Hall of Fame Philadelphia Eagles radio man Merle Reese once saw a play that seemed improbably — and perhaps against the rules — to which he disclaimed “he can’t do that! Yes, he can do that!” You might be thinking the same thing when you receive notice from your federal government client that the project is being shut down for lack of funding and you will be paid only for the work already in place. This is a hard pill to swallow because your profit may not have come until a later part of the project that now will not be completed.
Almost all government contracts contain a termination for convenience clause that allows the government to terminate a contract without liability for breach of contract. Such clauses owe their roots to military procurement contracts as a way for the government to avoid liability once a war ended. Under federal regulations, you may not recover anticipatory or consequential damages following a termination for convenience. However, you are entitled to compensation for the work you performed at the time of termination and potential other costs delineated in your contract.
Yet, there are three exceptions to this general rule: (1) when the government terminates the contract in bad faith; (2) the government abuses its discretion in its decision to terminate the contract; or (3) when the government enters into a contract knowing it will terminate it before it is completed.
Unfortunately, you burden of proving “bad faith” is a high. To establish a breach based on bad faith in this context, you must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor. The clear and convincing standard is stricter than the preponderance of evidence standard that is normally applied in civil cases. In determining whether the government clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.
Termination for convenience clauses are just another factor you need to deal with in performing public work. As is usually the case, yes the government can do that.