12.2 Termination for Convenience

• Library: Virginia Construction Law Deskbook (Virginia CLE) (2019 Ed.)

12.2 TERMINATION FOR CONVENIENCE

12.201 Considerations. Termination for convenience is a remedy available to contracting parties to end a contract where performance under the contract is no longer desired, required, or deemed beneficial to the terminating party. Terminations for convenience have no basis in Virginia common law—it is unavailable to a party without a specific provision in a contract that allows it. Almost every state or federal government construction contract, and most private construction contracts, contain some type of termination for convenience (T for C) clause.

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The T for C clause typically gives a party (usually the party that is paying to have work performed) the right to end the performance of a contract. Usually, the right to terminate under a T for C clause is "for any reason." While the majority of standard form contracts contain a T for C clause, the single largest body of law that interprets such clauses is federal procurement law. For this reason, the following discussion usually addresses T for C provisions as they are addressed at the federal procurement level.

12.202 Federal Government Terminations for Convenience.

A. The Standard Federal Acquisition Regulation (FAR) T for C Clause. With respect to the federal government, the standard T for C clause, described in FAR 52.249-2, authorizes the government to terminate the contract "in whole or, from time to time, in part if the contracting officer (CO) determines that a termination is in the Government's interest."

A contract is terminated for convenience by the government issuing a written notice of termination. ⁴² Thereafter, the contractor is required to perform a number of tasks, including:

1.	Stop work immediately on the terminated portion of the contract;
2.	Terminate all subcontracts related to the terminated portion of the prime contract;
3.	Advise the government of any special circumstances precluding stoppage of work;
4.	Perform the continued portion of the contract if the termination is partial;
5.	Take any action necessary to protect property in the contractor's possession in which the government has an interest;
6.	Notify the government in writing of any legal proceedings growing out of any subcontract;

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7.	Settle any subcontractor claims arising out of the termination; and
8.	Dispose of termination inventory as directed by the government. 43

The CO will usually be required to designate a termination contracting officer (TCO) to handle all termination issues, who will report to the CO with a final recommendation. There are no formal requirements for the transfer of terminated contracts from a CO to a TCO in the FAR. The TCO can be the CO or a designated representative. In practice, the TCO is usually the highest ranking on-site representative for the government.

Under the standard T for C clause, the contractor is entitled to recover certain costs, including (i) its performance costs incurred up to the date of termination; (ii) costs of settlement with subcontractors; (iii) termination settlement expenses—typically the costs of preparing the termination claim proposal to the government; and (iv) profit or fees for work performed. ⁴⁴ These amounts are requested in a termination "settlement proposal" that must be submitted by the contractor within one year of the termination's effective date. ⁴⁵

If the contractor and the government are unable to come to an agreement on the costs, the CO may unilaterally determine what is owed the contractor. ⁴⁶ That may include a determination of what payments are due the contractor or what amount the contractor owes the government if it has been overpaid.

B. Duty of Good Faith and Fair Dealing. Although the T for C clause appears to allow the government to terminate a contract for any reason, there are some limits. A contract that allows one party to terminate for any reason is usually treated as an illusory contract. ⁴⁷ Courts that have

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addressed this issue usually infer in the T for C clause that the government has a duty of good faith and fair dealing not to abuse the clause. ⁴⁸

For example, when the government awards a project without the intention of honoring the contract and subsequently terminates the contract under the T for C clause, courts and boards have found that the government has breached the contract. ⁴⁹ As a result, the contractor may be entitled to recover breach of contract damages (including anticipated profits) and may not be limited to the remedies allowed by the T for C clause, which specifically precludes award of anticipatory profits. ⁵⁰

C. General Principles Surrounding Termination Settlements. FAR 49.201 ⁵¹ provides general guidance on the negotiation of termination settlement proposals. It states:

a.

A settlement should compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract, including a reasonable allowance for profit. Fair compensation is a matter of judgment and cannot be measured exactly. In a given case, various methods may be equally appropriate for arriving at fair compensation. The use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.

b.

The primary objective is to negotiate a settlement by agreement. The parties may agree upon a total amount to be paid the contractor without agreeing on or segregating the particular elements of costs or profit comprising this amount.

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c. Cost and accounting data may provide guides, but are not rigid measures, for ascertaining fair compensation. In appropriate cases, costs may be estimated, differences compromised, and doubtful questions settled by agreement. Other types of data, criteria, or standards may furnish equally reliable guides to fair compensation. The amount of recordkeeping, reporting, and accounting related to the settlement of terminated contracts should be kept to a minimum compatible with the reasonable protection of the public interest.

While FAR, in Part 49, seems to "giveth" in terms of providing wide discretion to the government in arriving at a settlement of a T for C, it then "taketh away" by requiring, in FAR 49.107, that any settlement proposal over $100,000 be audited. The auditor may "make any further accounting reviews it considers appropriate." ⁵² While the ultimate audit report is "advisory only," great weight is given to the audit for purposes of reaching a final settlement. ⁵³

D. The Architect/Engineer T for C Clause and Its Impact on Design-Build Projects. ...