For those unfamiliar with government contracting, the concept of the government’s right to terminate a contract for its own convenience can be an unpleasant surprise. A recent case highlights just how broadly courts interpret the government’s rights, but also provides some limits that should prove useful to contractors gauging their ability to challenge such terminations.
A termination for convenience provision is written into almost every government contract. Even where the clause is omitted from the contract, courts typically will “read into” government contracts a termination for convenience clause (under the “Christian” doctrine, which will be discussed in a future GovCon Now post).
Contractors typically have very few remedies when the government opts to terminate for convenience. Unlike a termination for default, though, a convenience termination at least allows the contractor to recover costs incurred and reasonable profit for work performed prior to the termination.
Does this mean that the government can terminate its contracts for any reason at all? Last year, the Court of Federal Claims clarified the government’s boundaries in this regard. “The considerable latitude the government is entitled to in terminating for convenience, however, is not unlimited.” Gulf Grp. Gen. Enterprises Co. W.L.L. v. United States, 114 Fed. Cl. 258, 361 (Fed. Cl. 2013).
The court goes on to note that contracting officers may not terminate for convenience if that decision represents a clear abuse of discretion or bad faith. For example, the government “may not terminate a contract ‘simply to acquire a better bargain from another source.’ Similarly, the government is not permitted to enter into a contract without any intention of upholding it.” Id., at 362 (internal citations omitted).
Although the government’s termination authority applies broadly and to nearly every contract with private industry, it’s important for contractors to remember that they can and should challenge terminations for convenience when the government reaches beyond its authority.