Terminations for Convenience: Necessary Evil or Unfair Advantage – Part 3

There are certain defenses available to contractors which can be used against terminations for convenience.

By Trent Cotney

This is the third installment of a four-part article on termination for convenience provisions in construction contracts. The previous article discussed the increasing use of terminations for convenience in the private sector. This article will focus on the bad faith defense to terminations for convenience.

Termination for convenience clauses are almost universally upheld. The clauses have survived an onslaught of creative arguments including that the provision was ambiguous, illusory, and unconscionable. See M. Fields v. United States, 53 Fed.Cl. 412 (2002) (holding that termination for convenience clause was not unconscionable).

However, there are certain defenses available to contractors which can be used against terminations for convenience. Many parties who were terminated for convenience have argued that the contracting officer or owner acted in bad faith in order to recover breach of contract damages. However, these parties have faced unsympathetic courts who generally rule in favor of upholding the convenience termination. Over the last 25 years, the courts have developed a standard which requires the terminated party to demonstrate an owner’s specific intent to injure. The standard espoused by courts requires the undeniable proof of bad faith in order for a termination of convenience to be overturned.

This almost insurmountable standard first appeared in Kavlar Corp., Inc. v. United States, 543 F.2d 1298 (Ct. Cl. 1976). In that case, Kavlar Corporation was granted a “primary supply” contract to provide the General Services Administration (GSA) with film. After the contract was awarded, the GSA contracted with the Xidex Corporation to provide film with a different speed rating. Kavlar contended that the GSA breached the sole supplier agreement by contracting with another party. The government then used the termination for convenience clause incorporated into the contract to limit its damages. Kavlar, 543 F.2d at 1301.

Kavlar filed suit and argued that the government acted in bad faith by arguing, among other things, that the GSA deliberately withheld information from Kavlar regarding the need for film with a different speed rating. In analyzing Kavlar’s claims, the court set the stage for its decision by articulating that there is a “presumption that public officials act ‘conscientiously in the discharge of their duties.’” Id. citing to Librach v. United States, 147 Ct.Cl. 605, 612 (1959). The court further stated that it requires “well-nigh irrefragable proof” for the court to find bad faith. “Well-nigh irrefragable proof” has been defined as “evidence that ‘cannot be refuted or disproved; incontrovertible, incontestable, indisputable, irrefutable, undeniable...” Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234, 1240 (Fed.Cir. 2002). Irrefragable proof has also been defined as clear and convincing evidence or something which is “stronger than a ‘preponderance of evidence.’” Id.

To prove bad faith, a terminated party must demonstrate that the contracting officer’s actions were “motivated alone by malice” or “actuated by animus toward the plaintiff.” Kavlar, 543 F.2d at 1302. Applying this standard to the facts of the case, the Kavlar Court held that the GSA’s award of a contract to a party other than Kavlar was insufficient to demonstrate bad faith. The court upheld the government’s termination for convenience. Id.

Six years later, the Court of Claims radically altered the Kavlar standard when it decided Torncello v. United States, 681 F.2d 756 (Ct.Cl. 1982). In Torncello, a contractor sued the government for breach of a pest control contract. The contractor argued that the Navy circumvented the requirements contract by hiring a subsequent contractor to perform pest control services. The contracting officer ruled against the contractor and the matter was appealed before the Armed Services Board of Contract Appeals (ASBCA). The ASBCA acknowledged that the government may have committed breach but viewed the breach as immaterial given the existence of a termination for convenience. The ASBCA retroactively applied the termination for convenience to defeat the contractor’s breach claim. Furthermore, because the contractor had not actually performed work under the requirements contract, the contractor was not entitled to any compensation under the termination for convenience.

In reviewing the ASBCA opinion, the Court of Claims in Torncello opined that allowing the government to constructively use a termination for convenience against the contractor in an unrestricted manner would obviate any consideration the government may have provided under the requirements contract. Torncello, 681 F.2d at 770. The Torncello Court disagreed with the Kavlar “irrefragable proof” standard and held that there must be a change in circumstances either in the bargain between the government and the contractor or in their expectations in order for the government to utilize the constructive termination for convenience. Id. at 772.

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.