Contractor’s continuing to work under an expired LOI results in not getting reimbursed for termination expenses

An oil refinery and a contractor signed a letter of intent saying that the refinery intended to award the contractor a significant contract to handle a plant-shutdown and -maintenance project. The LOI included a provision requiring the contractor to get started on the work even before the final agreement was signed, and to be paid up to $50K for that preliminary work.

The parties were unable to reach agreement about the scope of the work , the parties signed written addenda that extended the LOI expiration date. The first two of these addenda also increased the cap on the ‘preliminary’ work to $100K and then to $1.2 million.

At the LOI’s last expiration date, the parties did not sign an extension. Nevertheless, for several more weeks the contractor kept working, even though a final agreement still had not been signed. The contractor also continued to bill the refinery for its work.

Then, some six weeks after the LOI’s expiration date, the refinery invoked a termination-without-cause provision that was incorporated by reference in the LOI. (The court’s opinion does not explain why.)

The refinery paid nearly all of the contractor’s invoices, totaling over $2 million — but it declined to reimburse the contractor for some $38K in employee-severance payments and lease-breakage payments that the contractor had to pay after termination.

The contractor sued, claiming that because the LOI had expired, it had continued working solely on the basis of an oral or implied contract that could not be terminated without cause. The contractor was therefore entitled (so it claimed) to recover its severance- and lease-breakage payments from the refinery.

The district court disagreed, and granted the refinery’s motion for summary judgment. The district court held, and the appeals court agreed, that, by their conduct, the parties had again extended the LOI — including the incorporated termination-without-cause provision. The refinery, therefore was entitled to terminate the contract without cause.

The appellate court’s opinion is Cherne Contracting Corp. v. Marathon Petroleum Company, LLC, No. 08-2723 (8th Cir. Jul. 22, 2009).

Lesson learned: In drafting any expiring LOI or other expiring contract, consider including a clause stating that the expiration date cannot be extended except in writing. (Whether a court would enforce such a clause is an open question.)