Terminations For Convenience Clauses Vs. Mutual Termination Clauses: What Are The Limits On The Government's Right To Terminate?

• Published date: 24 September 2021
• Subject Matter: Government, Public Sector, Government Contracts, Procurement & PPP
• Law Firm: Husch Blackwell LLP
• Author: George Stewart, III

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...