Can the Government Terminate a Contract for Convenience When It Does Not Actually Terminate the Contract for Convenience?

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Court of Federal Claims rules that the government “constructively” terminated a contractor for convenience when it did not order the quantities specified in the contract.

TAKEAWAYS

  • The “constructive termination for convenience” doctrine requires the establishment of three elements.
  • Contractors constructively terminated for convenience cannot recover any costs if they do not submit a termination claim or request termination costs in their complaint.
  • Contractors should consider this ruling as they assess whether to elect the Court or a Board of Contract Appeals following an adverse final decision.

On October 16, 2020, the Court of Federal Claims granted a Motion for Summary Judgment that disposed of a breach of contract claim alleging the Army did not order certain services required under the contract. JKB Solutions and Services, LLC v. United States, COFC No. 19-1390C (Fed. Cl. Oct. 16, 2020) (“JKB II”). The Court held that the Army constructively terminated the contract for convenience and, therefore, did not breach it. The Court was not moved by the fact that the Army did not, in actuality, terminate the contract for convenience or for any other reason.

The contract at issue required JKB to provide instructors, under three consecutive task orders, for the Army’s Operation Contract Support program. The Army’s contract specified that JKB perform 14 classes per task order. The Army ordered nine courses under the first task order, 13 under the second, and eight under the third. Following successful completion of the task orders, JKB pursued its claim for breach of contract after the Army refused to pay JKB for 14 classes per task order. In JKB I (JKB Sols. & Servs., LLC v. United States, 148 Fed. Cl. 93, 97-99 (2020) (decided five months earlier), the Court denied the Army’s Motion to Dismiss JKB’s complaint for failure to state a claim. In that Motion, the Army argued that the contract unambiguously required the Army to pay for only the services it ordered. The Court disagreed, ruling that the contract the Army wrote had latent and patent ambiguities, and that the contractor therefore could proceed with its breach of contract claim premised on the non-payment issue.

In deciding JKB II in the Army’s favor, the Court stated that if a “contract contains a termination for convenience clause and the contracting officer could have invoked the clause instead of terminating, rescinding or repudiating the contract on some other invalid basis,” the Court must “constructively invoke the clause to retroactively justify the government’s actions, avoid breach, and limit liability.” The Court itemized three factors needed to establish a constructive termination: (1) the contract contains a termination for convenience clause, (2) the Government did not terminate the contract in bad faith or abuse its discretion, and (3) the contracting officer could have terminated the contract for convenience.

On the first factor, the Court found the contract had a termination for convenience clause—the FAR’s 52.212-4 commercial item clause. The contractor had argued that this clause was inapplicable to the contract because the contract was not commercial item, but the Court disagreed. The Court determined instead that, while the commercial item clause normally applies to commercial item contracts, nothing precludes its application to non-commercial item contracts as well.

Regarding the second factor, the Court found the Army did not act in bad faith: “the Court is constructively invoking the termination for convenience clause; the Army never explicitly invoked it, so it cannot have done so in bad faith or abused its discretion in having done so.” Finally, on the third factor, the Board determined that the Army could have invoked its right to terminate in this situation.

The Court also ruled that since JKB did not submit a termination for convenience settlement proposal or ask for termination costs in its complaint, JKB was not entitled to recover any costs.

This case offers contractors some potential new strategies. First, should the government not order the number of supplies or services set forth in a contract, the contractor might consider submitting a termination for convenience settlement proposal. If the government denies that it terminated for convenience, then the contractor likely could pursue a breach claim. Should the government instead process the termination claim, then the contractor might recover, at a minimum, the costs it incurred on the terminated portion of work. Second, facing this or a similar situation, contractors might consider how much effort they spend on the second element (the bad faith/abuse of discretion factor). We struggle to envision how the Court might find a bad faith constructive termination—since the government agency did not actually act to terminate anything. Third, to our knowledge, the Boards of Contract Appeals have not followed this seldomly invoked legal doctrine. Accordingly, should a contractor face a similar set of facts in the future, that contractor might consider whether it should file its appeal at a Board rather than at the Court following a final decision.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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