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Terminations for Convenience An Unrestrained Power?
John B. Wyatt III, JD, PDCM, CPP, CPPM
Full Professor, Coordinator of CM Programs
California State Polytechnic University, Pomona, CA 91768-4083
Date August 5, 2008
Time 1:50 – 2:50pm
Society of Law, Contracts & Procurement
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From Acquisition Professionals for Contract Management Students
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“This presentation is provided with the understanding that the presenter is not providing legal, accounting or other specific advice or professional service. If legal advice or other expert assistance is needed, the services of a relevant professional should be sought.”
Adapted from the “Declaration of Principles of the American Bar Association and the Committee of Publishers and Associations”
Inherent Sovereignty/Fiduciary of Public Funds
General Consensus of Case Law instructs that the Gov’t needs the T4C power to “terminate contracts made obsolete by technological or other developments” or “rapid changes of war or at war’s end” – in a nutshell – “some kind of change” from the date of contract execution
Historical Basis in Federal Law – Famous Navy Battle – Chesapeake Bay (Hampton Roads VA)
Monitor vs. Merrimac (CSS Virginia) Wooden frigates Congress and Cumberland were lost. Ironclad warship technology revolution prevailed.
Harvard Law – Prof. Samuel Williston: “[a]n agreement wherein one party reserves the right to cancel at his pleasure cannot create a contract – the promisor may perform or not solely on the condition of his whim, his promise will not serve as consideration”
Yale Law – Prof. Arthur Corbin: “[a] party [with T4C power] loses that power if …commits such a breach as goes to the essence [of the bargain]”.
George Washington Law – Prof. Ralph Nash: “[a]n unlimited Gov’t. right to terminate raises serious questions as to whether the Gov’t. furnishes consideration in a contract with the [T4C] clause”.
Restatement 2nd: “[a] promise…is not consideration if the promisor reserves a choice of alternative performance unless … the alternative performance would have been consideration if it alone had been bargained for”
NO LOSE situation for gov’t whether post award market price of items falls or rises
Inequitable effect puts contractors subject to a loss of the benefit of the sale when the market falls but being saddled with a loss when the cost of performing rises”
Ct of Claims reversed Colonial Metals in Torncello
Declared that Gov’t cannot T4C simply to acquire a better bargain from another source.
Gov’t can only T4C if there exists a “change in circumstances of the bargain, or in the expectations of the contracting parties occurring after contract award”
No changed circumstances exist if the reason for the T4C was known or should have been known to the government before the contract was awarded”
T4C clause will not act as a constructive shield to protect the gov’t from its decision to now engage an option considered but rejected before contracting Municipal Leasing Corp v. United States
Successful state case law T4C challenges:
RAM Engineering v. University of Louisville
KY Attorney General Opinion Affirming RAM
Ry-Tan Const., Inc. v. Washington School Dist.
Arizona Towing v. State of Arizona
“Changed Circumstances” Rule lives on in various state decisions
RAM Engineering v. University of Louisville Supreme Court of KY held that fairness and integrity of the state’s procurement system and the public’s confidence demanded nothing less than requiring a substantialchange in circumstances.
The interest of fair treatment and public confidence in the government outweigh possible expenses on the public coffers, within the reasonable limits of a substantial change from the parties’ expectations.
If there is no good faith limitation set by a substantial change of circumstances, then the government's contracted-for promise becomes illusory
[i]f we must presume that government officials act in good faith to contract in their best interest at the time of agreement, then a change of circumstances is necessary for the contract to no longer be in the government's best interest when terminating for convenience.
Request from KY Speaker of the House to the KY Attorney General concerning “To what extent can the General Assembly modify, amend, alter or terminate contracts and what would be the consequences in terms of remedies available to the parties for such action by the General Assembly.”
Citing RAM Engineering, the Attorney General concluded that “the Commonwealth does not have unfettered discretion to terminate the contract for convenience. A change of circumstance must first be identified. Moreover, the nature of that change could seriously affect the Contractor’s ability to even meet its burden to prove the amount of compensation to which it is entitled under the terms of the contract.
Ry-Tan Const., Inc. v. Washington School Dist , the AZ court of appeals held that “when evaluating a termination for convenience, one cannot ignore hornbook law that a route of complete escape vitiates any other consideration furnished and is incompatible with the existence of a contract. . . . [meaning that the ] application of a termination for convenience clause requires some kind of change from the circumstances of the bargain or in the expectations of the parties”
Different AZ Ct of Appeals likewise held state’s T4C of a services contract without changed circumstances constituted an abuse of discretion and breach of the Gov’t duty of good faith and fair dealing in its contractual performance and that such cancellation for convenience creates the impression that the contract was illusory.
Changed circumstances standard is needed to keep T4C’s from “going wild”.
T4C power is arguably excessively broad, especially since case law allows constructive terminations despite Gov’t. failure to follow its own mandated contractual and regulatory requirements prior to exercising T4C powers
KY has judiciously recognized the “proper T4C balance” between the (1) presumption that Gov’t. officials act in good faith and (2) Gov't.’s need to avoid paying breach of contract damages is to (3) require substantial change of circumstances that were not known or should have been known by the government.
Contractual clauses and regulatory provisions should be modified to include the “substantial change of circumstances ” requirement as a condition precedent to Gov’t exercising its T4C power
Such language helps to assure integrity, fairness and maintaining contractor trust in the procurement process and enhancing competition.
Recommended changes to FAR’s termination provisions, which were approved by the Section. http://www.abanet.org/contract/admin/minutes/15nov97.html
Subcommittee was wrestling with Krygoski’s restrictions on Torncello’s change of circumstances standard as well as the difficulty in proving bad faith.
An assertion by the contractor that the government when terminating for convenience or default has acted in bad faith shall be assessed objectively based upon standards applicable to private parties in commercial contracts. Among other things, this means that the government, whether knowingly or not, may not attempt to recapture an opportunity foreclosed at the time of contracting. (Emphasis added)
(iv)Termination for convenience to reflect changes in, but not elimination of, the actual needs of the government is appropriate, unless the change arises under and can be addressed by one of the remedy granting clauses of the contract. (Emphasis added)
Tried to minimize difficulty in proving bad faith by eliminating subjective intent by asserting that bad faith shall be “assess[ed] objectively based upon standards applicable to private parties in commercial contracts”. (Emphasis added).
ABA astutely focused on “changes” thereby affirming Torncello’s Changed Circumstances standard
Changed Circumstances standard is the right compromise as other existing challenges to Gov’t. T4C power are difficult or well nigh impossible to prove.
When T4C power goes wild, it allows arbitrary contractual abuse which will discourage suppliers with a “chilling effect” upon competition
Thanks for your courtesy and attention
Prof. John B. Wyatt III J.D.
California State Polytechnic University, Pomona
(951) 377-7439 FAX (909) 869-4353
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6 Corbin On Contracts, section 1266 (1962)
Nash et al, “Administration of Government Contracts”, 4th Ed., Wolters Kluwer (CCH) 2006.
Williston, Contracts 105 (3d ed. 1957 and Supp 1979).
Restatement of Contracts (2d)
Colonial Metals v. U.S. 494 F. 2d 1355 (1974)
Torncello v. U.S., 331 Ct. Cl. 20; 681 F.2d 756 (1982)
Municipal Leasing Corp v. U.S. 7 Cl. Ct. 43 (1984)
Krygoski Constr. Co. v. U.S. 94 F. 3d 1537 (1996)
RAM Eng’g & Constr, Inc. v. University of Louisville, 127 SW 3d 579; (Ky Sup. Ct. 2003)
Ry-Tan Const., Inc. v. Washington Elementary School Dist., No. 6, 208 Ariz. 379, 93 P. 3d 1095 (2004)
Arizona Towing Professionals, Inc. v. State of Arizona , 196 Ariz. 73, 993 P. 2d 1037 (1999)
OAG 04-009 (Oct 13, 2004) (KY State Attorney General Opinion) http://ag.ky.gov/NR/rdonlyres/E4DED9EA-3EBC-4D8A-9DBD-DD6C929DBD2F/0/OAG04009.doc
AMERICAN BAR ASSOCIATION, SECTION OF PUBLIC CONTRACT LAW, MINUTES of November 15, 1997 Council Meeting, http://www.abanet.org/contract/admin/minutes/15nov97.html