TERMINATION FOR CONVENIENCE IN FEDERAL GOVERNMENT CONTRACTS

imagesCAT7YPFETermination for convenience clauses are standard (and required) contractual clauses in federal government contracts and will be read into the contract even if not specifically incorporated. See G.L. Christian and Assocs. v. U.S., 160 Ct.Cl. 1 (Ct.Cl. 1963).  The clause allows the government to terminate the contract at its discretion if it is in the government’s interest to do so.  Yet, even though the government (through the contracting officer) has discretion to exercise the termination for convenience provision, it cannot do so with “bad faith” or with an “abuse of discretion”, although proving that that the government acted in bad faith or abused its discretion is extremely challenging because government officials are presumed to act in good faith. See T&M Distributors, Inc. v. U.S., 185 F.3d 1279 (Fed. Cir. 1999).  The Court of Federal Claims explained this challenging legal standard to establish that the government improperly exercised its termination for convenience provision:

 

 

The Federal Circuit—and the former Court of Claims—have recognized that an improper termination for convenience may give rise to a breach of contract claim when the agency (1) terminates the contract in bad faith or (2) abuses its discretion in its decision to terminate the contract. If a contractor can demonstrate that the agency’s termination for convenience was improper, the contractor will not be limited to damages identified in the termination for convenience clause. In such a case, traditional common law damages for breach of contract will be available to the contractor.

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Contractors face a high burden of proof for demonstrating an agency acted in “bad faith” by terminating the contract for convenience. To establish a breach based on bad faith in this context, the contractor must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor.

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In determining whether the CO clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.”  TigerSwan, Inc. v. U.S., 110 Fed.Cl. 336, 345 (Fed.Cl. 2013) (internal citations omitted).

 

One instance of bad faith / abuse of discretion could arise if the government terminates the contractor simply to acquire a better bargain or price from another contractor.  See Krygoski Const. Co., Inc. v. U.S., 94 F.3d 1537, 1541 (Fed. Cir. 1996) (“A contracting officer may not terminate for convenience in bad faith, for example, simply to acquire a better bargain from another source.”).  Another instance of bad faith / abuse of discretion may exist if the government contracts with a party knowing full well that it has no intent to honor the terms of the contract. See Torncello v. U.S., 231 Ct.Cl. 20 (Ct.Cl. 1982).

 

This bad faith / abuse of discretion component to the exercise of termination of convenience provisions may also be applied if a prime contractor terminates a subcontractor on a federal project.  See Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221 (10th Cir. 1999) (explaining that if subcontractor proved termination was in bad faith it could have recovered breach of contract damages).

 

 

An example of standard termination for convenience language for fixed sum contracts is included in the Federal Acquisition Regulations, 48 CFR 52.249-2:

 

“(a) The Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government’s interest. The Contracting Officer shall terminate by delivering to the Contractor a Notice of Termination specifying the extent of termination and the effective date.” (See also 48 CFR 52.249-6 which provides for standard termination for convenience language for cost-reimbursement contracts).

 

The termination for convenience language in the Federal Acquisition Regulations is substantially longer than what was provided above, but the point is that the government can simply terminate for convenience if it is in its interest.

 

When a fixed sum contract is terminated for convenience, the contract “is essentially converted into a cost reimbursement contract.”  White Buffalo Const., Inc. v. U.S., 52 Fed.Cl. 1, 3 (Fed.Cl. 2002).   The Federal Acquisition Regulations–sections noted above–govern what costs a contractor is entitled to recover when the contract is terminated for convenience.  Basically, “[t]he clause limits the contractor’s recovery to costs incurred prior to the termination, a reasonable profit on the work performed, and certain additional costs associated with the termination. Anticipatory profits and consequential damages are not recoverable.” Best Foam Fabricators, Inc. v. U.S., 38 Fed.Cl. 627, 637-38 (Fed.Cl. 197).  Thus, when a contact is terminated for convenience, the contractor cannot recover anticipated profits on the balance or unperformed part of the construction work.  To recover these damages, the contractor will need to argue that the government breached the contract by exercising the termination for convenience provision in bad faith or with an abuse of discretion. These damages are a major reason why a contractor would argue that the government wrongly exercised the termination for convenience provision.  See TigerSwan, 110 Fed.Cl. at 345.

 

If a contractor on a federal project is terminated for convenience or believes it will be terminated for convenience in the immediate future, it is imperative for that contractor to seek counsel to determine its rights.  These rights can include assistance in determining the recoverable costs under the Federal Acquisition Regulations and whether to pursue breach of contract damages for a wrongful termination for convenience for damages that would not be covered under the Federal Acquisition Regulations.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

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