For a government contractor, having a contract “terminated” means one of two possibilities.  One of those possibilities—being terminated for convenience—is bad, because you lose your right to the profit you would have made on the unperformed (i.e., the “terminated”) portion of the work.  The other possibility—being terminated for default—is really, really, really bad, for a whole host of reasons not applicable to this article.  Although challenging either type of termination is very difficult, challenges to terminations for convenience may have just gotten slightly easier as a result of the recent decision handed down by the United States Court of Federal Claims in TigerSwan, Inc. v. United States, 110 Fed.Cl. 336 (2013).

The Termination For Convenience Landscape: History And Purpose

Before discussing TigerSwan, it is important to put the concept of terminations for convenience in historical context.  For the lawyers among us, the idea of terminating a contract for “convenience” may appear at first blush to be an anomaly.  At common law, once an enforceable bargain was struck, the parties generally were bound to perform, regardless of how circumstances may have changed or how “inconvenient” that bargain may have become.  If, for example, a purchaser of materials terminated a sales contract before full performance, the purchaser was deemed to have breached the contract.  In such a case, the seller could recover damages, including lost profits on materials that had never even been delivered.

Notwithstanding these common law principles, courts began to acknowledge that the government should be allowed to terminate a contract prematurely without incurring liability for full breach of contract damages in certain circumstances.  The first such case, United States v. Corliss Steam Engine Co., 91 U.S. 321, 23 L.Ed. 397 (1876), arose as a result of government procurement during the Civil War.  During World War I and through the end of World War II, the principle took hold, and was eventually codified and embodied in a wide array of statutory, regulatory and contractual provisions.  Underlying all of these laws, regulations, and provisions was the recognition that the government needed the power to avoid large wartime procurements if hostilities ceased or other circumstances intervened.

Termination for convenience provisions soon made their way into peacetime military contracts, and it was not long until the government began using such provisions in non-military contracts.  Today, termination for convenience provisions, such as the one found at FAR 52.249-2, are an accepted part of nearly all government contracts.  Indeed, termination for convenience has become such a common concept that it is routinely included in private contracts.

Contractor Remedies In The Context Of A Termination For Convenience

Contractors who have been terminated for convenience typically are limited in the costs that may be recovered.  More specifically, such a contractor usually may only recover costs related to its performance under the contract up through the time of the termination.  Importantly, the terminated contractor may not recover anticipatory profits or consequential damages.  See, e.g., FAR 49.202(a).  In addition, when it can be shown that a contractor contract would have lost money, the contractor will typically be entitled to no profit on any of the work.  See FAR 49.203.

In addition, the government’s ability to terminate contracts for convenience has historically been very broad, as courts are exceedingly reluctant to second-guess a contracting officer’s decision that the government no longer needs the goods or services at issue.  In order to successfully challenge a termination for convenience as improper (and thereby recover anticipatory profits), contractors had to show bad faith or an abuse of discretion by the contracting officer.  In practice, this often resulted in a nearly insurmountable hurdle for contractors.  Unsurprisingly, although numerous contractors have challenged the propriety of terminations for convenience over the years, these challenges have very rarely succeeded.

TigerSwan, Inc. v. United States

Although not a radical departure from pre-existing case law on the subject, the TigerSwan decision appears to give contractors who are considering challenging their termination for convenience at least a glimmer of hope. In that case, the Department of Defense (“DOD”) awarded TigerSwan a non-commercial item contract to provide security and other resources in Iraq.  After award, two unsuccessful offerors, including Aegis, the incumbent contractor, filed protests. The DOD terminated the contract for convenience, however, before the merits of either protest could be addressed.

Two weeks later, the DOD issued a new solicitation.  TigerSwan, Aegis, and one other offeror submitted proposals, and TigerSwan was awarded the contract.  Aegis protested the award of the second contract, and the DOD issued a stop work order to TigerSwan.  Although the GAO denied Aegis’s protest of the second TigerSwan contract, DOD terminated that contract for convenience.  The DOD then awarded Aegis a sole-source contract for the work.

TigerSwan subsequently filed suit at the Court of Federal Claims, alleging, among other things, that the government’s termination for convenience was improper and amounted to a breach of contract.  The government moved for judgment on the pleadings, arguing that TigerSwan had failed to allege that the government intended to harm TigerSwan.  According to the government’s motion, absent an allegation of intent to harm, there could be no bad faith, and absent bad faith, there could be no finding of breach.

The Court of Federal Clams rejected the government’s arguments in this regard.  The Court began its discussion by examining the legal standards applicable to claims arising from terminations for convenience.  In so doing, the Court divided those standards into two broad categories: (1) “improper” terminations for convenience that amount to a breach of contract; and (2) terminations for convenience that constitute breaches of the implied duty of good faith and fair dealing.

First, the Court looked at cases in which terminations for convenience were found to be improper.  The Court noted that a termination for convenience may give rise to a breach of contract claim when the agency either terminates in bad faith or abuses its discretion in terminating a contract.  A finding of breach of contract under either theory would potentially allow the contractor to recover common law damages in excess of the termination costs allowed under the FAR.

Second, the Court discussed the general standards governing claims for breach of the implied duty of good faith and fair dealing.  Although evidence of neither “bad faith” nor intent to harm the contractor is required, the Court noted that the government may take any action allowed by the contract without violating the duty.  This is important in the context of terminations for convenience because if the government has the contractual right to terminate for convenience—and it almost always does—then such a termination cannot be held to breach the implied duty of good faith and fair dealing, even if the termination harms the contractor.

After setting forth these standards, the Court held that TigerSwan had adequately pleaded a claim for breach of contract. In so doing, the Court rejected the government’s argument that a contractor must allege that the government intended to harm the contractor by terminating the contract:

[T]he government may be liable for breach in situations where it took action at the expense of the plaintiff without necessarily acting with animus toward the plaintiff.  The court reads these precedents to include liability for a 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 benefit another contractor.

TigerSwan, 110 Fed.Cl. at 346-47 (citations omitted). Stated differently, the Court held that TigerSwan’s allegations that the government terminated the contracts solely to improperly steer work to Aegis would support a claim for breach of contract.  Because specific intent to harm the contractor need not be pleaded, the Court refused to dismiss TigerSwan’s claims.

Impact Of TigerSwan

Although TigerSwan appears to make it easier for contractors to challenge terminations for convenience, it is important to note that the Court did not hold that the government had actually breached its contract.  Instead, the Court merely held that TigerSwan had adequately pleaded a breach of contract cause of action based on the termination.  In short, the Court simply allowed TigerSwan “the opportunity to present its case on the merits.”  More importantly, a contractor hoping to challenge a termination for convenience still must meet one of the relatively difficult standards articulated in TigerSwan.

Nevertheless, a number of factors make it likely that the TigerSwan decision will be relied upon in future challenges to terminations for convenience.  First, the decision makes clear that government intent to harm the contractor need not be pleaded, and it also reaffirms that government self-dealing or improper steering of work to a competitor may give rise to a valid challenge to a termination for convenience.  In addition, due to the across-the-board federal spending cuts known commonly as the “sequester,” it is likely that agencies will resort to terminating contracts for convenience as agencies attempt to cope with reduced budgets.  In turn, the reduced availability of federal contracting dollars will give government contractors who fall victim to the budget axe ever more incentive to challenge such terminations, andTigerSwan provides contractors a bit of ammunition for these fights.