Many government contractors struggle in understanding their rights when the agency imposes a notice of termination for convenience or termination for default under the FAR. There are a myriad of situations that could amplify a contractor’s rights or, conversely, minimize them. The FAR Termination for Convenience Clause gives the government a unilateral right to issue a terminate the contract when it is in the best interest of the government.
Great care must be used to analyze whether Agency’s reasoning is legally sound. For example, an agency should not merely terminate a contract for convenience merely because a contractor challenges the decision of the Contracting Officer (CO) during performance. A more acceptable reason would be lack of funding or the requirement no longer supports the mission.
Agency Decision to Use the Termination For Convenience Clause Under the FAR
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.
Some courts even give the government a preference for a constructive termination instead of assessing it 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). Contractors should be very careful when litigating the Agency’s right to termination.
On the other hand, the government cannot use the termination for convenience clause 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 You Do When Given Notice of a Termination for Convenience?
Under the T4C Clause, 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.
- 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 Really a Breach of Contract?
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.
Options to Maximize Settlement Under the FAR Termination for Convenience Clause?
Normally, a contractor has one year to send a settlement proposal from the date of the contract termination notice. The two bases of settlement include under the FAR Termination for Convenience Clause 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 the Termination for Convenience Clause. For help, contact a government contracts attorney. Call 1-866-601-5518.