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Can the Postal Service Terminate Your Contract to Obtain a Better Price?, National Star Route Mail Contractors Association Newsletter

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10.01.10

As mail volumes decline, and postal deficits mount, the Postal Service naturally seeks to reduce its costs. HCR contractors are all too familiar with contract changes and terminations resulting from Postal Service efforts to eliminate service redundancies and increase operational efficiency. But can the Postal Service terminate your contract just to obtain a better price?

Even a dog knows the difference between being accidentally stepped on and purposely kicked. Having your contract terminated by the Postal Service as part of its efforts to increase operational efficiencies is like being stepped on. You don't like it, but it's not personal -- there was no intention to harm you, it just worked out that way. But having your contract terminated because the Postal Service wants a better price -- that is an intentional kick to the gut. Does the law follow this same common sense principle? Read on.

HCR contracts typically contain either a "Termination with Notice" or "Termination for the Postal Service's Convenience" clause. Either clause allows the Postal Service to terminate the contract before the expiration of the contract term. And neither clause contains any explicit limitation on that right. The Termination with Notice provision is short and to the point:

"The contracting officer or the supplier, on 60 days written notice, may terminate this contract or the right to perform under it, in whole or in part, without cost to either party."

Since neither termination clause contains any limitation on its use, can the Postal Service terminate your contract for the sole purpose of taking advantage of a better price?

The Sigal Case

While this question has not been definitively answered in the Postal Service context, it has been answered pertaining to other federal agency contracts. In a relatively recent case, Sigal Construction Co., CBCA No. 508, 10-1 BCA ΒΆ 34,442 (May 13, 2010), the Civilian Board of Contract Appeals held that a government agency may not terminate a contract for convenience simply to get a better price.

The Sigal case involved a contract to renovate an old office building. Offerors submitted unit prices for various types of work, such as "repair and refinish wood paneling." For each line item of work, offerors proposed a price per square foot. For purposes of evaluating these unit prices, the solicitation set out an estimate of the amount of square feet that would be ordered for each item. Sigal won award of the contract.

During the course of the contract, there was much more work to do than had been estimated in the solicitation. And Sigal, in turn, performed more work than had been estimated. Even so, there was still more work to do. Instead of giving all of that additional work to Sigal, however, the agency found another company who agreed to perform the additional work at a lower rate. The agency suspended Sigal's work on those line items and gave the additional work to the lower cost contractor.

Sigal brought a claim to recover the profits it (and its subcontractor) would have earned if it had performed all of the additional work. The agency denied the claim, contending that any work in excess of the amount estimated in the contract was extra-contractual and could be awarded to another contractor. The Civilian Board of Contract Appeals -- a sister tribunal to the Postal Service Board of Contract Appeals -- disagreed. The estimated quantities in the solicitation did not limit the amount of work for which Sigal was responsible. (This holding is analogous to the position of CDS contractors who claim a right of first refusal to perform any extra trips on their route.)

The Board found that by precluding Sigal from performing all of the additional work, the agency had constructively terminated for convenience that portion of the contract. But in this context, the termination amounted to a breach of contract:

"One of the few limitations on the Government's right to terminate for convenience is that the Government may not terminate simply to get a better price for performing needed work."

Thus, the Board held that the agency's action constituted a breach of contract, entitling Sigal and its subcontractor to recover the profit it would have earned on the deleted work.

While government agencies generally have broad authority to deduct or eliminate work from a contract, this authority is not without limits. The Termination for Convenience clause does not permit the government to dishonor with impunity its contractual obligations. A termination for convenience for the purpose of acquiring a better bargain from another source thus constitutes an abuse of discretion and breach of contract.

Termination with Notice

What about terminating a contract under the Termination with Notice provision to obtain a better price? That provision, it could be argued, is not a convenience termination clause, and thus should not be subject to the same restrictions. Indeed, that clause allows either party to exercise it.

While I am not aware of any case that specifically addresses this question, in your humble author's opinion, such action would produce the same result as in Sigal. Implied in every contract is the obligation of good faith and fair dealing. This obligation has many facets and applications. Part of that obligation is "the implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Solar Turbines, Inc. v. United States, 23 Cl. Ct. 142, 146 (1991). Terminating a contract with notice for the purpose of getting a better price would destroy the other party's right to receive the fruits of the contract.

Similarly, even where the express terms of a contract allow one party sole discretion to take an action under the contract, that power is "still limited by an obligation not to wield such authority without reasonable justification." Temple-Inland, Inc. v. United States, 59 Fed. Cl. 550, 562 (2004). Thus, if the Postal Service were to exercise the Termination with Notice provision solely to obtain a better price for the same or similar service, that would be an abuse of discretion and breach of contract.

This obligation of good faith and fair dealing runs both ways, and thus could also restrict an HCR contractor's exercise of the Termination with Notice provision. For example, assume that an HCR contractor has an opportunity to get a much better price for using the same equipment to perform the same service -- either for the Postal Service or another customer. If the HCR contractor were to exercise the Termination with Notice clause solely for the purpose of using the same equipment to perform the same work at a better price, that too could be a breach a contract.

Conclusion

The termination clauses in HCR contracts may not be as all empowering as one might think at first glance. When the termination clauses are read in conjunction with the implied covenant of good faith and fair dealing, it could well be an abuse of discretion for a contracting officer to exercise the clause to obtain a better price with another contractor. In such case, if successful, the contractor would be entitled to recover not only its termination costs, but also the profits it would have earned if the contract had not been terminated.

David P. Hendel
Partner
Husch Blackwell LLP
750 17th Street, NW, Suite 1000
Washington, D.C. 20006-4607
Direct Phone: 202.378.2356
Direct Fax: 202.378.2319
E-Mail: david.hendel huschblackwell.com
Website: www.huschblackwell.com