Sunday, March 4, 2012

CONSTRUCTIVE TERMINATION FOR CONVENIENCE

Everyone in the government contracting community is familiar with "constructive changes" under the government contract changes clause.  We've written often in these blogs about how breaches of the government's implied duties under a contract amount to constructive changes.  The doctrine of constructive changes arose well over half a century ago as a fiction to afford the boards of contract appeals jurisdiction over ordinary breaches of contracts.  My mentor, Gil Cuneo, was one of its chief architects.  Under the doctrine, ordinary (and some extraordinary) contract breaches are treated as changes subject to equitable adjustments under the changes clause.

Similary, some breaches can be treated as constructive terminations for convenience.  The government can simply walk away from the contract, issue a "directive" to end performance, issue what it calls a "cancellation" or it can simply prevent the contractor from continuing performance.  Read that sentence again.  Has that happened to you?

If you have a commercial item contract under FAR Part 12, you might be well advised to call performance interruption or prevention a breach and calculate your damages accordingly.  However, as a practical matter, your recovery in all other cases may well be limited to rules for calculating recovery under the termination for convenience clause.  Most likely, the government's breach will be treated as a constructive termination, thereby insulating the government from ordinary breach damages such as recovery of lost profits.

In the commercial item FAR Part 12 breach by prevention of performance situation, it is unclear just how damages will be calculated.  First, there is the issue of whether the appropriate measure is ordinary common law breach damages or termination for convenience clause recovery.  Then, there is the issue of just what the termination for convenience recovery amounts to under the Red River case.  (If you want to hear more about that controversy, let me know.)  Since more and more contracts implicate FAR Part 12, we will see important judicial opinions coming down answering these questions in the coming months.

But in the more common current contracting environment involving non commercial item type contracts, a government breach by walking away, "cancelling", or otherwise preventing the completion of performance will be treated as if the contract were terminated for convenience.  And do not forget that in a termination for default situation (the government often terminates for default when it should terminate for convenience), you always should submit your pro forma termination for convenience settlement proposal as part of your defense to the default termination. 

We have a comprehensive termination (default and convenience) webinar/seminar available if you are interested.  Where two or more are gathered together . . . .

You can catch up on all our blogs both at this site and at http://scs.mymediaroom.com/blog/.

bill@spriggslawgroup.com

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