Government Contract Termination for Convenience - Protecting Your Rights
By Theodore Watson, Esq.
Many government contractors struggle in understanding their rights when the agency imposes a notice of termination for default or termination for convenience. There are a myriad of situations that could amplify a contractor’s rights or, conversely, minimize them. This is one reason why federal defense contractors should consider bringing an experienced government contract termination lawyer on board.
The government has a unilateral right to issue a termination for convenience. However, specific care must be used to analyze whether in fact the reasoning given by the agency meets the legal threshold. For example, an agency should merely terminate a contract for convenience merely because a contractor challenges the decision of the Contracting Officer (CO). A more acceptable reason would be lack of funding or the requirement no longer supports the mission.
Decision to Terminate For Convenience
When deciding the government’s interest, the FAR provides no specific guidance as to what the CO must consider.The termination for convenience clause under FAR 49.101(b) merely states that the CO shall terminate contracts only when in the government’s interest.
In reality the government has wide latitude. It is even allowed the preference for a constructive termination for Convenience instead of being faced with a breach of contract. For example, a government directive to end performance of work will not be considered a breach of contract but rather a convenience termination if the action could lawfully fall under that clause, even if the government mistakenly thinks a contract invalid, erroneously thinks the contract can be terminated on other grounds, or wrongfully calls a directive to stop work a “cancellation.” See G.C. Casebolt Co. v. United States, 421 F.2d 710 (Ct.Cl.1970); John Reiner & Co. v. United States, 325 F.2d 438 (Ct. Cl. 1963).
On the other hand, the government cannot use constructive termination for convenience as a defense to retroactively terminate a fully performed contract and to limit its liability for failing to order the contract’s minimum amount of goods or services. See Ace-Federal Reporting , Inc., v. Barram, 226 F.3d 1329 (Fed. Cir. 2000).
What Must A Contractor Do When Given Notice of a Termination for Convenience?
When you receive a termination letter, you should consider do the following:
- Terminate all subcontracts (hopefully, you have a provision in your subcontracts to allow this);
- Immediately stop work and order subcontractors to stop work;
- If there are special circumstances when you cannot stop work, then immediately notify the CO
- You should consider immediately settling subcontract claims. Always seek the advice of an experienced government contract attorney
- Any property in your possession, then immediately preserve it
- Promptly retain a contract termination for convenience attorney to help you draft and submit your termination settlement proposal
Is the Termination for Convenience Really a Breach of Contract Instead?
Oftentimes, federal contractors have privy to facts that question the government’s decision to terminate for convenience. Sometimes, the facts are so egregious, that businesses want to challenge the termination decision. Unfortunately, the legal burden is substantially high. The Contractor has to show bad faith or clear abuse of discretion (often called the “Kalvar Test”). See Kalvar Corp., Inc., V. United States, 543 F.2d 1298 (Ct. Cl. 1976). In other words, inept government actions do not constitute bad faith.
If you are contemplating challenging a termination for convenience decision, ensure that you have an experience government contract law attorney to provide you with guidance.
What Options are There for Settlement ?
Normally, a contractor has one year to submit a settlement proposal from the date of the contract termination notice. The two bases of settlement include (a) inventory settlement and (b) total cost basis. See FAR 49.206-2. Inventory basis in the preferred method.
- Cost of subcontractor settlement
- Settlement expenses
- Rentals under unexpired leases
- Subcontractor claims
These are but only a few issues that arise under a termination for convenience. If you are a contractor seeking help with settlement or negotiations, contact Watson & Associates online or call 866-601-5518.