CHAPTER

26

TERMINATIONS

Every contract allows a party to terminate the contract if the other party is not doing what it promised. Obviously, this is true of government contracts. Every government contract has a termination for default provision that lets the government end the contract if the contractor is not doing what it is being paid to do. It is very important that these terminations be done correctly. If the government terminates a contract for default when it has no right to do so or does the termination incorrectly (like not giving notice in some situations), the termination becomes a termination for convenience, which allows the defaulting contractor to recover damages. As the courts and boards often say, a default is a “drastic remedy” that has to be invoked properly.

    What are the most common mistakes the government makes in doing a termination for default?

Clearly, the most common mistake is that the government does not think through carefully the way it is doing the termination for default. There can be terrible mistakes in judgment in a termination for default.

The standard default clause (FAR 52.249-8) says that

Notice that the clause says that if there is a default, the government may terminate the contract for default. The government does not have to do a termination for default. The heart of the decision to terminate a contract for default is a CO’s exercise of discretion—the CO thinking through whether it would be in the government’s interest to terminate the contract for default and ending up with a decision that makes sense.

The classic examples of the failure to exercise discretion properly are cases where the government terminates the contract for default when all the contractor needed was a few more days to get the work done. In one case involving the Government Printing Office, the CO terminated the contract for default when it turned out that the proposed delivery would have occurred only several days after the deadline if it had been extended as it should have been.

Another example of how the government does not wisely exercise its discretion is when the government pays too much for a replacement contract. When the government does a termination for default, it should not come out of the process a loser. For example, when it terminates a $2 million per year contract only to end up paying $6 million per year, the decision to terminate is not a sound exercise of discretion. In one case, the VA stayed in a clinic that it said was not built properly for nine months. The judge commented “… if the VA had permitted, Moreland could have performed all the necessary repairs quickly and without interrupting the VA’s operations. The building was entirely safe for occupancy. Faced with this relatively simple and painless option to move forward under the existing lease, the contracting officer (CO) opted instead to terminate the lease for default and move to other facilities nine months later. In doing so, the cost of the VA was approximately $4 million per year greater than if the VA had remained in the medical clinic facility. This was an irrational decision by any measure, and one that could not have resulted from the exercise of reasoned discretion” (Moreland Corp. v. United States, U.S. Court of Claims No. 03-2154C, April 18, 2007).

Here are some other examples of the CO abusing discretion by terminating a contract.

Bad Faith

The bad faith of a CO’s representative (COR) as well as COR conduct in the COR’s financial interest will invalidate the termination for default.

Bad faith shows from the way the contractor is treated by the government. Telling a contractor to treat the COR like Jesus Christ and the CO like God is not only a dumb career move; saying these things also makes it difficult for the government to show how its termination for default was done in good faith.

In this case, a COR on a maintenance contract told the contractor’s employees that, in the words of the COR, they should think of him as Jesus Christ and the CO as God. Other people heard the COR say that he would run the contractor off the contract. Others heard him say to the contractor’s president that he would break the contractor. Still others heard the COR say that he needed some overtime to pay for his house. When the contractor had to work overtime to correct the supposedly unacceptable work, the COR also had to work and got paid overtime. So the COR had a financial interest in the contractor’s working overtime. Eventually, the contract was terminated for default. The contractor appealed and won.

First, the court discussed the famous traditional standard for proving bad faith: “well-nigh irrefragable proof of bad faith.” The court said that, if you think about it, this is way too high a standard because “irrefragable” means impossible to refute. To the court, this phrase simply meant a higher standard of proof than the famous standard of criminal law “beyond a reasonable doubt.” Too high a standard of proof “would appear to insulate government action from any review by courts—no matter how egregious.” The court therefore used a lower standard and looked for “evidence of some specific intent to injure” the contractor.

It found plenty. The COR’s “Jesus Christ” comparison “showed the COR to be a contracting official without a proper understanding of his role.” His personal animosity was clear from his “break ‘em” statements. The remaining issue was, must the entire government contract administration staff be tarred by the conduct of one person? The government argued that there were other government employees who acted professionally. The court did not agree: “The CO’s failure to inquire into and remedy the COR’s bad faith coupled with the lack of evidence that the CO exercised independent judgment in applying the [inspection] standards of the contract results in the court’s finding of bad faith on the part of the government in administering the contract.” The court converted the termination for default into a termination for convenience (The Libertatia Associates, U.S. Court of Federal Claims No. 93-459C, May 23, 2000).

Insufficient Proof of a Contractor’s Failure to Make Progress

To support a decision to terminate a contract for default for failing to make progress, the government must demonstrate that there was no reasonable likelihood that the contractor could complete the project within the time remaining.

The government faces two significant problems when it terminates a contract for failure to make progress: It carries the heavy burden of proving the default, and it must also prove that the contractor could not have finished the project within the time remaining.

A U.S. Postal Service contractor was delayed in the construction of a post office because the CO and the COR did not respond to the contractor’s plans for changes the Postal Service wanted. Nor did the Postal Service employees return the contractor’s phone calls. If they had, the project could have been completed on time. Eventually, the CO issued a termination for default. If, by the day the CO defaulted the contractor, she had given the necessary approvals asked for by the contractor, the contractor could have finished the project on time with the help of an accelerated work schedule.

The government was wrong to terminate the contract. For the government to win, it had to prove that there was no reasonable likelihood that the contractor could complete the project within the time remaining. It could not prove this. If the contractor had gotten government approvals and had accelerated its schedule, the contractor could have completed the project on time. Moreover, the government failed to cooperate with the contractor on resolving the design problems, making the delay an excusable one.

    Are cure notices needed before doing all terminations for default?

A cure notice is needed only when the contractor would not be sure when the deadline is. In a supply contract for widgets to be delivered by April 1, the contract can be terminated on April 2 without a cure notice because the company, which is a party to the contract, is presumed to know the deadline.

Cure notices are used when the government does not believe that the contractor can finish the job on time. They are also used to warn the contractor that it may be terminated for default for violation of another part of the contract.

    How does a contracting officer correctly charge a defaulted contractor for the excess costs of reprocuring the materials that should have been bought under the defaulted contract?

When carrying out a reprocurement following a default, the CO does not have to get the lowest price, but only a reasonable price, which is then passed on to the defaulted contractor.

One of the biggest penalties a defaulted contractor bears is paying the excess reprocurement costs. When a defaulted contractor causes the government to pay more to get the goods from another company, the government has the right to pass on any extra costs incurred to the defaulted contractor. The government, however, cannot go out and buy a premium product and claim that the contractor must bear the price. The government has the obligation to mitigate the damages the defaulted contractor must bear. Importantly, when the government does not mitigate damages, it may lose its right to recover all the excess reprocurement costs.

A defaulted contractor argued that the government did not mitigate the defaulted contractor’s damages in reprocuring loose-leaf products: The CO did not take into account a decline in paper prices prior to awarding the reprocurement contract to the next low bidder at its original price. A board of contract appeals ruled the reprocurement has been done correctly.

The Bureau of Labor Statistics (BLS) data relied on by the CO showed that the price of paper used in the contract had increased only slightly each month from the time the bids were received to the time the reprocurement contract was let. The CO had verified the BLS data. Moreover, the paper used in the contract had a price reduction of less than 1 percent and paper was only one-third of the contract’s cost. A new competition would result in a price reduction of only $700. Although prices might have gone down in the following months, prices known to the CO at the time he made his decision had gone down only slightly.

    On what grounds can the government terminate for convenience a newly awarded contract?

The cure for everything—competition—will justify the government’s doing a termination for convenience during a solicitation. To properly terminate a contract for convenience shortly after award, the government need not prove a cardinal change. It must simply prove that the termination furthers full and open competition.

In one case, the government underestimated by 450 percent the amount of work that was required under a requirements contract. The CO believed that this error affected the pool of potential bidders and terminated the contract for convenience. The court agreed. To justify a termination for convenience during competition, the government did not have to prove a cardinal change (i.e., a beyond-scope change) to justify the termination for convenience. All the CO had to demonstrate was that the statutory requirements for full and open competition had been affected.