U.S. Federal Contract Claims Insights – Recovery Under Termination for Convenience

By February 20, 2024 No Comments
TILLIT LAW PLLC

One of the unique privileges enjoyed by the U.S. Government as a contracting party under a federal contract is its authority to terminate the contract at any time, regardless of the contractor’s fault. Known as termination for convenience, the contracting action allows the Government an exclusive and almost unlimited right to terminate a government contract unilaterally. When terminating a contract for convenience, the Government may terminate the contract entirely or choose to make partial terminations with practically no limitations on the extent, type, or profitability of the portion of the contract being terminated.

While contract termination is seldom a cause for celebration for the contractor, a convenience termination is still greatly preferred over termination for default. This is because of the simple reason that a convenience termination indicates that the Government terminated the contract in its own best interests rather than due to the contractor’s fault. This allows contractors to receive the costs they incurred in performing the contract up to the point of termination, along with any profits on the completed work, if applicable. Under convenience termination, contractors can also recover any costs expended in delivering the termination proposal.

Despite these recovery options, the contractor terminated for convenience may wish to challenge the Government’s termination decision. Contractors in such a situation should understand that while the Government’s right to terminate a contract is nearly unlimited, there are still certain limitations on the Government’s ability to exercise this unilateral contractual right. For instance, the Government must follow proper procedural requirements in notifying the contractor of termination. Additionally, the Government may not properly terminate a contract for convenience if the contractor can show bad faith or abuse of discretion in the termination decision.

  • Notice Requirements

When terminating the contract for convenience, the Government is still responsible for notifying the contractor. The Federal Acquisition Regulations (FAR) 49.102 outlines the notice requirements for a termination convenience. The contracting officer must provide a written notice of termination when terminating the contract for convenience. FAR Subpart 49.6 provides forms and formats that contracting officers may utilize in notifying the contractor of the convenience termination. The written notice may be delivered to the contractor electronically, by certified mail, or by hand delivery. However, the contracting officer must receive a confirmation that the contractor received the termination notice. The notice must additionally meet the following requirements.

  1. The notice must notify the contractor that the contract is being terminated for the Government’s convenience and specify the clause under which the termination is authorized.
  2. The notice must provide the effective date of the termination and the extent to which the contract is terminated.
  3. Finally, the notice must include any special instructions the contractor must adhere to and any steps to minimize the impact on contractor personnel if the termination significantly reduces the contractor’s workforce.
  • Government Bad Faith

Since Government officials are afforded the presumption of good faith, the contractor must carry a heavy burden in proving that the contracting officer terminated their contract in bad faith. Adjudicative forums rarely find that Government officials acted in bad faith in terminating a contract. Still, contractors aiming to prove Government bad faith should look to produce almost indisputable proof of Government actions that demonstrate an evasion of the spirit of the contract, a complete lack of diligence, willful rendering of imperfect performance, or an absolute failure to cooperate in the contractor’s performance. Contractors may also be successful in such claims if they can prove with clear and convincing evidence that the Government did not intend to follow through on its obligations under the contract during the formation of the contract.     

  • Government Abuse of Discretion

Contractors looking to challenge convenience terminations may attempt to prove that the Government abused its discretion in terminating the contract. However, this is similarly challenging, although somewhat easier to prove than bad faith, as Government officials enjoy a latitude of judgment in discharging their official duties. Government officials may abuse their administrative discretion if the termination decision is unreasonable or otherwise violates law or Government policies. For instance, the Government may not solely terminate a contract for convenience to get a better price from a different contractor. It may also be an abuse of discretion if the Government official issuing the termination exceeds his authority in making the decision.

While not as damaging as a default termination, a termination for convenience may nevertheless be undesirable to contractors in certain circumstances. Contractors should understand that their avenues for challenging the Government’s convenience terminations are limited if the termination is in the Government’s best interests. This includes a variety of scenarios, such as changes in acquisition priorities, budgetary constraints, technological changes, or other unforeseen circumstances. In situations where the contractor suspects bad faith or abuse of discretion by the Government, it should be ready to back its allegations with evidence that is almost irrefutable.

 This U.S. Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.