Imagine as a supplier of medical oxygen cylinders and tanks in your region, you enter into an arrangement with HHS or DHS to provide oxygen to nearby hospital facilities dealing with surges in the COVID-19 pandemic. However, due to the recent dramatic surge in your area and the significant demand for oxygen, the government moved quickly to award you a contract that appears very different from other federal contracts you have previously signed.
For example, instead of containing a standard FAR clause for Terminations for Convenience, your contract has a clause that states “this contract may be terminated in whole or in part by either party upon thirty (30) days notice in writing to the other party.” Is this mutual termination clause treated any differently under the law? Would you still get the same protection if the government decided to cancel your contract to obtain better prices a week later from your competitor across town?
Unfortunately, the answers to these questions are murky at best. But contractors should be aware that there could be a difference between these two types of clauses and to not instantly assume that they will be treated similarly should a claim arise.
As federal and state contractors are aware, one of the hallmarks of government contracts is the government’s ability to unilaterally terminate a contract for convenience without cause. When exercised, contractor recovery is generally limited to costs incurred, profit on work done, and costs of preparing the termination settlement proposal. Contractors receive no reciprocal right. And the government’s right to terminate is very broad under the standard termination for convenience clauses. The Federal Circuit’s decision in Krygoski Construction, 94 F.3d 1537, establishes that a termination for convenience is proper absent bad faith or abuse of discretion by the contracting officer. The government’s cancellation solely to obtain a better price from another source is one of the few examples provided in Krygoski of bad faith by the government when terminating a contract.
In contracts incorporating standard termination for convenience clauses, contractors have been able to successfully challenge terminations by the government that were solely intended to obtain better pricing from another source. In Sigal Construction, CBCA 508, for example, the CBCA held a constructive partial termination for convenience was in bad faith because it was done to simply get a better price for the work.
The law is not well-developed when it comes to mutual termination clauses, however. The Federal Circuit has not addressed this issue and the boards of contract appeal have not reached a consensus in the wake of the Krygoski opinion. Decisions at the ASBCA handed down before Krygoski, such as Christine Turner, ASBCA No. 26900, suggest that the parties possess the “unfettered right to terminate” as long as the notice period is met. More recent opinions, such as Zalzar FZE, ASBCA No. 59545, acknowledge this line of authority but also consider whether there is bad faith by the government when it terminates the agreement. The Postal Service board has even applied the standard of bad faith/abuse of discretion to such mutual termination clauses.
The application of the bad faith/abuse of discretion standard to mutual termination clauses— à la the Krygoski standard—could suggest that even these “unfettered” clauses have limits. Arguably, the same rationale behind Krygoski still applies: it would be unfair to the contractor to allow the government to cancel a contract to obtain better prices from competitors. But to date, neither the Federal Circuit nor a board of contract appeals has reached this conclusion for a mutual termination clause. And unlike terminations for convenience, either side has the right to cancel the contract, making it naturally more difficult for a contractor to establish the reciprocal clause is unfair. Although mutual termination clauses tend to be less common than termination for convenience clauses, contractors should nonetheless be aware that the protections offered by Krygoski and other Federal Circuit opinions remain an open question in these types of arrangements and will likely be more difficult to prevail on a claim of bad faith termination by the government.