Get rid of the termination-for-convenience clause

It is always amusing to watch the reaction of a businessperson or corporate lawyer who
first learns about some of the standard clauses in a government contract. Shock, outrage
and disbelief are the usual reactions to terms and conditions that the government and its
contractors take for granted.


One of the most amazing clauses is the one that lets the government--but not the
contractor--terminate a contract for convenience.


In the private sector, this would typically be a breach of contract, and the party
disclaiming its obligations would be liable for damages.


The clause, however, lets the government cancel an inconvenient contract and insulates
it from paying common-law damages such as lost profits.


When a contract is terminated for convenience, the vendor typically recovers only the
costs it expended until the termination and a profit on the costs.


If the contractor was headed for a loss on the contract, its recovery is reduced to
reflect the projected deficit.


Beyond this, the government is liable only for the costs of the termination itself,
such as the preparation of the contractor's claim.


The notion that the government should be able to cancel its contracts dates back more
than a century.


The origins of the current clause reach back at least to World War II. It is believed
that the clause started as an extraordinary power needed to speed the transition from
mobilization to a peacetime economy. It didn't end there, though.


The ability to simply walk away from a contract with little or no liability was an
irresistible power.


The clause became so important that courts would insert it, by operation of law, into
contracts whenever the government forgot to include it.


Exculpating the government from damages was such a nifty idea that it soon spread
further.


If the government improperly terminated a contract for default, then another standard
contract clause converted that mistake into a termination for convenience.


In other words, the government got the benefits of the clause even though it had not
terminated the contract for convenience, and even though it had acted improperly in
terminating the contract at all.


Once again, the contractor lost the right to be paid its anticipatory profit.


The ability of the government to walk away from its contracts was so broad that some
began to ask whether the government was really bound at all. If not, government contracts
wouldn't be enforceable, even against the contractor. To solve this problem, courts began
to seek some limits to the power to terminate for convenience.


Unfortunately, the courts have not yet defined an understandable and durable set of
rules. In the first judicial decision about the problem, half the judges thought that the
government should have to show some change in the basic circumstances of the contract to
justify a termination.


The changed circumstances test did not last long. Later decisions interpreted the
limits more narrowly. The contractor would have to show that the government entered into
the contract intending not to honor it. As might be expected, almost nobody could meet
this test.


More recently, the Court of Appeals for the Federal Circuit ruled that it is proper to
terminate a contract for convenience to avoid a cardinal change, in other words, one
beyond the scope of the contract. In the case, Krygoski Construction Co. Inc. vs. the
United States
, it is doubtful that there really was a cardinal change. The bottom line
is that the government still has almost no real limits on its power to terminate.


As the government migrates toward more commercial contracting practices, the power to
terminate for convenience is a good candidate for elimination. The clause is no longer
mandatory in contracts for commercial items, but most contracts have a standard provision
that lets agencies terminate for convenience.


Will contracting officers include the provision as a matter of course?


It will be very interesting to see. Meanwhile, the General Services Administration is
to be commended for giving schedule contractors the right to cancel their contracts on 30
days' notice.


That's almost parity.


Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo &
Powell, PLLC. E-mail him at jpetrillo@counsel.com.


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