Government Contract Termination

Document Sample
Government Contract Termination Powered By Docstoc

   Termination for Default
    – Ends performance on a contract and subjects
      the contractor to possible liability
    – Could prevent contractor from getting a future
    – Contractors normally attempt to overturn
      termination for default
    – Under a default termination – Gov’t has burden
      of proving the validity of the basis for the default

 – The standard clause states that the
   “Government may” terminate a contract
   for default upon the occurrence of
   specified events.
 – Practically speaking, the purpose of the
   permissive language is to allow for
   consideration of any number of various
   factors before issuing a default notice.
    Default Clause (fixed price supply contracts and
     (a)(1) the Gov’t may, subject to paragraphs (c) and
     (d) of this clause, by written notice of the default to
     the Contractor, terminate this contract in whole or
     in part if the Contractor fails to –
     (i) deliver the supplies or to perform the services
     within the time specified in this contract or any
    (ii) make progress, so as to endanger performance
     of this contract; or
   (iii) perform any of the other provisions of this
(2) The Government’s right to terminate this contract
   under subdivision (a)(1)(ii) and (a)(1)(iii) above,
   may be exercised if the Contractor does not cure
   such failure within 10 days after receipt of the
   notice from the Contracting Officer specifying the
   failure (more time may be permitted by the CO).
  Commercial Items Clause
Termination for cause. The Gov’t may terminate this contract,
   or any part thereof, for cause in the event of any default by
   the contractor or if the Contractor fails to comply with any
   contract terms and conditions, or fails to provide the Gov’t,
   upon request, with adequate assurances of future
   performance. …………If it is determined that the Gov’t
   improperly terminated this contract for default, such
   termination shall be deemed a termination for convenience.

Although the termination for cause in commercial items does not
   contain a “cure clause” The FAR termination procedures for
   commercial contracts require the CO to send a standard cure
   notice prior to termination for a reason other than late

   Contractor Defenses
    – Contractor may be able to avoid the termination
      if it can show
          Excusable delay, or
          The Gov’t waived the due date
            – Gov’t waives right to terminate for default if
                 (1) it fails to terminate within a reasonable time
                  after the default, and
                 (2) contractor continues to perform the contract in
                  reliance on the gov’ts failure to insist on strict
                  adherence to the delivery schedule

 Gov’t is entitled to forbearance – a
  sufficient period of time in which to
  determine a course of action.
 More contractor performs – the better
(1 to 2 weeks)
 Gov’t may revive right to terminate by
  setting a new delivery schedule after
  the waiver.
   Excusable Delay
    – Acts of God or of the public enemy
    – Acts of the Government in either its sovereign or contractual
    – Fires
    – Floods
    – Epidemics
    – Quarantine restrictions
    – Strikes
    – Freight embargoes
    – Unusually severe weather
    – In each instance, the failure to perform must be beyond the
      control and without the fault or negligence of the Contractor.

The Government’s right to terminate for
 default has been consistently upheld if
 valid grounds for the default action
 exist at the time of the termination
 notice. For example: this right exists
 if delivery has already been missed or
 if the contractor has failed to comply
 with some material provisions of the

   Fixed Price Contracts – if termination
    is completed, the contractor is paid
    nothing – no cost, no profit.
   Cost Reimbursement Contracts –
    contractor is paid cost to date, but no
   Anticipatory Breach
    – Government will often terminate a contract on
      the basis of the contractor's anticipatory breach
      of the contract. An Anticipatory breach occurs
      whenever intent is demonstrated (a positive,
      definite, unconditional and unequivocal
      manifestation of intent), by words or conduct of
      the contractor’s intent not to perform.
    – Usually found in 2 instances
          Circumstances dictate contractor will not be able to
           perform although will to do so and
          Where the contractor before performance is due states
           it will be perform.

   Government Remedies
    – Entitled to excess costs of reprocurement
    (check the similarity of the repurchase – burden is
      on the contractor here)
    – Any additional rights and remedies under law or
      the contract
          May recover actual damages
          Recoup unliquidated progress payments
          Confiscate project-related inventory in addition to or
           instead of excess recoupment costs

   Contesting a Default Termination
    – Some delays caused by subcontractors –
      when the delay is beyond the subs
    – Delays caused by the government
        Delays in awarding the contract such that a
         contractor does not have a reasonable period
         of time to prepare for the start of
        Payment delays
   Government Delays
    – Unreasonable delays in approving contractor drawings,
      equipment, materials or subcontractors
    – Failure to accept or reject a “first-article” within a
      reasonable time
    – Improper and unreasonable government inspections
    – Formal or constructive suspensions of work
    – Defective specifications or drawings
    – Late or defective government furnished property
    – Failure to disclose vital information

   Terminations for Convenience
    – Important right for the Government (and
      beneficial to public!)
    – Gov’t needs the ability to discontinue
      contracts that are made obsolete by
      technology and other developments or
      that are otherwise no longer

 – In exchange, for the right to terminate,
   the Government agrees to reimburse the
   contractor for all reasonable and allocable
   costs connected with performance. In
   addition the contractor will normally be
   entitled to a reasonable profit on those

   Terminations for Convenience can
    arise as a result of written notice for
    the CO or by operation of law.

   FAR directs the CO to issue a detailed,
    written notice to effect the T of C.
   The prescribed notice should include:
    – A statement that the contract is being
      terminated for the convenience of the
    – The effective date of the termination
    – The extent of the termination (what portion or
      entire contract, being terminated)
    – Recommended actions to minimize the impact of
      the termination especially on personnel
    – Any special instructions regarding work in
      progress or other matters

   T of C by operation of law happens
    when by conversion of an improper
    termination for default. When issued
    it usually includes detailed and specific
    procedures for the contractor to
    follow. Failure to follow these
    instructions exactly can result in
    disallowance for costs.
 – Typically the instructions include the following:
        All work on the termination portion of the contract cease
         immediately unless the CO approves otherwise (in writing)
        Notify affected subcontractors that their subcontracts are
         likewise terminated (see clauses in subcontracts to be sure
         you can terminate)
        Settle subcontractors’ claims
        Dispose of property associated with the terminated contract
        Segregate, record, and protect property which cannot be
         disposed of
        This should also cover all actions relating to redistribution
         and disposal of contractor inventory from the contractor’s
         plant or work site.

   Cost Settlement
    – Contractor may receive costs of
      performance incurred up to time of
      termination, certain continuing costs,
      settlement expenses and (for FP
      contracts) an allowance for profit (unless
      contract would have been performed at a
      loss). On CR contracts, contractor is
      entitled to a portion of the fee.

 – FAR requires every effort be made to
   reach a fair and prompt settlement with
   the contractor.
 – Contractor must submit a settlement
   proposal supported by appropriate data
 – In FP contract – settlement may not
   exceed contract price (exclusive of
   settlement expenses)

   Disputes
    – Contract Disputes Act of 1978 as
      amended by Federal Courts Improvement
      Act of 1982 provides for dispute remedies
      to parties of a government contract.
    – FAR Part 33 provides the CO with broad
      discretion to settle disagreements,
      without litigation. (Negotiation leverage)

   The Act allows Contractors disputing
    the CO’s decision to bypass the Board
    of Contract Appeals and go directly to
    Court of Claims.
   The process:
    – Initial disputed matter goes to the CO for final decision
    – After issuance of final decisions the contractor submits a
    – CO has 60 days to decide on claim
    – If rejected, the contractor may go to Board of Contract
      Appeals or Court of Federal Claims
    – Either the government or the contractor may appeal a
      decision of the BCXA or CFC to the US Court of Appeals
    – To Court within 12 months
    – To Court of Appeals within 120 days after adverse Board
    – To Courts of Appeals within 60 days after adverse Court of
      Claims decisions

   Closeout
    – Verify all administrative matters have
      been concluded after
      performance/delivery is performed.
    – CO must make a determination that
      Contractor has complied with all
      provisions of contract
   Closeout
    – Issues that need to resolved during closeout
          Return of or disposition of government property
          Disposition of classified materials
          Settlement of terminated subcontracts
          Settlement of value engineering issues
          Settlement of suspended or disallowed costs issues
          Payment of withheld fee
          Overhead rate settlement
          Closing statement completion
          Deobligation of excess funds

Description: Government Contract Termination document sample