Tag Archives: termination

A TERMINATION FOR CONVENIENCE IS NOT A TERMINATION FOR DEFAULT

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A termination for convenience is NOT a termination for default.  They are NOT the same. They should NOT be treated as the same.  I am a huge proponent of termination for convenience provisions because sometimes a party needs to be able to exercise a termination for convenience, but the termination is not one that rises to a basis for default. However, exercising a termination for convenience does not mean you get to go back in time and convert the termination for convenience into a termination for default.  It does not work like that.  Nor should it.

An opinion out of the Civilian Board of Contract Appeals – Williams Building Company, Inc. v. Department of State, CBCA 7147, 2024 WL 1099788 (CBCA 2024 – demonstrates a fundamental distinction between a termination for convenience and a termination for default, i.e., that you don’t get to conjure up defaults when you exercise a termination for convenience:

Because a termination for convenience essentially turns a fixed-price construction contract into a cost-reimbursement contract, allowing the contractor to recover its incurred performance costs, the resolution of this appeal will involve identifying the total costs that [Contractor] incurred in performing this contract before [Government] terminated it for convenience. Since [Government] terminated the contract for convenience rather than for default, it no longer matters whether, in the past,[Contractor] acted intentionally in overstating the amount of its incurred costs or committed a contract breach. Ultimately, as permitted in response to a termination for convenience, [Contractor] will recover those allowable costs that [Contractor]establishes it incurred in performing the contract.

Williams Building Company, supra.

In this matter, the government terminated a contractor for convenience as it was entitled to do per the Federal Acquisition Regulations (FAR). The contractor submitted its incurred costs through the termination and a dispute arose as the costs the contractor was entitled to. The government claimed the contractor committed prior material breaches of contract prior to the termination for convenience.  Unfortunately, the government can’t have its cake and eat it too by trying to convert its termination for convenience into one of default:

Once [Government] terminated the contract for convenience, [Contractor] became entitled to recover the allowable costs that it can show it incurred in performing the contract. If [Government] had wanted to hold [Contractor] responsible for prior breaches ofthat contract, it should have terminated the contract for default. [Government’s] decision to terminate for convenience, rather than default, effectively precludes [Government] from treating past contractor improprieties as material breaches of contract for which it can obtain relief.

Williams Building Company, supra (internal citations omitted).

This does not mean the contractor does not have to demonstrate its costs through the termination. The contractor still “bears the burden of establishing the costs that it incurred in performing its contract.” Williams Building Company, supra.  It does mean, however, that the contractor is not in a position where it’s defending a termination for convenience as if it were terminated for default.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

GOVERNMENT’S TERMINATION OF CONTRACTOR FOR DEFAULT FOR FAILURE-TO-MAKE PROGRESS

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Whenever you elect to terminate the other party for cause or for default, you need to JUSTIFY the basis of the cause or default. The reason being is that a termination for default or cause is the harshest contractual remedy. This is why the other party will typically either (i) convert the termination for default into one for convenience, or (ii) if there is no termination for convenience provision in the contract, argue the terminating party breached the contract by terminating the contract without rightful justification.

The key is if you are going to terminate a party for cause of default, make sure you have memorialized the persuasive reasons for exercising the termination, and can otherwise reasonably support the justification.  Do not, and I repeat, do not haphazardly exercise a termination for default and think you do not have to justify the basis for the termination.

In the federal arena on a federal construction project, “[w]hen a contracting officer terminates a contract for default, and the contractor appeals that termination decision, ‘the government…bear[s] the burden of proof with respect to the issue of whether termination for default was justified.’” Department of Transportation v. Eagle Peak Rock and Paving, Inc., 2023 WL 3829625, *4 (Fed. Civ. 2023) (citation omitted).

In Eagle Peak Rock and Paving, the government terminated the contractor for cause for not maintaining progress, i.e., the contractor was not going to timely complete the project. “In failure-to-make-progress cases, the government must establish that ‘the contracting officer’s decision to terminate…was reasonable given the events that occurred before the termination decision was made.’ If the government makes this showing, the contractor then bears the ‘burden of providing that its nonperformance was excusable.’” Eagle Peak Rock and Paving, supra, at *4 (internal citations omitted).

On the often-central issue of whether it was reasonable to view timely completion as not reasonably likely, the tribunal must focus on ‘tangible, direct evidence reflecting the impairment of timely completion. In particular, the [tribunal] must ‘decide the actual performance that the contract requires and the amount of time remaining for performance’ and ‘may also consider’ factors such as ‘the contracting officer’s testimony and contemporaneously documents[,]…a comparison of the percentage of work completed and the amount of time remaining under the contract, the contractor’s failure to meet progress milestones, problems with subcontractors and suppliers, the contractor’s financial situation,…a contractor’s performance history, and other pertinent circumstances.’ This is a de novo adjudication: If the adjudicatory tribunal finds, based on all the evidence before it, that the standard for termination under the contract’s default clause is met, it is to uphold that decision whether or not the contracting officer stated the basis for that finding.

Eagle Peak Rock and Paving, supra, at *4 (internal citations omitted).

Importantly, “the termination-for-default decision must be performance-based and not pretextual.” Eagle Peak Rock and Paving, supra, at *5 (citation omitted).  There must be a connection between the decision to terminate for default and the terminated contractor’s performance.  Id. (citation omitted).

[A]s long as ‘the termination for default was predicated on contract-related issues,’ i.e., ‘the government’s default termination was not pretextual or unrelated to Contractor’s alleged inability to fulfill their obligations under the contract,’ the reasoning of the contracting officer at the time of termination is not the subject of the [Contract Disputes Act] adjudication, must proceed on the evidence and arguments made in the adjudicatory proceeding, not through arbitrary-and-capricious or abuse-of-discretion review. Of course, the substantive contract standard in its endangerment-of-timely-completion component, doubly considers what is ‘reasonable’—whether it was ‘reasonable’ to find that there was no ‘reasonable likelihood’ of timely completion.

 Eagle Peak Rock and Paving, supra, at *5 (internal citation omitted).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

TERMINATING CONTRACTS FOR CONVENIENCE — “JUST BECAUSE”

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Termination for convenience provisions are important provisions to include in construction contracts.  These are provisions that allow a party to terminate the contract for ANY REASON.  No cause is needed to exercise the termination for convenience provision.  In other words, the terminating party does not have to demonstrate the other party breached the contract.  A termination for convenience can be exercised “just because.”

Typically, the party providing the service should not get to terminate for convenience.  However, the party receiving the service will want to be afforded this contractual right.

For example, an owner (receiving a service) will want to include a termination for convenience provision with its prime contractor (providing a service).  And, a general contractor (receiving a service) will want to include a termination for convenience provision in its subcontract with its subcontractor (providing a service).  However, a general contractor providing a service for an owner, or a subcontractor providing a service to a general contractor, should not be able to terminate the contract for their convenience “just because” a better opportunity comes along.

Consideration should be taken as to the required notice to exercise the termination for convenience and any fee associated with the termination for convenience.   A party providing a service that agrees to a contractual termination for convenience provision will want to consider and negotiate a termination for convenience fee in the event the other party exercises this right, which is a fee in addition to all costs incurred through the date of the termination for convenience, including any demobilization costs and any early return fees (i.e., costs associated with the termination for convenience).  Sometimes the fee included in the termination for convenience provision make it cost prohibitive for the other party to ever exercise this right.  But it should be a consideration and negotiation on the frontend because a termination for convenience provision is an enforceable contractual provision and, as quoted below, “difficult to argue around.”  There is flexibility to have the contractual right to terminate “just because” without having to establish the cause or breach supporting the termination.

The Middle District of Florida discussed termination for convenience provisions in a non-construction case:

Termination-for-convenience clauses are difficult to argue around. The only plausible exceptions under federal andFlorida law are: (1) bad faith, or possibly (2) lack of consideration. As to the latter exception, Florida courts have heldthat “proper notice” is sufficient consideration. And “proper” notice does not mean that the language of the contractmust provide for “advance” notice—contemporaneous notice will suffice.

Oakes Farms Food and Distributions Services, LLC v. The School District of Lee County, Florida, 2021 WL 2186457, *11 (M.D.Fla. 2021) (internal citations omitted).

It is unclear whether Florida recognizes a “bad faith” exception to exercising a termination for convenience.  See id.  This is an exception applied in the federal context in limited circumstances where the government-owner acts with malice towards the contractor or with intent to harm the contract by exercising the termination for convenience.  See id.  Clearly, a difficult exception to prevail upon!  However, it is doubtful this exception would support a a basis to argue around the properness of a termination for convenience.

Keep in mind that termination for convenience provisions are enforceable.  This is why when reviewing a contract–and hopefully you are working with construction counsel–that includes such language (and this will be included in many construction contracts), negotiating the notice provision and costs/fees in the event such provision is exercised should not be overlooked.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

FEDERAL GOVERNMENT TERMINATING FOR DEFAULT “SEPARABLE” CONTRACT

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If a contractor is terminated for default on a federal project (really, any project), the objective for the contractor is to convert that termination for default into a termination for convenience so that the contractor can get paid for work performed and associated profit on that work through the date of the termination. For more information on termination for defaults and convenience, check out this article and this article.

 

The Armed Service Board of Contract Appeals (ASBCA) decision, Nelson, Inc., ASBCA No. 57201, 2015 WL 959241 (ASBCA 2015), provides an example of the government terminating a prime contractor for default where the prime contractor argued the termination was improper.  The prime contract called for the construction of stone dikes at four sites along the Mississippi River.  Each site had separate pricing, separate notices to proceed, and separate performance periods and durations for the construction of the stone dikes. After the prime contractor had started to perform at two of the four sites, the government terminated the prime contractor for default based on the prime contractor’s failure to timely perform in accordance with the schedules for those sites. 

 

The prime contract included the F.A.R. 52.249.10 clause (set forth in full at the bottom of this posting) relating to termination for defaults.   Applicable here, F.A.R. 52.249-10(a) and (c) provide:

 

(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

***

(c) If, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been issued for the convenience of the Government.

 

This case focused on the language “separable part” in F.A.R. 52.249-10(a) to determine whether the government properly terminated the prime contractor from ALL four of the sites along the Mississippi River when the termination focused on the prime contractor’s delay at only two of those sites. 

 
“The government has the burden of proving that the termination for default was justified.”  Nelson, Inc., supra, citing Libson Contractors, Inc. v. U.S., 828 F.2d 759, 764 (Fed. Cir. 1987).   When a contract is separable, or divisible, “and a contractor is delinquent only as to a separable part of the contract work, it is improper for the contracting officer to terminate for default the entire contract.”  Nelson, Inc., supra, citing Overhead Electric Co., ASBCA No. 25656, 1985 WL 16703 (1985). 

 

The ASBCA found that the four sites were separable because each site had separate performance periods, notices to proceed, and pricing.  The commencement of the prime contractor’s work at one of the sites was not dependent on or related to its completion of work at another site. (To support the divisibility of the work, the ASCBA stated: “Work at each of the locations did not involve sequential or incremental and interdependent progression of construction, e.g., of one building or levee at one contiguous site.” Nelson, Inc., supra.)   Therefore, the ASBCA found that terminating the prime contractor for default from all four of the sites was improper since the prime contractor’s work was separable (and the government based the termination on delay of two of the four separable sites).

 

Importantly, even when a prime contractor challenges a termination for default claiming it should be converted to a termination for convenience, the prime contractor needs to comply with the Contract Disputes Act.  In other words, the prime contractor needs to submit its termination for convenience costs / claim. For more information on this important issue, check out this article. 

 

 

F.A.R. 52.249-10 Default (Fixed-Price Construction)

(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if—

(1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and

(2) The Contractor, within 10 days from the beginning of any delay (unless extended by the Contracting Officer), notifies the Contracting Officer in writing of the causes of delay. The Contracting Officer shall ascertain the facts and the extent of delay. If, in the judgment of the Contracting Officer, the findings of fact warrant such action, the time for completing the work shall be extended. The findings of the Contracting Officer shall be final and conclusive on the parties, but subject to appeal under the Disputes clause.

(c) If, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been issued for the convenience of the Government.

(d) The rights and remedies of the Government in this clause are in addition to any other rights and remedies provided by law or under this contract.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

RELEASES ON FEDERAL PROJECTS — MAYBE THE RELEASE IS NOT A FINAL RELEASE

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Executing partial releases and a final release in consideration of payment are routine on construction projects.  Counsel will correctly tell you not to sign a release if you don’t intend to release all of your claims through the date of the release.  Counsel will also tell you to be sure to exempt those claims from a release that you do not intend on releasing.  The reason for this is that if you sign a release and then seek damages or costs pre-dating the release, the party you gave the release too will waive it in front of your face and say “tough luck; you released these claims and costs!” 

 

However, the opinion in H.J. Lyness Construction, Inc. v.  U.S., 120 Fed.cl. 1 (Fed.Cl. 2015) gives those contractors (or subcontractors), particularly federal government contractors, that sign a release and do not exempt certain claims or costs from the release some hope that not all is lost.  In this case, the federal government terminated a contractor for convenience.  After the termination for convenience, the contractor submitted a release and was paid in consideration for that release.  The contractor did not exempt or carve out any claims or costs from that release even though the release allowed the contractor to do so.    In other words, the release did not carve out any termination for convenience settlement costs that the contractor would be entitled to.  Notwithstanding, the government and contractor continued to discuss termination for convenience settlement costs and when an agreement could not be reached, the contractor filed suit.

 

The government moved for summary judgment that the contractor released the government for termination for convenience settlement costs because the contractor executed the unambiguous release after the termination for convenience.  The contractor countered that the release did not apply to termination for convenience settlement costs and, to show this, the government continued to entertain discussions regarding these costs after it received the release the government is arguing under.  Furthermore, the contractor argued that it timely and properly submitted its settlement costs in accordance with F.A.R. 52.249-2(e) that provides:

 

(e) After termination, the Contractor shall submit a final termination settlement proposal to the Contracting Officer in the form and with the certification prescribed by the Contracting Officer. The Contractor shall submit the proposal promptly, but no later than 1 year from the effective date of termination, unless extended in writing by the Contracting Officer upon written request of the Contractor within this 1–year period. However, if the Contracting Officer determines that the facts justify it, a termination settlement proposal may be received and acted on after 1 year or any extension. If the Contractor fails to submit the proposal within the time allowed, the Contracting Officer may determine, on the basis of information available, the amount, if any, due the Contractor because of the termination and shall pay the amount determined.

 

Based on these facts and circumstances, the contractor took the position that the  government never intended the release the contractor furnished post-termination for convenience to operate as a final release and release of its termination for convenience costs.  The Court of Federal Claims sided with the contractor:

 

The Court finds that through the affidavit provided by Mr. Lyness [contractor’s representative], the parties’ actions and course of conduct in this case creates a genuine issue of material fact regarding whether the release constituted a full and final release of claims given in exchange for a final payment, or was simply a routine payment application form that was used with respect to all applications for partial payments requested by HJL [contractor].

H.J. Lyness Construction, supra.

 

Now, why is this case helpful?  Because it goes directly to the argument on federal projects that even if a contractor executed an unambiguous release and does not exempt or carve out any claims, there may be an argument that the conduct of the parties reflects that the parties did not intend the release to operate as a final release of all claims.  In H.J. Lyness the argument was that the release was not intended to bar termination for convenience settlement costs even though the release was executed months after the termination for convenience.

 

Regardless of the holding in H.J. Lyness, it is important for contractors to read what they sign and be cognizant of those claims and costs they do not want to release.  This includes executing a release without properly exempting termination for convenience settlement costs if the contractor does not intend its release to be a final release of all claims.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.