Difference Between Termination for Default Clause & Convenience Government Contracts

There are subtle differences between the government contract termination for convenience vs termination for default clause in federal government contracts decisions.

Contractors who incorrectly respond to termination by default or cause quickly find the painful and subtle differences, especially at the appeals stage. The same is true when the contractor does not submit his termination for convenience settlement proposal on time.

• How you approach a FAR termination for default vs convenience situation is critical to getting favorable versus unfavorable result.

In each situation, the government’s interest is different. In this type of contract termination, the government wants to terminate the contractor regardless of fault, and when it is in the “government’s interest.”

On the other hand, the government’s decision to issue a contract termination for cause (T4D) takes a totally different path.  A default situation is more damaging to your reputation and ability to conduct future business with the federal government if not handled correctly. In either situation, you should act immediately to protect your legal rights. Once a case gets closer to a FAR termination for cause clause and convenience, it is generally more difficult to reverse or properly negotiate.

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Basics of FAR 52.249-2 Termination for Convenience Clause

Termination for convenience reasons. (T4C Government Contracts)

A government contract termination for convenience (T4C) is substantially different than in the commercial sector. Under federal contract law, the federal government’s termination policy was intended to allow the parties to avoid further contract obligations when certain conditions occur. The CO can issue a termination notice when it is in the government’s  ‘best interest” regardless of whether contractors are at fault. What does that mean? The answer to that question remains vague.  Under FAR 52.249-2, Courts tend not to get into whether the government’s termination was in the interest of the government. Instead, it looks to see whether the decision was a reasonable one. Termination for convenience reasons include:

• Mission changes
• The agency no longer needs the requirements
• Lack of funding

An important part of assessing whether the termination was lawful is to decide whether the government terminated the contract to get a better deal. If so, courts look at this very closely.

• Not all contracts terminated by convenience decisions are legally valid.
• The common question for contractors issue is what damages can they recover.
• Your goal is to always maximize damages quickly after receiving the letter.
• You must also mitigate damages because the government will try to reduce any payment if you do not.

What are your legal obligations? 

When the agency issues a contract termination notice, the Federal Acquisition Regulation imposes certain contractual obligations. For example, you must immediately stop the terminated work and immediately start to mitigate your damages. 

Termination For Convenience Compensation

The T4C Clause requires the government to compensate the contractor with specific statutory damages. In order to get the allowed damages, contractors must submit a government contract termination for convenience settlement proposal to the contracting officer within one year.

When deciding to submit your settlement proposal, you should pay special attention to the definition of allowable costs. Keep the following in mind.

• Termination for convenience compensation is derived from the statute;
• The legal burden is on the contractor to justify convenience damages;
• You have a statutory deadline to submit your settlement proposal; 
• When looking at the government’s actions, you should first see whether the government has breached the contract.

Termination for Convenience Settlement Proposals

Government contractors are entitled to recover under the reasonable expense of preparing and presenting termination for convenience settlement proposals, including reasonable legal expenses. See Dellew Corp., ASBCA No. 58538, 15-1 BCA ,i 35,975 at 175,783.  The problem is usually that the government almost will challenge your request for damages and the documentation and support for your compensation amounts.

Courts on appeal will agree with the government if you do not provide sufficient evidence to support your damages or compensation. When preparing termination for convenience settlement proposals, the main problem that you want to avoid is simply making conclusions or providing self-made spreadsheets.  Instead, you want to focus on providing actual invoices, timesheets or payroll and more defined evidence.

All claimed amounts must have been presented to the contracting officer. One of the most deadly legal mistakes that you want to avoid is making the conclusion that if the contracting agency denies your request for settlement proposal compensation you will increase the amounts on appeal. This is a very dangerous mistake.

• All damages must be presented to the contracting officer
• Trying to get more compensation in an appeal will get that portion of the claims dismissed because the appeals court only had jurisdiction to hear claims properly submitted according to the Contract Disputes Act and denied by the contracting officer.

Court’s View of Government’s Best Interest 

 Courts interpret the “best interest” standard very broadly in a government convenience termination case. There are situations when contracting officers terminate the contract only to immediately reissue a new contract for the exact services or products. In these situations, a court may look at the agency’s actions to see if the contracting officer simply seeks to get a better deal.

There are even cases where the agency may not like a specific contractor or somehow terminate the prime contractor to provide the work to another contractor. Courts are beginning to question the underlying motives of the agency when it comes to terminating a contract for convenience.

In the landmark case of Krygoski Const. Co. v. United States, 94 F.3d 1537, 1541 (Fed. Cir. 1996), the Federal Circuit Court ruled that the contracting officer cannot terminate a contract in bad faith or abuse his or her discretion.

If your company prevails in showing bad faith or an abuse of discretion, you can be fortunate to get common law damages over the statutory damages. See the case of TigerSwan, Inc. v. United States, 110 Fed. Cl. 336 (2013). As stated before, very few cases favor contractors on these topics.

Watch additional information about terminations for convenience

Termination for Convenience Reasons – Proving Bad Faith in T4C Government Contracts

When contractors appeal the government’s termination for default clause or convenience (T4C), proving that the contracting officer acted in bad faith is very difficult to prove. See Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234, 1239 (Fed. Cir. 2002).

What evidence do you need to prove that the government acted unlawfully when it terminated for default?

Hard evidence is what a court looks for. Companies should seriously look at the level of substantive evidence they have when deciding to go down this path. Here are a few suggestions of evidence to gather before contacting a government contract termination for default clause attorney.

• Evidence that the agency was negotiating with another contractor for the same scope of work – look specifically at 8(a) sole-source awards.
• After terminating for convenience, the government publicized another solicitation for the same scope of work.
• Before termination for convenience, the government secretly discusses going to another contractor or finding some ‘polite’ way to get rid of the current contractor.

Government Termination Notice Requirements

When the government issues a termination notice, it must be in writing. A termination notice under the FAR must include the following:

1. The contract is being terminated for the convenience of the Government under the convenience contract clauses;
2. The effective date of termination;
3. The extent of the termination;
4. Any special instructions; and
5. The steps the contractor should take to reduce the impact on their staff if the termination, together with all other outstanding terminations, will result in a significant reduction in the contractor’s work.

Tip: If you are seeking damages under the contract termination clause, the process allows you one year to submit a settlement proposal. However, you may want to consult with a lawyer in the early stages because government employees rotate or retire. 

Default Termination / Termination for Cause Clause (T4D)

What is the difference between FAR termination for cause actions and termination for default government contracts actions?

In practice, there is really no difference between termination for cause and termination for default in government contracting. Federal government agencies tend to use the terms interchangeably. At the end of the day, the government is seeking to call in the ‘chips’ and make it difficult for your company to ever do business again with the federal government.

Under what authority can the contracting officer terminate a contract for default or cause?

Federal government agencies use the Default Clause , often referred to as termination for default clause, when contractors fail to meet delivery schedules, fail to comply with the terms and conditions of the contract or some other contract performance breach theory. 

When considering the difference between a government convenience and termination for default, and the government’s contractual right to terminate a commercial contract, contractors should remember two things:

• Litigation as to what “best interest” of the government means very seldom gets the court’s sympathy unless you have hard facts to show that the government may have acted in bad faith. The issue of what the CO believes was an anticipated failure to perform is also one of the most highly litigated issues.
• By comparison, in a default case, you have to show that you complied with the contract terms or that the government caused the underlying reason for the termination or that your alleged breach was excused or legally justifies.

The government’s posture will be a lot more adverse than with a default case. Furthermore, the costs associated with termination for default clause are much different.

FAR Termination for Cause Penalties

What happens if you default on a government contract? Without properly defending your rights, you could face suspension or debarment and even lose the ability to do business with the government in the future. In addition, if you are not able to prove that the termination was unlawful, the contracting officer can even go after re-procurement costs and make you liable to the government for other associated damages. The default termination liability action can also seriously impact your CPARS ratings.

Depending on the facts of the case, contracting officers make refer false claims to the Inspector General’s (IG) office. the consequences if there is a case against you can be devastating.  In such cases, you should be seeking legal advice and help from an experienced termination for default attorney. See information about liquidated damages.

The government’s pursuit is for breach of contract from the contractor

 The T4D Clause is essentially a breach of contract allegation.  The agency will allege that you have not complied with the terms of the contract. This puts your company in a tough position because it now has to defend itself and now put together evidence to present on appeal. 

• Courts look at termination for default vs convenience case as an extreme measure;
• Before issuing a T4C, the FAR requires to contracting officer to consider certain things;
• The agency can seek damages from the contractor under the regulations;
• The legal burden to show why the default should be upheld lies on the defaulting contractor;
• The government’s contribution to the default can be a defense;
• Failure to adequately defend the T4D may mean that you have to pay the government.

Can a Contractor Terminate a Government Contract?

The general answer is no. However, arguing that there is a constructive termination caused by the government could be a close second.  If the contractor simply threatens to terminate the contract, or walks away from the project, the government will more than likely issue a termination for default.

What Factors does the Contracting Officer have to take into Consideration Before Termination for Default?

The contracting officer shall consider the following factors in determining whether to terminate a contract for default:

           (1) The terms of the contract and applicable laws and regulations.

           (2) The specific failure of the contractor and the excuses for the failure.

           (3) The availability of the supplies or services from other sources.

           (4) The urgency of the need for the supplies or services and the period of time required to obtain them from other sources, as compared with the time delivery could be obtained from the delinquent contractor.

           (5) The degree of essentiality of the contractor in the Government acquisition program and the effect of a termination for default upon the contractor’s capability as a supplier under other contracts.

           (6) The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments.

           (7) Any other pertinent facts and circumstances.

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FAR Termination for Default Clause vs Convenience Process

When a default termination is considered, the Contracting Officer must issue you written notice and also decide which clause to apply. As mentioned above, he or she must consider the following factors:

• The terms of the contract and applicable laws and regulations.
• The specific failure of the contractor and the excuses for the failure.
• The availability of the supplies or services from other sources.
• The urgency of the need for the supplies or services and the time required to obtain them from other sources, as compared with the time delivery could be obtained from the delinquent contractor.
• The degree of contractor importance to the Government acquisition program and the effect of a termination for default upon the contractor’s capability as a supplier under other contracts.
• The effect of a default on the contractor’s ability to liquidate guaranteed loans, progress payments, or advance payments.
• Any other pertinent facts and circumstances.

(T4D) What is Termination for Default Government Contracts Appeals Process

When the agency issues a termination for default letter, contractors must make an informed decision to either appeal or not to appeal. This can be a tough decision but one that must be made. There are specified deadlines in place. The contracting officer’s final decision letter should tell you about those appeal deadlines. 

Tip: You can certainly require the contracting officer to reconsider the decision. However, this request does not automatically suspend the deadline to file an appeal.

There is no legal difference between FAR termination for cause vs default. A government default termination appeal can be heard at the respective Board of Contract Appeals or the U.S. Court of Federal Claims. There are specific deadlines to file your appeal. Read more on how appeal courts look at contract T4D cases.

Contract Termination for Default vs Convenience – Tips

Keep all records: To avoid problems, keep records of communications with the government. As stated earlier, the difference between termination for cause vs convenience is very fact-based.

Learn when defaults are converted to a termination for convenience.

Make sure that contracting officers are included in all related communications: It is critical to keep records of communications with government contracting officials, including the Contracting Officer Representative (COR) about situations leading up to the termination.

• Compile a list of facts showing why the FAR default was no fault of your company;
• Remember that evidence showing that the COR directed you to do something can hurt your case if the CO has no knowledge of it.
• Consider the possibility of negotiating for conversion to a termination for convenience.

FAR termination for default clause can cause forfeiture or amounts of money owed

 If the Agency alleges that you have submitted false claims or there are re-procurement excess costs incurred, the Agency may put a hold on unpaid invoices. There are many other issues when considering the difference between a contract termination for cause vs convenience clause. Understanding your legal obligations and rights is essential to the outcome of your case. 

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See also, Government Contracting FAR Cure Notice Letter Response & Show Cause Letter Tips.

For immediate help with termination for default government contracts or termination for convenience (T4C Government contracts ) compensation, call Watson & Associates, LLC at 1-866-601- 5518.