Without Cause, But Within Reason: The Intersection of Contract Law and CPLR Article 78
7.7.2025
When private vendors bid for government work, their contracts usually include a standard clause for termination “without cause” or “for convenience” by the agency. This clause is not negotiated, but rather compelled and usually set forth in standard appendices. The power of termination enables governments to act flexibly, responding to budgetary or funding issues or to significant changes in policy necessitating redirection of funding. Given its “plain language,” these termination clauses appear to give agencies absolute discretion to cancel contracts at any time.
But what if vendors challenge the contract’s cancellation under New York State CPLR 78, i.e., on grounds that the government abused its power or acted “arbitrarily and capriciously”? New York jurisprudence on this issue is, at best, muddled, and warrants scholarly and judicial review. This article seeks to lay the foundation for such review and argues that a more just outcome would be to limit the power of New York agencies to cancel contracts, regardless of their adhesive contractual terms. While courts should recognize a presumption of reasonableness on the part of the agencies, this presumption should be rebutted if the vendor demonstrates that the termination was made in bad faith or an abuse of discretion.[1] Stated otherwise, in the context of government contracts, the term “termination without cause” should be contextually interpreted as “termination without fault [on the vendor’s part] and not unreasonable [on the agency’s part].”
This outcome would be consistent with public policy concerns given the inherent imbalance of power between government agencies and private vendors. Without such constraint, agencies could, for example, arbitrarily cancel contracts midstream and give them to other contractors at lower prices.
Recognition of this rebuttable presumption is supported by a recently litigated dispute between a midtown Manhattan homeless shelter and its municipal funding agency. The court there held that, in the context of a government contract, cancellation “without cause” still had to be “within reason,” and found that the shelter had demonstrated a lack thereof, thereby compelling continued funding until the contract’s expiration date.[2]
Standard Government Contract Service Termination Clauses
The only terms generally negotiated between a vendor and government agency are those contained in the request for proposals, i.e., the goods and/or services to be rendered, the charges therefore, the amount and terms of payment, and the commencement/duration of the contract. While those negotiated terms are reflected in the final agreement, most of the conditions attendant thereto have been standardized, just like contracts between tenants and landlords. For instance, the standard multipage Appendix A incorporated into New York City agency contracts with outside vendors provides as follows:
“Section 10.01 Termination by the City Without Cause
“The City shall have the right to terminate this Agreement, in whole or in part, without cause, in accordance with the provisions of Section 10.05.”[3]
The standard New York City contract also empowers the agency to terminate the contract for cause, e.g., unsatisfactory performance of the services.[4] Contracts with federal agencies have a similar termination clause, though such agencies are empowered to terminate “for convenience.”
Different procedures govern termination “with” or “without” cause. In the former, the agency must give the vendor written notice and an opportunity to “cure” the default. When the termination is “without cause,” the city need only provide the time frame for cessation without any opportunity to cure (though the city remains obligated to pay for all services rendered prior to termination).
Significantly, though, the distinction of termination with or without cause has materially different consequences for the vendor. If the vendor is terminated “with cause,” and then fails to cure the “default,” the vendor may be barred from bidding on any future contracts with the city. In contrast, if the vendor is terminated “without cause,” it can continue to bid on future contracts. As such, vendors more often litigate terminations “with cause” to avoid being barred from bidding for future contracts. There is no similar incentive to litigate termination “without cause.” Indeed, in this Alice in Wonderland context, it is generally better for the vendor to be terminated without cause than with cause. So long as the termination is without cause, the vendor can continue to bid on future contracts. The exception is in cases where arbitrary cancellation in midstream of a contract would be a death knell, like the homeless shelter in the Grand Central case whose sole source of income was its contract with the city.
Federal Case Law
Given the similarity of contractual terms and conditions, federal case law can provide some guidance to New York State courts for adjudication of this issue. For nearly 50 years, federal courts have judicially imposed a requirement that despite the express right to terminate “for convenience,” contracts cannot be canceled in “bad faith or a clear abuse of discretion in its actions.”[5]
Jurisprudence concerning the government’s power to cancel contracts with private vendors can be traced back the American Civil War. The government needed flexibility to cancel orders if battlefield conditions changed, or hostilities ceased altogether. For instance, during the Civil War, Rule 1179 of the Army Regulations required that contracts for subsistence stores “expressly provide for their termination at such time as the Commissary-General may direct.”[6] However, these contracts did not include any requirement that the government state the grounds for termination. As such, the courts deemed the government’s termination to be a “breach of contract” by the agency, thus giving rise to the question of appropriate remedies (e.g., lost profits).[7]
Even after numerous contracts were canceled during and after World Wars I and II, resolution of claims arising from termination relied upon statutes or regulations, rather than the terms of the contracts themselves.[8] It was not until after World War II that the federal government required “termination for convenience” clauses be inserted in civilian agency contracts. In time, these clauses expanded to all non-warfare related contracts.[9] It was not until 1967 that the Federal Procurement Regulations (applicable to all agencies) mandated termination for convenience clauses,[10] which “permit[ed] the Government to terminate a contract for commercial products or commercial services either for the convenience of the Government or for cause.”[11]
The government’s unilateral right to terminate a contract for convenience or cause gave rise to litigation over whether such contractual clauses were enforceable. It is hornbook law that a contract exists only if “consideration” has been exchanged. As noted in Williston on Contracts, “[a]n agreement wherein one party reserves the right to cancel at his pleasure cannot create a contract.”[12] Given that there was no expressed limitation on the government’s right to terminate, vendors contested cancellations that were premised on mere “convenience” on grounds of unenforceability.[13] Initially courts such as Sylvan Crest found that such unilateral termination contracts were enforceable, and that the “consideration” was the government’s obligation to give “reasonable” notice before cancellation.[14] This reasoning was rejected in Torncello v. United States, which held that the right to terminate had to be limited to prevent a finding of lack of consideration, and that reasonable notice was not sufficient consideration.[15]
Other courts took the position that the common law “implied duty” that all parties act in “good faith” is implicit in any contract, regardless of a right to termination for convenience. By the same token, the Uniform Commercial Code expressly requires that “[e]very contract or duty within this act imposes an obligation of good faith in its performance and enforcement.”[16] Hence, when terminating contracts, the government needed to exercise its discretion reasonably, not abusively.[17]
In the seminal Kalvar case, the court held that there was a “presumption that public officials act conscientiously in the discharge of their duties” but that this presumption was rebuttable if the contractor demonstrated the officials had acted in bad faith.[18] Courts thereupon wrestled over the degree of bad faith sufficient to rebut the presumption. Kalvar suggested “irrefragable proof” akin to a “specific intent to injure the plaintiff.”[19] The concurring opinion in Torncello asserted that while proof of specific intent was sufficient, it was not the only means of rebuttal, contending that “abuse of discretion” should also satisfy the vendor’s burden.[20] Krygoski Construction Co. v. United States then expanded “abuse of discretion” to include consideration of bad faith, the reasonableness of the decision, the degree of discretion delegated to the official, and violations of application regulations or statutes.[21] In 2002, the Federal Circuit clarified the vendor’s burden of proof to be “clear and convincing.”[22]
As such, ample federal jurisprudence is available to guide New York state courts without having to reinvent the proverbial wheel.
The Intersection of CPLR Article 78 and State Agency Contracts
Article 78 created an expedited proceeding whereby courts assess whether an administrative decision “was made in violation of lawful procedure, was affected by an error of law or was an arbitrary or capricious or an abuse of discretion.”[23] As noted by the Court of Appeals in Pell v. Board of Education,[24] the court must decide whether the agency decision was “rationally based”:
“The arbitrary or capricious test chiefly ‘relates to whether a particular action should have been taken or is justified * * * and whether the administrative action is without foundation in fact.’ Arbitrary action is without sound basis in reason and is generally taken without regard to the facts.
[. . . .]
“[A] court may not substitute its judgment for that of the board or body it reviews unless the decision under review is arbitrary and unreasonable and constitutes an abuse of discretion.”[25]
Some New York state courts confronted with Article 78 claims arising out of contract cancellations without cause have held that the statute limits unbridled discretion regardless of the standard contractual clause. In Karanja v. Perales, the Appellate Division, First Department made unequivocally clear that
“We are committed to the view that a Medicaid provider denied reenrollment
“. . . . is . . . entitled to a statement of the reasons why reenrollment is denied, and to Article 78 relief if those reasons are arbitrary and capricious.”[26]
Nine years later, in RX 2000, Inc. v. DeBuono,[27] the New York State Department of Health terminated a pharmacy’s contract to participate in the state’s Medicaid program. The agency argued that it had the right to terminate without cause, adding that the pharmacy had filled fraudulent prescriptions. The First Department Appellate Division reversed the lower court’s decision upholding the termination, initially noting that
“While the [Medicaid Program] statute gives respondents the right to terminate without cause, such termination is subject to review under CPLR Article 78 to determine if the decision was made in bad faith and therefore arbitrary and capricious.”[28]
The court then reviewed the facts and determined that “the decision to terminate was made in bad faith,” noting the absence of evidence that the pharmacy knew the prescriptions were fraudulent (while pointing out that the state was otherwise aware of a prescription forgery ring, but had failed to notify the pharmacy).[29]
On the other hand, several New York state courts, even those in the same Appellate Department, have held that the “without cause” language provides absolute immunity to any termination challenge without regard to Article 78. Some courts gave primacy to the without cause clause but still cited facts which amply supported the reasonableness of the municipal agency’s decision to terminate. For instance, in Red Apple Child Development Center v. Community School Districts Two,[30] the panel held that “[a] contract terminable without cause does not give rise to a protected property interest, such as would afford the right to a hearing as to the propriety of the termination.”[31] In so holding, the court not only ignored Karanja and RX2000 (decided by appellate panels in the same department) but also relied upon cases that were 60 to 110 years old involving disputes between private corporations.[32] Nonetheless, the court noted that the petitioner’s contract to operate a child care center had been terminated after its CEO was arrested for allegedly attempting to bribe an agency inspector after he uncovered falsified documentation, which was clearly sufficient to demonstrate good faith on the agency’s part.[33]
Similarly, in Big Apple Car, Inc. v. City of New York,[34] a radio dispatch car service contract with New York City Human Resources Administration was terminated after federal authorities began investigating fraudulent overbilling. Given these facts, there was clearly a reasonable basis for termination, and thus no evidence supporting an Article 78 challenge. However, while upholding the termination, the court also held that the terms of the contract precluded the need to show any justification: “A party has an absolute, unqualified right to terminate a contract on notice pursuant to an unconditional termination clause without court inquiry into whether the termination was activated by an ulterior motive.”[35] In so ruling, the court ignored Article 78 and Karanja’s interpretation thereof, instead relying upon much older cases involving disputes between private companies, not municipal agencies and private companies.[36] It may well be though that this case had not been filed under Article 78, since there is no mention thereof in the opinion.
The holding in A.J. Temple Marble & Tile, Inc. v. Long Island Rail Road[37] is most perplexing. The petitioner in an Article 78 proceeding claimed that it had been damaged by the agency’s rejection of its service contract bid. Citing Krygoski and Torncello, the lower court held that the agency’s power to terminate “for convenience” could be reversed if the vendor “can show that the government acted in bad faith or abused its discretion.”[38] The court then found that the agency’s action was reasonable since the vendor’s bid had been ranked lower than competing bids. On appeal, the Appellate Division issued a two-paragraph affirming the dismissal, but on more narrow grounds:
“Contrary to the plaintiff’s contention, “[a] party has an absolute, unqualified right to terminate a contract on notice pursuant to an unconditional termination clause without court inquiry into whether the termination was activated by an ulterior motive.” Accordingly, it was proper for the Supreme Court to grant that branch of the defendant’s motion which was for summary judgment dismissing the first cause of action, which sought to recover damages, inter alia, for breach of contract and breach of an implied duty of good faith and fair dealing.”[39]
The court did not address the language of Article 78, nor cases cited by the lower court, nor the prior First Department cases that were contra wise. As such, the precedential value of its statement of the law might be questioned, especially given the facts of the case which clearly evidenced the agency’s reasonableness. Arguably, the statement of law in the case should be deemed obiter dictum.[40]
Thus, while some New York state court decisions have given lip service to government agencies’ absolute right to terminate, the same courts also reviewed facts that clearly demonstrated the terminations were reasonable and not arbitrary.
The Recent Grand Central Decision
The litigation that prompted this article involved Mainchance, a drop-in center that has served homeless individuals in midtown Manhattan for over 30 years. The shelter operates 24/7 and provides a place where on a first-come, first-served basis, up to 72 homeless people can sleep overnight, have dinner and breakfast, shower, and receive medical and housing consultation services. Mainchance’s fiscal sponsor is the Grand Central Neighborhood Social Services Corp. Nearly all Mainchance’s funding comes from New York City’s Department of Homeless Services.[41]
In January 2024, the Department of Homeless Services notified Mainchance that it was terminating its most recent contract with the facility as of June 30, 2024, two years before the contract’s expiration date. At the time, the department offered no reason for the termination, orally or in writing. At a New York City Council meeting in April 2024, a department official stated that the premature closure was due to Mainchance’s “underperformance.” Mainchance thereupon filed an administrative notice of dispute challenging the underperformance claim, noting that it had previously exceeded the department’s prescribed performance goals, and that periodic audits had graded the shelter’s performance as good to excellent. In response, the department pivoted, conceding that there was no underperformance, but instead asserting that the termination was due to a “policy” decision to shift from overnight drop-in centers (where homeless people sleep in chairs) to overnight safe havens (where homeless sleep on beds but otherwise receive the same services provided by drop-in centers).
In response, Mainchance pointed out that it had already submitted a proposal to convert to a safe haven, and that the proposal was being actively considered by another office within Homeless Services. Mainchance’s fiscal sponsor, Grand Central, thereupon filed an Article 78 petition to enjoin the termination and compel continued funding of the drop-in center until the contract expiration date.
Given that Mainchance’s contract contained the standard language entitling the Department of Homeless Services to terminate without cause, it is not surprising that the agency asserted that it had an “absolute right” to cancel at any time. In effect, the city argued, the precise terms of the contract gave it an unbounded right to terminate “at will,” as is the case in, for instance, contracts between private companies and their employees. The court held otherwise: “While DHS did reserve to itself the right to terminate the Contract, this does not give it the right to do so in an arbitrary and capricious manner.”[42]
Contrasting the decision in Institute for Puerto Rican/Hispanic Elderly,[43] the court reasoned that
“Petitioners [in that case] signed a contract knowing the possibility they would lose the bid process and be replaced, whereas here, the [Department of Homeless Services] has no plan in place to replace Mainchance with an alternative shelter, essentially reducing the aid provided to persons suffering housing insecurity based upon the preference for safe havens over drop-in centers. Yet respondents do not point to a new safe haven that will serve the community petitioners have served for the past 25 years.”[44]
The court proceeded to cite several other facts evidencing the capriciousness of the termination decision, including the department’s failure to explain “why Mainchance is the only drop-in center which petitioners seek to close.”[45] It concluded that the department’s “decision to terminate the Contract lacked a rational basis and is otherwise arbitrary and capricious” and compelled the agency to continuing funding Mainchance’s operations until expiration of its contract in June 2026.[46]
As the foregoing demonstrates, there is a reasonable basis to conclude that, regardless of standard terms that empower a municipal or state agency to terminate a contract “without cause” or for “convenience,” at least in New York State, administrative agency decisions are subject to the requirements of Article 78, and can be challenged as arbitrary, unreasonable or capricious.
Marc I. Gross is senior counsel at Pomerantz, where he has litigated securities fraud class actions for 48 years. He is also a past president of the Institute of Law and Economic Policy. This article arose out of his role as board member and pro bono counsel for Mainchance, a homeless shelter located in midtown Manhattan.
Endnotes:
[1] See Kalvar Corp. v. United States, 543 F.2d 1298, 1301 (Ct. Cl. 1976) (discussed infra at n. 18).
[2] Grand Cent. Neighborhood Soc. Servs. Corp. v. Park, No. 155327/2024, 2024 N.Y. Misc. LEXIS 7061 (Sup. Ct., N.Y. Co. Sept. 18, 2024) (Kotler, J.S.C.) (discussed infra at n. 32).
[3] Emphasis added. Paragraph 10.05 sets forth the procedures for termination.
[4] Such terminations are contractually characterized as “defaults” by the vendor.
[5] See Kalvar, 543 F.2d at 1301 (where contract included “termination-for-convenience clause,” termination could be reversed upon proof that government “had evinced bad faith or a clear abuse of discretion in its actions”).
[6] John Cibinic, Jr, James F. Nagle & Ralph C. Nash Jr, Administration of Government Contracts 941 (5th ed. 2016); United States v. Speed, 75 U.S. 77, 78 (1868).
[7] See United States v. Corliss Steam Engine Co., 91 U.S. 321 (1875) (finding the Navy Department had authority to suspend work under a contract and enter into a breach settlement for partial performance); G.L. Christian & Assocs. v. United States, 312 F.2d 418 (Ct. Cl. 1963). See generally Cibinic, supra note 6, at 941–59.
[8] Contract Settlement Act of 1944, Pub. L. 78-395, 58 Stat. 649.
[9] Cibinic, supra note 6, at 942.
[10] Miscellaneous Amendments to Chapter, 32 Fed. Reg. 8467, 8477-79 (June 14, 1967).
[11] See FAR 12.403(a) (2021) (emphasis added). Different notice and remedies apply depending on which of these reasons are the basis for termination.
[12] 1 Samuel Williston, A Treatise on the Law of Contracts § 105, at 418 (3d ed. 1957 & Supp. 1979) (quoted by Cibinic, supra note 6, at 949).
[13] See Matthew S. Pearlman & William W. Goodrich, Jr., Termination for Convenience Settlements – The Government’s Limited Payment for Cancellation of Contracts, 10 Pub. Cont. L.J. 1 (1978) (quoted by Cibinic, supra note 6, at 948).
[14] Sylvan Crest Sand & Gravel Co. v. United States, 150 F.2d 642 (2d Cir. 1945).
[15] 681 F.2d 756 (Ct. Cl. 1982) (Torncello).
[16] UCC § 1-304 (Obligation of Good Faith).
[17] See Librach v. United States, 147 Ct. Cl. 605, 612 (Ct. Cl. 1959) (“Hence, this court is required to apply the rule that, in the absence of clear evidence to the contrary, it must be presumed that the public officials involved in the termination of the plaintiffs’ contract were acting conscientiously in the discharge of their duties when the contract was terminated for the purported convenience of the Government.”) (emphasis added); Hoel-Steffen Const. Co. v. United States, 684 F.2d 843 (Ct. Cl. 1982); Schlesinger v. United States, 390 F.2d 702 (Ct. Cl. 1968). United States v. Chem. Found., 272 U.S. 1, 14–15 (1926); New River Min. Co. v. Roanoke Coal & Coke Co., 110 F. 343, 345 (4th Cir. 1901); Knotts v. United States, 128 Ct. Cl. 489, 492 (Ct. Cl. 1954).
[18] Kalvar Corp. v. United States, 543 F.2d 1298, 1301–02 (Ct. Cl. 1976) (quoting Librach, 147 Ct. Cl. at 612).
[19] Id.
[20] Torncello, 681 F.2d at 773–74 (Davis, J., concurring) (finding that public official acted in bad faith when “terminat[ing] a contract for convenience to get a better price of which [the public official] had full knowledge (and which was available) at the time when he deliberately entered into the contract with plaintiff”).
[21] 94 F.3d 1537, 1543 n.3 (Fed. Cir. 1996) (Krygoski); Accord, Irwin Cty. v. United States, 170 Fed. Cl. 355, 370 (2024).
[22] Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (Fed. Cir. 2002).
[23] CPLR 7803(3).
[24] 34 N.Y.2d 222 (1974).
[25] Id. at 231–32 (quoting 1 N.Y. Jur. Administrative Law § 184); then quoting Diocese of Rochester v. Planning Bd., 1 N.Y.2d 508, 520 (1956)) Accord; Matter of Rysiejko v. City of New York, 232 A.D.3d 432 (2024).
[26] Karanja v. Perales, 163 A.D.2d 264, 265(1st Dep’t 1990) (Karanja) (internal citation omitted) (the court reversed the trial court’s finding that termination was arbitrary or capricious).
[27] 261 A.D.2d 162 (1st Dep’t 1999).
[28] Id. at 504 (citing Karanja, 163 A.D.2d at 264).
[29] Id. See also Farmacia Honeywell, Inc. v. DeBuono, 276 A.D.2d 206, 207 (1st Dep’t 2000) (Court held that where termination was “without cause,” the pharmacy was “entitled to a statement of the reasons why reenrollment is denied, and to Article 78 relief if those reasons are arbitrary and capricious.” In that case, termination of the pharmacy’s participation in the Medicaid drug plan was deemed reasonable given that the over 100 prescriptions were forgeries) (internal citation omitted) (quoting Karanja, 163 A.D.2d at 265); 701 Pharmacy Corp. v. Perales, 930 F.2d 163, 166 (2d Cir. 1991) (Pharmacies contested license terminations due to regulatory violations, including handling of controlled substances. The court held that “Judicial review of the Department’s termination decision . . . is available under Article 78 . . . . Such a review, of course, is common. . . . Even when the termination is without cause, the Department will be obligated to state its reasons for the termination to enable the Article 78 court to determine whether the decision was made in bad faith and therefore arbitrary and capricious”).
[30] 303 A.D.2d 156 (1st Dep’t 2003).
[31] Id. at 158 (internal citation omitted).
[32] N.Y. Tel. Co. v. Jamestown Tel. Corp., 282 N.Y. 365 (1940) (dispute between private parties over telephone charges); Crown Point Iron Co. v. Aetna Ins. Co., 127 N.Y. 608 (1891) (dispute over insurance policy coverage).
[33] See also Inst. for Puerto Rican/Hispanic Elderly v. N.Y.C. Dep’t for Aging, No. 103869/12, 2012 N.Y. Misc. LEXIS 5738, at *7 (Sup. Ct., N.Y. Co. Dec. 10, 2012) (Institute for Puerto Rican/Hispanic Elderly) (citing the “without cause” termination clause, but then proceeding to review the facts which demonstrated that after expiration of the petitioner’s contract, bids were requested for a new contract, which resulted in petitioner’s proposal being ranked the lowest. As such, the court held Dep’t of Homeless Services had “provided a rational basis for their determination and have not acted arbitrarily or exceeded their authority by entering into a contract with [a competing bidder]”).
[34] 204 A.D.2d 109 (1st Dep’t 1994).
[35] Id. at 111.
[36] A.S. Rampell, Inc. v. Hyster Co., 3 N.Y.2d 369 (1957) (dispute between car manufacturer and dealer); Div. of Triple T Serv., Inc. v Mobil Oil Corp., 60 Misc. 2d 720 (Sup. Ct., Westchester Co. 1969) (franchise dispute), aff’d, 34 A.D.2d 618 (2d Dep’t 1970).
[37] 256 A.D.2d 526 (2d Dep’t 1998).
[38] A.J. Temple Marble & Tile, Inc. v. Long Island R.R., 172 Misc. 2d 422, 424 (Sup. Ct., Queens Co. 1997), aff’d in part, 256 A.D.2d 526(2d Dep’t 1998).
[39] A.J. Temple Marble & Tile, Inc. v. Long Island R.R., 256 A.D.2d 526, 527 (App. Div. 1998) (quoting Big Apple Car, 204 A.D.2d at 111) (citing Division of Triple T., 60 Misc. 2d at 720).
[40] The author thanks Stanley M. Grossman, his mentor at Pomerantz LLP, for this “term of art.”
[41] The Department of Homeless Services is part of New York City’s Department of Human Services.
[42] Grand Cent. Neighborhood Soc. Servs. Corp. v. Park, No. 155327/2024, 2024 N.Y. Misc. LEXIS 7061, at *8–9 (Sup. Ct., N.Y. Co. Sept. 18, 2024).
[43] See n. 33 supra.
[45] Id. at *11-12. Mainchance suggested that the decision to prematurely terminate its contract may have been precipitated by its proximity to a luxury five-star hotel built and owned by Turkish businessmen, at least one of whom was indicted for funneling campaign contributions to New York’s mayor, himself who was indicted as well but then pardoned..
