Litigation over Contract Clauses
Contracts between the federal government and private contractors frequently contain a clause giving the government the right to terminate the contract, in whole or in part, at the convenience of the government although there has been no fault or breach by the other party. Termination for convenience clauses serve the purpose of limiting the government’s liability upon invocation. These clauses are finding their way more and more in private contracts as well. Before entering into a contract with a Termination for Convenience Clause it is important that you consult with a qualified and experienced attorney because your livelihood may depend on it.
Originally, termination for convenience clauses appeared after the US Civil War. Federal authorities decided that it was in the public interest not to complete some projects after the war’s end. Courts gave the gave the government the right to suspend or terminate such contracts and to compensate the contractors only for work actually performed prior to termination or suspension. After applying only to wartime contracts, terminations for convenience were applied to both wartime and peacetime procurement in the 1950s and 1960s.
Termination for convenience clauses are often required for certain types of governmental contracts and may be enforced in those contracts whether or not they are drafted into them. These contract provisions may also be drafted in such a manner as to include partial terminations and suspensions for convenience, but in no event are they applicable to situations where the work has been neither suspended nor terminated in part or in whole. They also provide the contractor with payment for work completed, costs for preparing a final settlement after termination, and lost profits on work actually performed.
While termination for convenience clause have been most frequently found in public construction contracts, it is possible for such a clause to be used in private construction contracts. In a private contract, such a clause might be called for when the project owner’s financing for the project is uncertain. Perhaps a contractor wants to avoid having its subcontractors complete their work where the owner has abandoned the project. A termination for convenience clause may also allow the project owner or general contractor to terminate only a portion of the other party’s remaining work on the project.
Parties Entitled to Damages
Subcontractors may be entitled to the same kinds of damages as the contractor. The government may also be entitled to liquidated damages to be credited against the contractors’ recovery of damages for termination for convenience.
Federal courts have considered the kinds of damages that are and are not awardable where the government terminates a contract with a private contractor for its own convenience. Damages found to be awardable under particular circumstances have included costs and expenses of partial performance and professional fees such as legal and accounting fees incurred in preparing and presenting a final settlement. Damages held not awardable under other circumstances have included certain claimed costs and expenses of partial performance and professional fees not expended toward preparation of settlement claims. Courts have also adjudicated whether damages were awardable under the circumstances presented for lost profits on work actually performed, reliance damages, anticipatory unearned profits, and consequential damages.
Not all terminations for convenience occur because of a government representative’s decision to terminate for convenience. The government may erroneously or improperly terminate a contract for default, only to have a reviewing court constructively convert the termination for default into a termination for convenience. The court may do so even in instances where the government representative was unaware of the inclusion of a termination for convenience clause in the contract. In the absence of governmental bad faith or clear abuse of discretion, constructive termination moots all breach of contract claims and limits a contractor’s recovery to costs which would have been allowed had the contracting officer actually invoked the termination for convenience clause. Ordinarily, constructive termination for convenience will be invoked pursuant to a valid termination for convenience clause in the contract, although it is occasionally invoked by the courts even when there is no such clause in the contract, but only where a convenience termination clause is required by law to be included in that type of contract.
Damage Awards for Constructive Termination
Several kinds of damages are allowable to the contractor upon the government’s constructive termination for convenience. Damages held awardable under the circumstances of particular cases include costs and expenses of partial performance, professional fees expended towards completion of settlement, and interest. Damages held not awardable under other circumstances have included certain claimed costs and expenses of partial performance, professional fees not incurred towards the completion of settlement, and interest. Courts have also adjudicated whether plaintiffs were entitled to damages under the circumstances presented for lost earned profits, anticipatory unearned profits, and consequential damages.
Liability Despite a Termination for Convenience Clause
The government may be held liable for breach of contract despite claiming termination for convenience directly or constructively. Different courts disallow terminations for convenience for different reasons. Reasons may include bad faith, abuse of discretion, where no change of circumstances existed, or where the government was attempting to prevent the contractor from obtaining any future government contracts.
Burden of Proof and Appeals
Once termination for convenience has occurred, the contractor bears the burden of proving its damages. If it appeals a damage award, the reviewing court may impose the “clean slate rule” and review all damages considered by the lower court or administrative tribunal, including those damages already awarded by the lower court or tribunal. An exception to the “clean slate” rule is that appellate courts will usually uphold damage awards that are stipulated to by counsel. Therefore, it is best to stipulate to such damages as can be agreed upon, so that the contractor will not risk losing them on appeal and so that the government will not face additional liability above and beyond the stipulated amount of damages.
John Henry Wright, Esq., has more than 25 years of experience in construction law and litigation and has successfully defended and negotiated Termination for Convenience Clause claims made by the government and private parties. We are well equipped to assist you in handling your construction contract matters. Please call us at 702-405-0001 to schedule a consultation. You can also EMAIL US with any questions.