Termination for Convenience: Necessary Evil or Unfair Advantage - Part 4

By Trent Cotney

The modern use of the bad-faith defense to overcome a termination for convenience.

This is the fourth and final installment of the article on termination for convenience provisions in construction contracts. This article will discuss the modern use of the bad faith defense as well as other defenses that may be available to contractors to overcome a termination for convenience.

The previous article ended with a discussion of the Torncello case and the short- lived success of the “change in circumstances” defense by contractors to avoid a termination for convenience. Although several post-Torncello cases used the “change in circumstances” test to analyze the validity of terminations for convenience, other courts eroded the Torncello decision by continuing to apply the “irrefragable proof” standard.

Those of you who were as riveted by the prior articles as we were and have stayed awake this far will recall that prior to Torncello the termination for convenience could not be defeated unless the contractor could show “well-nigh irrefragable proof” that the termination was motivated by malice or done in bad faith. Torncello made it easier to overcome the termination for convenience by not requiring “irrefragable proof” of bad faith by the owner.

The death knell for Torncello occurred in Krygoski Constr. Co., Inc. v. United States, 94 F.3d 1537 (Fed.Cir. 1996). The Krygoski Court reviewed the claims made by a demolition contractor against the Army Corps of Engineers. The contractor was the successful bidder on a project to demolish an airfield and missile site. The contractor was also required to remove asbestos in the structures. Prior to demolition, the contractor performed a survey which revealed additional asbestos in the buildings. The contractor requested an adjustment of the price to reflect the additional asbestos removal. The contracting officer determined that the increased work was as a cardinal change, thereby allowing the government to terminate for convenience and resubmit the project for competitive bidding. The Krygoski court rejected the Torncello approach and returned to the “well-nigh irrefragable proof” test to overcome a termination for convenience clause.

Post-Krygoski cases have continued to require “irrefragable proof” of the government’s specific intent to injure the terminated party. See e.g. Rice Systems, Inc. v. United States, 62 Fed.Cl. 608 (2004). Given this nearly insurmountable standard, it is not surprising that few terminated parties have been able to prove bad faith on the part of the government to avoid the termination for convenience clause limitations on recoverable damages. Several courts have noted that bad faith or fraud may be used to defeat a termination for convenience, but few, if any, have actually found bad faith. See e.g. Harris Corp. v. Giesting & Associates, Inc., 297 F.3d 1270 (11th Cir. 2002); Knotts v. United States, 128 Ct.Cl. 630 (1954); Struck Constr Co. v. United States, 96 Ct.Cl. 186 (1942).

The Court in Kavlar Corp. v. U.S., 543 F.2d 1298 (Ct. Cl. 1976), in explaining what sort of evidence constitutes irrefragable proof of bad faith sufficient to avoid convenience terminations, provided two illustrations of courts holding that a party had demonstrated bad faith. The Kavlar Court noted that in Knotts v. United States, the plaintiff employee was able to prove a conspiracy on the part of the employer and others to terminate the employee, thus demonstrating malice. Similarly, in Struck Constr. Co. v. United States, it was held that the government repeatedly engaged in an intentional effort to disrupt the contractor, including actively delaying the contractor on the project. In both cases, the court was able to find that the government had acted in bad faith.

Convenience Termination after Contract Completion Courts have uniformly held that a termination for convenience may not be used after the terminated party has completed its contract performance. The seminal case on this issue is Maxima Corp. v. United States, 847 F.2d 1549 (Fed.Cir. 1988). Maxima Corp. entered into a contract with the government to supply secretarial services. One year after the completion of the performance period, the government sought to constructively utilize the termination for convenience clause in the contract to obtain a retroactive adjustment in the contract price. The court opined that the government could use a constructive termination for convenience to remedy a breach or premature termination. However, if the contractor had already completed performance, a contract could not be constructively terminated for convenience.

Similarly, in Ace-Federal Reporters, Inc. v. Barram, 226 F.3d 1329 (Fed.Cir. 2000), the court held that a termination for convenience could not be retroactively applied where the contract had been fully performed. The court stated that there was “no reason in law or logic to impose a retroactive constructive termination for convenience” in these situations. In Appeal of Carroll Automotive, ASBCA No. 50993, 98-2BCAP29, 864 (1998) the board followed the Maxima holding and held that “the Government cannot retroactively create a breach in order to change its obligations under a completed contract.” Accordingly, the court held that the government could not use a constructive termination for convenience against the contractor.

Other Defenses Other arguments may be available to a contractor to defeat a termination for convenience depending on the wording of the termination for convenience clause. For example, termination for convenience clauses often contain strict notice provisions for using the termination for convenience. If an owner fails to follow these strict notice requirements governing the convenience termination, the contractor may have an argument that notice was not properly given. See e.g., Angers v. Perini Corp., 1993 W.L. 235911 at *8 (E.D. Pa. 1993); Capital Safety, Inc. v. State, 848 A.2d 863 (N.J. App. Ct. 2004).

Unfortunately for contractors, it appears that terminations for convenience are here to stay and are now spreading from federal government contracts to state and local government contracts as well as some larger private sector agreements. Before signing any contract with a termination for convenience clause, a contractor should thoroughly review the termination provisions and recognize the limitations on how it will be compensated if a convenience termination occurs.

Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Trent Cotney is Florida Bar Certified in Construction Law, a member of the National Roofing Contractors Association (NRCA), General Counsel and a director of the Florida Roofing Sheet Metal and Air-Conditioning Contractors Association (FRSA), General Counsel and member of the Governance Committee of the National Women in Roofing (NWIR), the Treasurer of the West Coast Roofing Contractors Association (WCRCA), and affiliated with almost a dozen other roofing associations. For more information, contact the author at 866-303- 5868 or visit www.RoofingLawyer.com.