Similar to a Termination for Convenience clause, a Termination with Notice clause (often found in U.S. Postal Service contracts) allows a party to end a contract without breaching it. Under the clause, either party may terminate the contract without cost consequences by providing advance written notice – usually 60 days – to the other party. The Postal Service Board of Contract Appeals (PSBCA) addressed the limits that apply to the exercise of this clause in a decision on two closely related cases. Cook Mail Carriers, Inc., PSBCA No. 6583, and Patricia Joy Sasnett, PSBCA No. 6584, issued on March 24, 2017.

Cook and Sasnett each had separate Highway Contract Route contracts to transport mail at designated times between various points in Alabama. In March 2014, the Postal Service made changes to its processing network that affected several contractors, including Cook and Sasnett. While the network changes could have been effected by modifying their contracts, the Contracting Officer (CO) instead exercised the Termination with Notice clause.

When he terminated the contracts, the CO misunderstood the network changes.  He thought the changes were needed because the Gadsden, AL mail processing facility was closing.  In fact, the Gadsden facility was already closed and revised routes were needed because other mail transportation hubs were being relocated.

Propriety of the termination

Cook and Sasnett filed claims asserting the terminations were improper and the case ended up at the Postal Service Board of Contract Appeals (PSBCA). Examining the Termination with Notice clause, the PSBCA noted that while it does not include any express limitations, its use “is not truly unlimited.”  The PSBCA then considered whether the CO’s action was proper under three separate legal principles.

The PSBCA first examined whether the decision to exercise the clause was made in bad faith, which would be a breach of contract. The contractors contended that because the CO was mistaken about the specific reason for the termination, the action was taken in bad faith. Proving bad faith, however, requires clear and convincing evidence of a specific intent to injure the contractor. This is a high hurdle, but not impossible to surmount. For example, in Keeter Trading Company, Inc. v. U.S., 85 Fed. Cl. 613 (2009), the U.S. Court of Federal Claims found that Postal Service wrongfully terminated a similar contract in bad faith, entitling the contractor to breach of contract damages.

In this case, however, the PSBCA found that the CO’s mistaken understanding as to why the changes were needed was not an act of bad faith. Honest mistakes amounting to errors in judgment do not, by themselves, amount to bad faith.

Second, the PSBCA examined whether the decision to terminate, which is a discretionary act, was an abuse of that discretion. The contractors contended that the CO abused his discretion by failing to exercise his own independent judgment and terminating based on mistaken assumptions. In determining whether the CO abused his discretion, the PSBCA examined whether the CO had “a reasonable, contract-based reason for his decision [;] the amount of discretion available to him [;] and whether an applicable statute or regulation was violated.”

The PSBCA found this was not a case in which a CO mindlessly and without the exercise of judgment terminated a contract at the insistence of a higher level official. Although the CO was mistaken as to the status of the Gadsden facility, the CO later justified his action based on “the evolving operational needs that would be served by consolidation of transportation routes.”  The PSBCA held that was sufficient to meet the CO’s obligation to become acquainted with the facts and apply his own judgment.

But can a CO’s obligation to become acquainted with the facts be satisfied by becoming acquainted with non-facts?  And can a decision to terminate be considered reasonable if it was primarily based on untrue material facts?

Instead of going down this path, the Board accepted the CO’s testimony on network consolidation and how it would have caused him to terminate the contracts anyway. One might argue that if network consolidation justified the terminations, why were these separate contracts awarded in the first place and what exactly changed since then?

Third, the PSBCA examined whether exercise of the Termination with Notice clause breached the implied duty of good faith and fair dealing. Under this theory, a contractor does not need to prove bad faith. Rather, the government breaches this duty when it acts unreasonably under the circumstances contrary to the reasonable expectations of the contractor, thereby depriving the contractor of the fruits of the contract.

The Board noted, however, that the legitimate exercise of an express contract right cannot breach the implied duty of good faith and fair dealing. Since the contracts here expressly provided for termination with notice, the PSBCA held it could not find that the Postal Service breached this duty.

Assuming the operational change could have been accomplished through contract modifications, did the duty of good faith and fair dealing require the CO to try that first? This would have been less disruptive to all parties, preserved the fruits of the contract, and still met the Postal Service’s needs. Under the duty of good faith and fair dealing, is there some obligation to try to preserve a contract before taking the drastic step of terminating it? The PSBCA did not address this question.

Moral of the story

The PSBCA has set out three separate legal principles that limit the use of the Termination with Notice clause, even though the clause has no express limitations. The clause cannot be exercised:  (1) with the intent to injure the contractor, (2) in an abuse of discretion, or (3) if there is a breach of the duty of good faith and fair dealing. Perhaps with a little re-framing and a more searching analysis of the justification for the termination, this case might have come out differently. In the future, contractors who contend that exercise of the Termination with Notice clause was a breach of contract now know what they must show to prevail.