When is a Termination for Convenience a Breach of Contract?
By: Michael Hawkes
Published Date: September 9, 2019
For a contractor to succeed on a claim that it was wrongfully terminated for convenience by the Government it must prove that the termination was either in bad faith or was an abuse of discretion. This can be a high burden for a contractor to meet, as one contractor recently discovered in Optimum Services, Inc. v. Dep’t of Interior, CBCA No. 4968 (July 1, 2019).
In Optimum Services, the contractor sought to recover breach of contract damages after its contract with the National Park Service (NPS) for ecological restoration work in the Everglades National Park was terminated for convenience. The contract was an indefinite-delivery/indefinite-quantity (IDIQ) contract with a base period of one year and four one-year options. The contract specified the minimum amount the Government would purchase would be $2 million, and that the contractor was guaranteed a minimum of $2 million during the life of the contract.
NPS terminated the contract for convenience as a result of a bid protest in which NPS decided to take corrective action by cancelling the solicitation and terminating the contract. Although the contractor filed a protest challenging the cancellation of the solicitation, its protest was denied by the Government Accountability Office. Thereafter, the contractor submitted a claim for termination costs as well as a breach of contract claim.
In its breach of contract claim, the contractor sought to recover its anticipated profits on the $2 million minimum in the contract, claiming that the termination was done either in bad faith or as an abuse of discretion. The Contracting Officer allowed for payment of the termination costs but denied the breach of contract claim. The contractor then appealed to the Civilian Board of Contract Appeals.
In the appeal, the contractor argued, among other things, that: (1) the termination was in bad faith because NPS terminated the contract in order to obtain a better price for the work; (2) NPS’s cancellation of the solicitation was an abuse of discretion because the bid protest was without merit and also that NPS had alternatives which it did not consider; (3) NPS’s termination for convenience was a breach of contract because NPS did not purchase the guaranteed minimum specified in the IDIQ contract; and (4) NPS’s cancellation of the solicitation was unreasonable.
The Board held, as it has in the past, that the Government can terminate a contract for convenience when termination is in the Government’s best interests. Further, as long as adequate cause for termination is found, the termination will be held valid, even if that cause was not known at the time of termination.
The Government enjoys preferential inferences when it comes to termination for convenience. In fact, a contractor must show clear and convincing evidence of bad faith, as there is a presumption that government officials act in good faith. This presumption holds steady, and it is intended to be difficult to overcome. The Board found that the contractor presented no evidence that NPS’s decision to terminate was done in bad faith.
As for abuse of discretion, the decision must be arbitrary and capricious, and the Board will consider: (1) evidence of subjective bad faith; (2) the existence of a reasonable, contract-related basis for the decision; (3) how much discretion is given to the decision maker; and (4) whether there was any statute or regulation that was violated. Although the contractor argued that its contract was terminated in bad faith and as an abuse of discretion because NPS allegedly terminated the contract to obtain a better price, the Board found this was not the case. The Board determined that the record showed NPS terminated the contract as a direct result of the bid protest. An agency is well within its rights to mitigate protests or claims by resolving them quickly and terminating OSI’s contract fell within that purview.
The Board determined that terminating the contract before purchasing the guaranteed minimum was not a breach of contract. The termination for convenience clause provides the contractor with compensation such that the contract is not rendered illusory.
Finally, in response to the contractor’s contention that NPS’s cancellation of the solicitation was unreasonable, the Board found that it did not have jurisdiction to rule on the propriety of the cancellation. The Board reasoned that it hears complaints from contractors, not disappointed bidders. Thus, the Board will only rule on protests regarding terminations of a contract, not the cancellation of a solicitation.
The Optimum Services cases shows that a contractor’s burden in proving a wrongful termination for convenience by the Government is extremely high. The Government enjoys preferential inferences that its actions were not undertaken in bad faith and were not an abuse of discretion. Thus, a contractor must put forth clear and convincing evidence that the Government’s termination was wrongful. The contractor’s mere disagreement with the Government’s decision to terminate is not enough.