Notice Periods and Termination Clauses as Limitations on Damages

Construction and Procurement Law News, Q2 2018

Client Alert

Author(s)

A recent Supreme Court of North Dakota holding is worth noting for anyone who enters into agreements containing notice periods to terminate the right or obligation to proceed under a contract. Continental Resources, Inc. v. P&P Industries, LLC, involved an oil producer and two companies providing transportation, water hauling, and related services and materials to the oil producer. Among other things, the case dealt with the amount of lost profits damages available to one of the service companies after termination for convenience.

The district court held that the service company, if it were to prevail on its breach of contract claim against the oil producer, would be limited to damages only for the net profits it would have earned during a 30-day termination notice period in the parties’ contract, along with its expenses to mitigate its damages after the breach and the expenses accrued in preparation for performance. The service company appealed the decision of the district court.

The Supreme Court of North Dakota, applying Oklahoma law, upheld the district court’s ruling. The service company argued on appeal that the alleged breach by the oil producer completely destroyed the company and that it was entitled to recover damages sufficient to put it in the position it would have occupied had the contract been fully performed. In other words, the service company claimed that it was entitled to the lost profits expected under the contract and the value of the company at the time of the breach. However, the Court held that the termination for convenience notice provision shielded the oil producer from much of the liability as it limited the collectible lost profits to only those profits that would have been made during the 30-day period from the notice of the termination until the complete termination of the obligation of the producer to proceed with contract. The Court reasoned that the purpose of allowing a party to recover lost profits is to protect the injured party’s expectations. Where there is a termination for convenience clause in which either party can cancel a contract after giving notice and a specified amount of time after the notice, each party’s expectations of business cannot exceed the length of that notice period.

This case serves as a reminder to all members of the construction industry of the potential implications from the inclusion of a termination for convenience clause. This principle is important to recognize even when contractual notice is not required, as this result could have equally occurred in the case of a termination for convenience in which notice is not required. If no notice is required, then there is possibly an argument that one cannot expect any lost profits beyond the date of termination; of course, with no cap, as there was in P&P, there is at least an equal argument that the right to lost expectancy is valid. Almost all termination for convenience clauses in contemporary sophisticated contracts describe the damages one is entitled to upon a termination for convenience. So if you are negotiating a contract where a notice termination period or any termination for convenience clause is in play, it is crucial to recognize that damages will likely be limited by these clauses, and one should consider the risks inherent in such a situation.