Brook’s points on appeal, including the argument that TCNJ should be prohibited from invoking the termination for convenience and conversion clauses because TCNJ failed to carry out its contractual obligations in good faith.  The appellate court gave deference to the umpire’s finding of good faith, which had been accepted by the trial court.  It elaborated:

In the case before us, the umpire found that TCNJ’s motive for terminating the contract was not to harm Stony Brook, but to protect the interests of the college. This project involved the construction of a three-story classroom building that TCNJ wanted ready for the Fall 1999 semester. After numerous delays caused by both parties, the project remained unfinished as of the August 1999 deadline. TCNJ terminated Stony Brook because it wanted to complete the project in a timely fashion, and it felt it could no longer accomplish that goal with Stony Brook as its general contractor. Although TCNJ was not justified in terminating Stony Brook for nonperformance, it was not motivated by malice or an intent to harm Stony Brook . . . These were the factual findings accepted by the trial court. They are supported by adequate, substantial and credible evidence in the record, and we defer to them.

Thus, in the absence of bad faith, the appellate court found no error in enforcing the clear, express provision by which the parties agreed to apply the doctrine of constructive termination for convenience to their contractual undertaking.

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