A T FOR C MAY BE A BREACH OF CONTRACT

Judge Nancy B. Firestone, of the U. S. Court of Federal Claims COFC), has just handed down an opinion in which she holds that the government's termination for convenience (T for C) may be a breach of a non-commercial item procurement contract for security services in Iraq and Afghanistan.  The Department of Defense (DOD) awarded two contracts to the plaintiff but then terminated each for its convenience.  After reviewing all the relevant Court of Appeals for the Federal Circuit (CAFC) opinions, she concludes:

The court reads these precedents to include liability for breach of contract based on an improper termination for convenience where the government has engaged in some form of improper self-dealing for its own benefit or to the benefit of another contractor.

Her discussion hinges on the linchpin of the duty of good faith and fair dealing.

She begins her discussion pointing out that the government's right to terminate a contract for convenience without giving rise to a breach of contract claim has its roots in military contracts.  The military needed the clause so as to avoid large, unneeded military procurements upon cessation of war and other hostilities.  She then acknowledges that the CAFC has held a T for C may give rise to a breach claim where there is bad faith or an abuse of discretion.  The CAFC also has recognized  a T for C can be a breach when the government "contracts with a party knowing full well it will not honor the contract."

Importantly, a claim for breach of contract based on breach of the implied duty of good faith and fair dealing is different than a claim for breach based on an improper T for C.  The implied duty of good faith and fair dealing is inherent in every contract.  This duty requires each party "do everything that the contract presupposes should be done by a party to accomplish the contract's purpose."  A party must not destroy the reasonable expectations of the other party.

The breach of the obligation to exercise good faith and fair dealing also includes, as we have written many times, the duty to cooperate, communicate with and not interfere in the other party's performance.  Again, and very importantly, proof of bad faith is not required to show a breach of the implied duty of good faith and fair dealing in most cases.  As Judge Firestone notes:  "Evidence of government intent to harm the contractor is not ordinarily required."

Judge Firestone agrees with the government that breach of the covenant of good faith and fair dealing cannot be the basis for a claim of an improper T for C.  However, animus toward the contractor is not required.  The government can abuse its discretion by not intending for the contract to go forward, by terminating for convenience in order to get a better price for itself and by entering into a contract without intending to allow the contractor to perform.  These are breaches of the duty of good faith and fair dealing and are therefore an abuse of discretion.

Judge Firestone concludes with the language quoted above: the government can breach the contract by some form of "improper self-dealing for its own benefit" such as terminating a contract just so it can award it to another contractor (which was the alleged case before the judge).

Can the government breach this duty of good faith and fair dealing by walking away from an awarded contract just so as to take the work in-house due to sequestration or budget limitations?  Perhaps.  Is it "improper self-dealing" or not? 

bill@spriggsconsultingservices.com                          www.spriggslawgroup.com