Wrongful Termination for Convenience Results in a Finding of Breach of Contract Against the Government

Thomas M. "Tom" Brownell, partner and Gregory R. Hallmark, associate are based in our Northern Virginia office.

A recent Civilian Board of Contract Appeals (CBCA) case, Sigal Construction Corp., 10-1 BCA ¶ 34442, CBCA 508 (May 13, 2010), provides a timely reminder that the government's right to terminate a contract for its own convenience is not unlimited, and that the improper exercise of that power will result in the award of damages for lost profits, just as in private contracting.

Sigal Background

In Sigal, the General Services Administration (GSA) issued a contract for the renovation of a federal office building. The contract included provisions calling for the repair of certain building finishes on a square foot basis, at fixed unit prices. At the time of the award, the government found that the unit prices were reasonable and appropriate, but when the volume of work significantly exceeded the contract's estimated quantities, the government sought to reduce costs. Rather than seek to adjust prices based upon the Variation in Estimated Quantities clause of the contract (see FAR 52.211-8), the government barred the contractor from proceeding with the excess unit price work and brought in another contractor to perform that work, at a reduced price. Sigal filed a claim for the profits it would have earned in performing the deleted work and the government sought to defend under the termination for convenience clause of the standard form government construction contract.

In most circumstances, the termination for convenience clause permits the government to terminate at will and pay only for the cost of, and a reasonable profit on, the work actually done. Thus, the government argued, Sigal was not entitled to recover lost profits for work not yet performed. However, the CBCA ruled that Sigal was entitled to recover profits it would have earned on the deleted work and granted summary relief on the issue of entitlement, leaving the amount of damages to be awarded to be decided at a later date. After first rejecting the government's arguments that the unit price work above the estimated quantities really wasn't a part of the contract, and noting that its failure to allow Sigal to proceed with the work amounted to a constructive termination for convenience of that part of the contract, the Board said:

One of the few limitations on the government's right to terminate for convenience is that the government may not terminate simply to get a better...