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Terminations for convenience.

Warranty and Upgrade Obligations Survive Contract Termination

Reversing a Court of Federal Claims (COFC) decision from two years ago, (1) this year the U.S. Court of Appeals for the Federal Circuit held that the termination of a contract for convenience does not terminate the contractor's obligation to continue providing warranty and upgrade services for the goods purchased under the contract prior to termination. In International Data Products Corp. v. United States, (2) the contractor provided computer systems and related services to the Air Force under an indefinite-delivery indefinite quantity (ID/IQ) contract awarded under section 8(a) of the Small Business Act. (3) The Air Force was ultimately compelled to terminate the contract for convenience when the contractor corporation was purchased by a non-section 8(a) concern. (4) At that time, the Air Force had already purchased over $35 million in goods and services under the contract, far in excess of the contract's $100,000 minimum quantity. (5) Upon termination, the Air Force insisted that the contractor continue to fulfill its contract obligations for warranty services and software upgrades that accompanied the products purchased prior to the contract termination. (6) The contractor objected, but continued to provide the warranty services under threat of default and debarment. (7)

At the COFC, the contractor sought approximately $1.7 million in termination costs, which included $440,990 for providing the warranty services and software upgrades after the contract had been termination. (8) The COFC granted summary judgment for the government on the issue of termination settlement costs, holding that once the government had met its obligation to purchase the guaranteed minimum quantity under the ID/IQ contract, it had no further obligation to pay contractor settlement costs. (9) But the court also held that the contractor was not required to continue to perform the warranty and upgrade services after the contract was terminated, finding that the statute which required the government to terminate the contract for convenience in these circumstances does not permit a "partial termination of the contract." (10) The court recognized that this holding would result in the Air Force's loss of the warranty and upgrade services for which it had already paid, but noted such losses were contemplated by Congress when it enacted the statute. (11) Still, in the subsequent trial on quantum, (12) the court held that there was no theory under which the contractor could recover for the post-termination warranty services it provided. The court found that the post-termination services were not provided under the terms of either an express or implied contract, because no such contract existed after the termination. (13) And because the COFC lacked jurisdiction over contracts implied in law, the contractor also could not recover in quantum meruit. (14)

The Federal Circuit, however, held that the statute did not terminate the contractor's obligation to continue performing the warranty and upgrade services after the termination for convenience. (15) The court first found that the Air Force had already paid for the warranty services, because the warranty accompanied, and was included in the cost of, the equipment that the Air Force had purchased. (16) The court also observed that the COFC's holding was inconsistent with the Federal Acquisition Regulation (FAR), which specifies that termination does not affect the parties' rights and liabilities "concerning defects, guarantees, or warranties relating to any articles or component parts furnished to the Government by the Contractor under the contract," which survive termination. (17) The regulation, the contract, and Air Force's termination notice which tracked the language in the regulation, all supported the court's conclusion. (18) While the court reversed the COFC as to whether the contractor's warranty and upgrade services obligation survives termination for convenience, the court affirmed the COFC's determination that the contractor was not entitled to any termination costs, (19) finding each of the contractor's theories of recovery to be without merit. (20)

A Contractor Being a Pain in the Butt Is a Good Enough Reason to T4C Contract

The government's right to terminate a contract for the convenience of the government is, of course, a very broad right. In a case more notable for its entertainment value than for legal developments, a decision by the Civilian Board of Contract Appeals this year further illustrates the breadth of this right. In Greenlee Construction, Inc. v. General Services Administration, (21) a job order contract for construction work was terminated for the convenience of the government after the contractor failed to provide a price proposal for a payment bond required as a result of the contracting officer's unilateral change and for which the government agreed to pay. The contractor, who at the time of termination had not yet performed any work or apparently incurred any costs, appealed the contracting officer's deemed denial of the contractor's claim for $2,282,822 and the contracting officer's final decision denying a $165,000 claim for termination settlement charges, alleging that the termination was unreasonable and in bad faith. (22)

The Board noted that a failure to provide a required bond was a valid ground even for a termination for default, so it was certainly an adequate justification for terminating the contract for convenience. (23) However, the Board noted that even if that justification had not sufficed, "the contracting officer had another, ample reason for issuing the termination: Greenlee was a consistently uncooperative contractor, and it is unquestionably in the Government's interest to be free from such a party." (24) Among the contractor's several other failures to endear himself to the General Services Administration (GSA) were the contractor's demand, two days after award, that GSA not issue any orders for work under certain contract line items because those tasks would net little profit, informing the GSA that if it were given only the guaranteed minimum instead of the contract maximum "then we will have more problems." The contractor sought to have the contract prices increased, complaining that the contract provided the contractor with too little profit. The contractor asked for a different start date, different line items, two additional option years, and a payment of $73,400. Lastly, the contractor demanded that GSA not issue any orders under the contract unless GSA amended the contract to increase the percentage adjustment to the same percentage that another contractor was allegedly receiving under a different contract in a different geographical area. (25) "It does not take much imagination," the Board stated, "to see how a contracting officer would find it advantageous to end legal entanglements with a contractor who behaved in this fashion." (26)

Finding that the termination was not motivated by bad faith, the Board denied the breach of contract claim. Because the contractor failed to show any incurred costs, and finding the claim "misguided in several ways," (27) the Board also denied the claim for termination settlement charges.

Lieutenant Colonel Michael L. Norris

(1) Int'l Data Prods. Corp. v. United States, 64 Fed. Cl. 642 (2005).

(2) 492 F.3d 1317 (Fed. Cir. 2007).

(3) 15 U.S.C.S. [section] 637(a) (LexisNexis 2008).

(4) Int'l Data Prods., 492 F.3d at 1321. The Small Business Act required the government to terminate the contract under those circumstances:
 Subject to the provisions of subparagraph (B), a contract
 (including options) awarded pursuant to this subsection shall be
 performed by the concern that initially received such contract.
 Notwithstanding the provisions of the preceding sentence, if the
 owner or owners upon whom eligibility was based relinquish
 ownership or control of such concern, or enter into any agreement
 to relinquish such ownership or control, such contract or option
 shall be terminated for the convenience of the Government, except
 that no repurchase costs or other damages may be assessed against
 such concerns due solely to the provisions of this subparagraph.

15 U.S.C.S. [section] 637(a)(21)(A).

(5) Int'l Data Prods., 492 F.3d at 1321.

(6) Id.

(7) Id.

(8) Int'l Data Prods. Corp. v. United States, 70 Fed. Cl. 386, 393 (2006).

(9) Int'l Data Prods. Corp. v. United States, 64 Fed. Cl. 642, 647.

(10) Id. at 650 (citing 15 U.S.C. [section] 637(a)(21)(A)) (LexisNexis 20087).

(11) Id. at 651. The court explained:
 Congress weighed the inconvenience and expense of termination to
 the Government against the goals of the 8(a) program and concluded
 that the exceptions to termination should be made only when the
 agency's objectives would be "severely impaired." Congress
 determined that not every loss or inconvenience to the agency would
 prevent termination of the contract. It is not up to the Court or
 the contracting officer to strike a different balance from that set
 forth in the statute.


(12) Int'l Data Prods. 70 Fed. Cl. at 386.

(13) Id. at 399. In a footnote, the court also noted that even if the services had been provided pursuant to the contract, the cost of the services were included as part of the unit prices of the products purchased and already paid for by the government. The contractor argued that it still hadn't been "fully" compensated for the services because it had based its pricing on an expectation that all four of the contract's option periods would be exercised. The court rejected this argument, noting that the government had no obligation to exercise any options, and if the warranty services had been priced "based upon the assumption that all four option periods would be exercised, it did so at its own risk." Id. at 399 n.11.

(14) Id. at 404.

(15) Int'l Data Prods. Corp. v. United States, 492 F.3d 1317, 1320 (Fed Cir. 2007) (LEXIS 2008).

(16) Id. at 1322-23.

(17) Id. at 1323 (quoting U.S. GEN. SERVS. ADMIN. ET AL., FEDERAL ACQUISITION REG. pt. 49.603-1(b)(7)(v) [hereinafter FAR]).

(18) Id. While not specifically noted by the court, the statute that compelled termination in this case merely directed that the contract "shall be terminated for the convenience of the Government," giving no indication that the effect of termination under these circumstances would be different from any other termination for convenience. 15 U.S.C.S. [section] 637(a)(21)(A) (LexisNexis 2008). This point by itself seemingly supports the court's holding that the warranty obligations survive the termination for convenience.

(19) Int'l Data Prods., 492 F.3d at 1320.

(20) Id. at 1323-27. The contractor's theories of recovery included "expectation damages, warranty services under an express contract, warranty services under an implied in fact contract, warranty work under a theory of constructive change or equitable adjustment or cardinal change, and quantum meruit based on an implied in fact contract." Id. at 1323. Except for the theory of implied in fact contract, over which the COFC lacked jurisdiction, the Federal Circuit rejected each of these theories for essentially the same reasons as had the COFC.

(21) CBCA Nos. 415, 448, 07-2 BCA [paragraph] 33,619.

(22) Id. at 166,509. The claims for these amounts are as interesting as the contractor's conduct before termination, and included such things as anticipated overhead and profits during the base year, both unexercised option years, and two additional years that the contractor alleged would be granted to "favored contractors"; the wages that the contractor's president would allegedly have received over those five years; attorney fees; and an amount the contractor erroneously alleged to be the contract's guaranteed minimum for both the base year as well as for each of the contract's unexercised option years. Id.

(23) Id. at 166,511.

(24) Id.

(25) Id. at 166,511-12.

(26) Id. at 166,512.

(27) Id.
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Title Annotation:Contract and Fiscal Developments of 2007 - the Year in Review
Author:Norris, Michael L.
Publication:Army Lawyer
Date:Jan 1, 2008
Previous Article:Terminations for default.
Next Article:Government property.

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