Public-private Partnerships and Termination for Convenience Clauses: Time for a Mandate
| Publication year | 2013 |
Public-Private Partnerships and Termination for Convenience Clauses: Time for a Mandate
Julie A. Roin
For better or worse, and for richer or poorer, the line between government and private provision of goods and services is disappearing. It was never a bright line; governments have always turned to private purveyors of goods and services to acquire many of the tools required for the provision of public services.1 The sanitation workers picking up garbage may have been employed directly by a city, but they picked up the trash in trucks built by private companies. Beneath those trucks are public roads, which have almost always been built entirely by private construction companies, not government employees.2 Increasingly, however, governments at all levels are contracting out responsibility for the services themselves.3 Private enterprises now build and staff the garbage trucks.4 They build and operate roadways; they staff manual and electronic toll collection systems;5 and they plow and maintain road surfaces. Private enterprises also own and run "public" schools6 and
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prisons.7 On occasion, the government retains its role as financier, collecting taxes or fees with which to defray the costs of hiring the private purveyors of goods or services.8 Often, however, the government's role is limited to picking the private enterprise which will provide a good or service and negotiating the fees that the enterprise can charge for its services; the enterprise then collects the appropriate fee directly from residents and other users.9 In theory, the incentive provided by the profit motive and the absence of legal restrictions, such as civil service protections, allow private entrepreneurs to provide better quality services at lower cost than their public counterparts.10
But what if things go wrong? At times, the public authorities or their constituents are dissatisfied with the performance of the private enterprise and wish to switch to another private purveyor, to return to public provision, or to eliminate the service entirely. Unless the private enterprise's lack of performance rises to the level of a breach of its contractual obligations, a government must buy its way out of the contract. And under standard contract law, such buyouts do not come cheaply. Private parties insist on receiving payments comparable to the compensation due following the government's breach of its obligation to continue the contract. Expectation damages are the norm; this measure of damages requires that the nonbreaching party be placed in the position that it would have been in had the contract been completed in accordance with its terms.11 In the normal course of events, the nonbreaching party is entitled to the discounted present value of its projected future profits. The extensive term of many of these privatization arrangements not only causes the amount of damages to balloon but also ensures that the calculation of the amount owed will be contentious and expensive to calculate.12
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There is an alternative. It is to follow the pattern set by federal procurement law and mandate the inclusion of termination for convenience clauses in all privatization contracts. Including such clauses would diminish a government's damage obligation in the event it desires to cancel a contract. Instead of paying expectation damages, the government would pay something closer to out-of-pocket reliance damages.13 Specifically, under a termination for convenience clause, the government need only pay "the price on work completed, actual costs incurred plus a reasonable allowance for profit on partially completed work, and nothing whatsoever on work not yet begun (thus, no lost profits on such work)."14
As other commentators have noted, one-sided termination privileges are not an unalloyed blessing.15 This Article, however, argues that in the context of privatization agreements, the costs of including a termination for convenience clause are far outweighed by the benefits. Indeed, in this Article I urge that such clauses be both mandatory and nonwaivable.
Part I describes the history and current use of termination for convenience clauses. Part II argues for the use of these clauses in the privatization of (previously) government services. Part III concludes.
Contractual parties have always had the right to terminate their contracts without cause. Ordinarily, such terminations are labeled as "breaches" and require the terminating party to pay expectation damages. Termination for convenience clauses, by contrast, give the holder of the right the ability to terminate the contract without cause while limiting the other party's recovery to "costs incurred, profit on work done, and costs of preparing the termination settlement proposal. Recovery of anticipated profit is precluded."16 They confer a "major contract right" on the holder "with no commensurate advantage" to the other side—though we should expect prices to reflect the agreement and the legal rule.17
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These clauses were initially developed "as a means to end the massive procurement efforts that accompanied major wars"18 in the face of "objections to paying a contractor profits on unperformed work"19 following the cessation of hostilities. Such clauses first appeared at the time of the Civil War, when army regulations required that "contracts for subsistence stores 'shall expressly provide for their termination at such time as the Commissary-General may direct.'"20 The concept reappeared during World War I when Congress passed statutes granting the government authority to settle claims for damages from the termination of defense contracts at the end of that war.21 These statutes were interpreted as disallowing settlements containing awards of "prospective or possible profits."22 A combination of statutory law23 and regulatory provisions24 prevented the award of prospective profits on contracts entered into in connection with the World War II war effort.
Termination for convenience clauses spread to a wider variety of federal government contracts after World War II. By 1950, the Armed Services Procurement Regulations required all Department of Defense contracts in excess of $1,000 to include such clauses.25 The first edition of the Federal Procurement Regulations, published in 1964, contained an "optional" termination for convenience clause to be used "'whenever an agency considered it necessary or desirable . . . .'"26 In June 1967, those regulations were amended to make the use of such clauses mandatory in most federal
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(including non-defense) procurement and construction contracts.27 Current procurement regulations continue to require the use of a termination for convenience clause in virtually all federal procurement contracts.28
The federal government does not have an unfettered right to terminate a contract under a termination for convenience clause. If a termination is made in "bad faith" or the contracting agency "abuses its discretion in its decision to terminate the contract,"29 the termination is treated as a breach entitling the nonbreaching party to a recovery of expectation damages.30 Contractors must present clear and convincing evidence of bad faith to prevail,31 however, and few plaintiffs have succeeded.32
Although a finding of bad faith may be predicated on the existence of animus, or an "'intent to injure' the contractor,"33 animus is not required. Bad faith encompasses situations in which the government enters into a contract without intending to honor it, regardless of motive.34 In Torncello v. United States, for example, the government entered into a requirements contract with the plaintiff while "knowing that it [could] obtain an item the contract cover[ed] for less than the contract price and intend[ed] to do so."35 Essentially, the court found that the government never intended to purchase any items under the contract. The Court of Claims held that the government could not use the contract's termination for convenience clause to reduce the
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damages owed to the plaintiff in that case.36 More recently, the Court of Federal Claims refused to grant the government's motion for judgment on the pleadings in TigerSwan, Inc. v. United States37 when the plaintiff alleged that contracts terminated by the Department of Defense had been awarded after the Department had awarded sole-source contracts for the same work to a competitor.38 Again, the basis of the claim was that the government never intended to live up to its obligations under the contracts.39
A plurality of the Torncello court40 wanted to go further, mandating that "the termination for convenience clause . . . [be read] to require some kind of change from the circumstances of the bargain or in the expectations of the parties,"41 so that terminations could not be "based on knowledge of a lower cost when that knowledge preceded award of the contract."42 The plurality also intimated that post-contract changes in the price situation might not be enough to trigger the termination for convenience clause.43 However, the remaining three judges wrote opinions that were considerably narrower in scope, and therefore of precedential value.44 Chief Judge Friedman's brief concurrence did not mention the "change in circumstances" test.45 Judge Davis's concurrence criticized the plurality's opinion as "unnecessarily broad . . . and, on some points, incorrect,"46 noting in particular that it was "wrong and a mistake to intimate, even provisionally or gratuitously, that the convenience termination clause cannot be utilized when a better price appears after the contract is made."47
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Subsequent cases seem to have rejected the broader implications of the Torncello plurality opinion.48 In Krygoski Construction Company, Inc. v. United States, for...
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