Opinion ID: 1652082
Heading Depth: 1
Heading Rank: 3

Heading: kentucky model procurement code

Text: The Kentucky Model Procurement Code requires that all government construction contracts exceeding $50,000 include a termination for convenience clause. [1] Article 22 of the University's contract with RAM stipulated that the University may terminate the contract for its own convenience when it is determined by the contracting authority that such termination will be in the best interest of the University, and provided for compensation of the contractor's expenses paid or incurred in the performance of the contract. Termination for convenience clauses required by the Model Procurement Code are subject to the good faith and fair dealing requirements set forth in KRS 45A.015(2): Every contract or duty under this code shall impose an obligation of good faith in its performance or enforcement. Good faith shall mean honesty in fact in the conduct or transaction concerned and the observance of reasonable commercial standards of fair dealing. This good faith obligation is recognized and explained in our case law, In every contract, there is an implied covenant of good faith and fair dealing. 17A Am.Jur.2d Contracts section 380; KRS 355.1-203. Indeed, it may be said that contracts impose on the parties thereto a duty to do everything necessary to carry them out. Beech Creek Coal Co. v. Jones, Ky., 262 S.W.2d 174 (1953). Ranier v. Mount Sterling National Bank, Ky., 812 S.W.2d 154, 156 (1991); see also Kentucky Utilities Co. v. South East Coal Co., Ky., 836 S.W.2d 392, 405 (1992), cert. dismissed, 506 U.S. 1090, 113 S.Ct. 1147, 122 L.Ed.2d 498 (1993). The fact that Kentucky's obligation of good faith arises not only from the UCC, but also from the same source that requires termination for convenience, the Model Procurement Code, negates any argument that the covenant of good faith cannot supplant explicit terms of the contract, because the terms of the contract and the obligation of good faith originate concurrently. The Kentucky Model Procurement Code holds the government to the same standard of good faith and fair dealing as private parties. KRS 45A.015. Although the government may terminate contracts for convenience, that cannot supersede the good faith duty to do everything necessary to carry out the contract. Kentucky's recognition of good faith as a duty to do everything necessary to carry [the contract] out, Kentucky Utilities, supra , limits the contracting officer's discretion to terminate a contract for convenience and indicates that a change of circumstances standard is best for Kentucky. Interpreting termination for convenience clauses required by the Code in the light of the duty of good faith and fair dealing obligations of that same Code is reasonable. And if we must presume that government officials act in good faith to contract in their best interest at the time of the agreement, Linan-Faye, supra , then a change in circumstances is necessary for the contract to no longer be in the government's best interest when terminating for convenience. KRS 45A.010, Constructionpurposes and policies, provides, (1) This code shall be liberally construed and applied to promote its underlying purposes and policies. (2) The underlying purposes and policies of this code shall be: (a) To simplify, clarify, and modernize the law governing purchasing by the Commonwealth; (b) To permit the continued development of purchasing policies and practices; (c) To make as consistent as possible the purchasing laws among the various states; (d) To provide for increased public confidence in the procedures followed in public procurement; (e) To insure the fair and equitable treatment of all persons who deal with the procurement system of the Commonwealth; (f) To provide increased economy in state procurement activities by fostering effective competition; and (g) To provide safeguards for the maintenance of a procurement system of quality and integrity. [emphasis added]. The primary function of the Model Procurement Code is to benefit citizens of the Commonwealth. Ohio River Conversions, Inc. v. City of Owensboro, Ky.App., 663 S.W.2d 759 (1984). Subsections (d), (e), and (g) emphasize the importance of good faith and fair dealing. The substantial change in circumstances standard for determining good faith in a termination for convenience advances these policies. Public confidence in government procurement procedures will increase, as section (d) encourages, because the public will know that the government cannot simply excuse itself from a contract for any reason, or for no reason at all. The public should have no cause to doubt the honesty of the officials of this Commonwealth. Similarly, interpreting termination for convenience as allowing the government to terminate without a substantial change of circumstances would not advance the fairness policies of KRS 45A.010(e). While contractors ought to expect the government to terminate a contract when it is in its best interest to do so, it is also reasonable for them to expect that the government's interest will only change if the circumstances surrounding the contract substantially change. Courts often interpret good faith based on the parties' reasonable expectations of the meaning of the provisions of the contract. Corenswet, Inc. v. Amana Refrigeration, Inc., 594 F.2d 129, 138 (5th Cir.1979), cert. denied, 444 U.S. 938, 100 S.Ct. 288, 62 L.Ed.2d 198 (1979). The purposes and policies of the Code set forth in KRS 45A.010 are best implemented by requiring a substantial change in circumstances, thus ensuring that Kentucky's procurement system is one of quality and integrity. Furthermore, if there is no good faith limitation set by a change of circumstances, then the government's contracted-for promise becomes illusory: [T]he courts in general require that before mutual promises will be enforced, each as the consideration of the other, each party must promise to do something which will yield a benefit or advantage to the other, or which will result in a detriment or disadvantage to himself in exchange for the other promise. Whatever may be the character of the thing promised, as a general rule it cannot serve as consideration unless it is binding. ... Where an illusory promise is made, that is, a promise merely in form, but in actuality not promising anything, it cannot serve as consideration. Even if it were recognized by law, it would impose no obligation, since the promisor always has it within his power to keep his promise and yet escape performance of anything detrimental to himself or beneficial to the promissee. In such cases, the promisor may perform or not, solely on the condition of his whim, his promise will not serve as consideration. 7 Williston on Contracts, § 7:6, at 77-79, and § 7:7, at 88-89 (4th ed.1992). Although the termination for convenience clause requires the government to compensate a contractor for costs, if those costs and the government's determination of its best interest represent the only consideration for the contract, then the government may be procuring something for nothing. David Roth's Sons, Inc. v. Wright & Taylor, Inc., Ky., 343 S.W.2d 389, 391 (1961). The reasonable commercial standards of fair dealing required by KRS 45A.015(2) further require valuable government consideration in procurements by the Commonwealth. Furthering the purpose of the Code, the termination for convenience clause of the contract should be liberally construed and applied to ... (e) insure the fair and equitable treatment of all persons who deal with the procurement system of the Commonwealth, KRS 45A.010(e). The interests of fair treatment and public confidence in the government from the Model Procurement Code outweigh possible expenses on the public coffers, within the reasonable limits of a substantial change from the parties' expectations.