A recent decision of the Civilian Board of Contract Appeals (the Board) reminds us that the Government's right to terminate a contract for its convenience is broad, but subject to important limitations. In Sigal Construction Corp., CBCA No. 508, May 13, 2010, 10-1 BCA ¶ 34442, the Board held that the Government breached its contract when it effected a constructive termination "simply to get a better price for performing needed work." The Board's ruling provided the contractor with the rare remedy of recovering anticipatory profits-i.e., the profits it would have earned on the work if it had not been terminated.
The appeal in Sigal involved a General Service Administration (GSA) contract for renovation and improvement work at the Harry S. Truman Building (the Old State Building) in Washington, DC. The contract contained firm fixed unit prices for, among other things, 17 restoration work items. The dispute arose when, following contract award, GSA's project manager wrote to another contractor requesting a cost proposal to perform a portion of the unit price restoration work covered by Sigal's contract. When the other contractor submitted an attractive proposal, GSA suspended Sigal's performance of the relevant portion of the work.
Sigal submitted a certified claim asserting that GSA had breached the contract by improperly eliminating unit price restoration work. Sigal's claim sought $1,519,803 for the anticipatory profits it lost on the work that GSA precluded it from performing. GSA responded by arguing, first, that the work was never part of the contract, and second, that even if were, the Contracting Officer (CO) properly terminated that portion of the contract for convenience. The Board rejected both of the Government's arguments. With respect to the Government's invocation of its rights to terminate for convenience, the Board relied on the rule set forth in Krygoski Construction Co. v. United States, 94 F.3d 1537, 1541 (Fed. Cir. 1996), that a CO may not terminate for convenience in bad faith, for example, simply to acquire a better bargain from another source. The Board held that GSA had done precisely that, and that its actions therefore amounted to bad faith. Accordingly, the Board held that the agency's constructive termination was a breach of contract, entitling Sigal to recover the profits it would have earned had it been permitted to perform that work.
Courts and Boards employ a "highly deferential standard when reviewing the government's decision to terminate for convenience" and the "case law clearly provides that the government is entitled to considerable latitude in making such a decision to terminate." Custom Printing Co. v. United States, 51 Fed. Cl. 729, 733-734 (2002). Sigal reminds us, however, that this discretion is limited by the duty of good faith and fair dealing, and that there is a remedy where the Government terminates a contract in bad faith simply to get a better price.