All government contracts give the Federal Government the right to terminate a contract for default if the contractor fails to perform. If the contractor’s failure to perform is excusable or the termination for default was improper, the termination usually is converted into a termination for the Government’s convenience and is not considered a breach of contract. The contractor only can recover termination for convenience damages and not breach of contract damages.
There is an exception when the termination for default is made in bad faith. However, this exception is rarely applied because the government employees are presumed to discharge their duties in good faith. In order for the contractor to establish that a government employee acted in bad faith, the contractor must present what is known as “irrefragable proof.” The Court of Federal Claims has defined irrefragable proof as an improper motive on the part of the Government that is shown by clear and convincing evidence, which could include a specific intent to injure the contractor or a conspiracy to get rid of the contractor. The Court found that the contractor met this burden in Bowles v. United States, No. 14-198 (Aug. 8, 2019).
In that case, Mr. Bowles had a contract with the United States Postal Service (“USPS”) for mail delivery and transportation services. Mr. Bowles had an extremely contentious relationship with various UPSP employees, including his supervisor. The Court found that the supervisor and other USPS employees engaged in a pattern of misconduct in administering the contract that demonstrated a clear intent to harm Mr. Bowles and dispossess him of his contract. This pattern of misconduct included refusing to fill out required paperwork to pay Mr. Bowles for extra work, permitting his entire paycheck to be garnished on many occasions, and refusing to provide Mr. Bowles with a barcode for a scanner and training in using the scanner. The misconduct culminated when, according to the Court, the supervisor falsely accused Mr. Bowles of hitting her over the head with a five pound mail scanner. After the false assault allegations, Mr. Bowles refused to return to work and his contract was terminated for default.
The Court of Federal Claims held that the termination for default was wrongful and in bad faith. The Court found that the USPS breached the implied covenant of good faith and fair dealing and prevented Mr. Bowles from continuing to perform his contract. The Court further found that Mr. Bowles had met the high standard of showing bad faith by demonstrated by clear and convincing evidence that certain USPS employees had a specific intent to injure Mr. Bowles.
The Court held that Mr. Bowles’s damages for the bad faith termination were not limited to damages under the termination for convenience clause (i.e., the costs of performing the work prior to the termination and the costs resulting from the termination plus profit on those costs). Instead, Mr. Bowles was entitled to recover his expectation damages that were actually foreseen or reasonably foreseeable. In this case, the Court found that it was foreseeable that Mr. Bowles would have renewed his contract for one additional term and therefore was entitled to the amount of his original contract plus the renewal contract.
Contractors should be cautious in accusing government employees of bad faith without specific proof. The Court of Federal Claims and the boards of contract appeals rarely find that government employees act in bad faith given the presumption that government employees act in good faith and the extremely high burden of proof to establish bad faith. However, when there is evidence of bad faith, contractors should consider bringing an action for breach of the implied covenant of good faith and fair dealing. Depending upon the circumstances, such a cause of action may result in a greater recovery on the contractors’ claims.