STOPPING WORK ON A FEDERAL GOVERNMENT CONTRACT

The changes and disputes clauses in federal government contracts require the contractor to perform pending resolution of changes claims and all disputes arising under or related to the contracts.  But there is an exception in the caselaw for material breaches of the contract by the government.  Some fly under the banner of cardinal changes.  But the definition of the exception to the duty to perform is a material breach.  What is a material breach?

A material breach is a matter of vital importance or that goes to the essence of the contract.  Gilbert v. Department of Justice, 334 F.3d 1065, 1071 (Fed Cir. 2003).  That is the best way to define a cardinal change.  A matter of vital important or that goes to the essence of the contract  The five factors considered by the court and boards are set out as follows:

1. the extent to which the contractor will be deprived of the benefit reasonably expected under the contract;
2. the extent to which the contractor can be compensated adequately for the benefit of which the contractor will be deprived;
3. the extent to which the government will suffer forfeiture;
4. the likelihood that government will cure its failure to perform; and
5. the extent to which the government's behavior comports with the duty of good faith and fair dealing.

The Court of Appeals for the Federal Circuit has held "[u]pon material breach of a contract the non-breaching party has the right to discontinue performance of the contract."  Stone Forest Industries, Inc. v. United States, 973 F.2d 1548, 1550 (Fec. Cir. 1992).

In fact, if the contractor encounters a material breach by the government and nevertheless continues to perform, without protest, the contractor waives the breach and will be held to complete the contract.  In effect, in the face of a material breach by the government, the contractor is obliged to stop work or at the very least complain.  The best remedy in the circumstance is to seek declaratory relief.  See our blog post this date on declaratory relief.

Stopping work is risky business.  The contracting officer may well disagree with the contractor's assertion of a material breach, order continued performance, and then terminate for default if the contractor fails to comply.  Although the contractor may seek declaratory relief, the court and boards do not have injunctive relief power in the administration of contracts.  Prudence and principles of equity, however, strongly suggest that the parties await the outcome of litigation of the dispute.  The situation cries out for Alternative Dispute Resolution but it takes two to tango and to reach a compromise.

bill@spriggslawgroup.com