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Recovering Costs in a Convenience Termination, National Star Route Mail Contractors Association Newsletter

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1.01.10

Most HCR contractors are probably familiar with the recovery of an "indemnity" payment for terminated contracts. Under this ancient and honorable method, the amount the contractor is entitled to recover is a fixed sum. The fixed sum – i.e., indemnity – is calculated based upon when, during its ill-fated life, the contract was terminated. The contractor is entitled to one-third the annual rate if it is terminated during the first two years, one-sixth the annual rate if terminated during the third year, or one-twelfth the annual rate if terminated during the fourth year. The annual rate is not necessarily the amount stated in the contract, but may be the total payments received during the 12 months prior to the termination.

Over the last several years, the Postal Service has abandoned the indemnity method, though it remains in place for most Contract Delivery Service (CDS) contracts. In its place, the Postal Service typically employs either the "Termination with Notice" or "Termination for the Postal Service's Convenience " clause.

Termination with Notice

The Termination with Notice clause allows either party to terminate the contract upon 60 days notice, without cost to either party. In certain circumstances, however, it would be an abuse of discretion to invoke this clause. That's because the implied obligation of good faith and fair dealing, which is in every contract, contains an implied covenant that neither party will do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. This implied obligation thus precludes a party from exercising its discretion in a way that deprives the other party of the fruits of the contract or thwarts the other party’s reasonable expectations. Thus, in the right set of circumstances, it could be an abuse of discretion for the Postal Service to exercise this clause.

Assuming the Postal Service does properly exercise this clause, the contractor is entitled to the full 60 days notice. If the Postal Service provides less than 60 days notice, the contractor is entitled to a pro rata amount for the shortage. Thus, if the Postal Service provided only 20 days notice, the contractor would be entitled to recover 40 days of contract payments after the last day of performance. While the contractor is entitled to 60 days notice, the contractor can waive this requirement. For example, the contractor might agree to waive the 60 days notice in return for award of a new contract that takes the place of the terminated contract.

Termination for Convenience

Alternatively, the Postal Service employs the Termination for the Postal Service's Convenience clause. This is a shortened version of the Termination for Convenience of Default clause, which is used in other types of Postal Service contracts. The HCR version of this clause allows the Postal Service to terminate an HCR contract for its convenience, but provides that the contractor may recover the costs it incurred "by reason of the termination." The clause does not specify what costs are recoverable. By the same token, the only stated restriction on recovery is that the contractor "will not be paid for any work performed or costs incurred which reasonably could have been avoided." Similarly, the clause does not impose any undue burdens on the contactor in establishing what its termination costs are. Indeed, the clause notes that the contractor "will not be required to comply with the cost accounting standards and principles" in submitting its termination claim.

The Colvin Case

An inkling of what type of costs are recoverable was provided in a recent decision issued by the Postal Service Board of Contract Appeals (PSBCA). In Elton T. Colvin Jr., PSBCA Nos. 6220 and 6241, November 18, 2009, the Postal Service terminated for convenience an HCR contract to transport mail between two cities in Mississippi. Colvin had performed the service for 32 years and was in the middle of his latest renewal when the Postal Service's consolidation of mail processing operations made the route redundant.

The termination notice stated that Colvin's contract was being terminated for convenience and warned him that he was "not entitled to indemnity." Colvin challenged the Postal Service's right to terminate the contract and in addition asked for 180 days of compensation. Colvin noted that the termination left him with a truck he could not use and had been unable to sell, as well as the cost of insuring the truck. Because Colvin had not specified what those costs were, the contracting officer denied his termination claim. The case found its way to the PSBCA.

At the PSBCA, Colvin argued that the Postal Service improperly terminated his contract for convenience. Colvin testified that he had been told that the termination for convenience clause could only be used if the service was no longer needed, not just redundant to other service. But the Board rejected this contention because it was too nonspecific – Colvin failed to identify the official who allegedly made that statement, when it was made, and under what circumstances. The Board also rejected his contention that the termination decision was made in bad faith.

But the PSBCA upheld Colvin's right to recover termination costs. The Board specifically held that Colvin was entitled to recover "the unrecovered costs of the truck used to perform the contract and the insurance costs for that truck." The Board found that Colvin had made reasonable efforts to sell the truck, demonstrating that the continuing costs of the truck were unavoidable. He was thus entitled to the unrecovered portion of his truck costs, including insurance costs. The case was remanded back to the parties to determine what Colvin's termination costs were.

Other Recoverable Costs

The Board does not address what other costs would be recoverable, so let me suggest some that might apply to a terminated HCR contractor. With respect to truck-related costs, the contractor could recover for no longer needed spare parts and tires, or recent unamortized maintenance that had been performed on the truck. Perhaps there are also location tracking devices and related software costs. In addition, there may be unamortized licensing, registration, and taxes related to trucks that are no longer needed.

Beyond truck-related costs, there may be recoverable personnel costs. For example, driver training and start-up costs should be amortized over the entire contemplated length of the contract, not just the shortened performance period. The contractor may also be justified in keeping his drivers and other employees on the payroll for a reasonable period of time until they can be assigned new work or it is clear they are no longer necessary. Contractors can also recover severance payments made under an established severance policy to employees who are no longer needed after the termination.

Contractors can also recover costs related to facilities that are now not needed or under-utilized. Similarly, there could be other equipment costs -- such as computers, yard equipment, or driver vans -- that are no longer needed or under-utilized.

Nearest and dearest to my heart, the contractor would be entitled to recover the costs of professional fees incurred in advising what costs are recoverable and in preparing the termination claim. This includes reasonably incurred attorney and accountant fees. A contractor would also be entitled to recover for the time its own personnel spends on closing out the contract and preparing the termination claim. To do this, the contractor would need to track and document the time incurred in such tasks.

Note that your entire contract need not be terminated to recover termination costs. The elimination of even one route under your contract would be a partial termination for convenience, under which the same recovery rules would apply.

At the end of the day, a terminated contractor may find itself entitled to a larger financial recovery under the Termination for the Postal Service's Convenience clause than under the prior indemnity method. At minimum, under the new clause, the contractor is entitled to recover all termination-related costs that it was unable to avoid – something that cannot be said for the indemnity method.

Don't Delay

A final word of warning: a termination claim must be submitted within 180 days after the effective date of the termination unless an extension had been granted in writing. If you wish to recover your termination costs, do not miss this deadline.

Our Postal Service Contracting practice information is available through the Postal Service Contracting page.

David P. Hendel
Husch Blackwell Sanders LLP
750 17th Street, N.W., Suite 1000
Washington, D.C. 20006

202.378.2356
fax: 202.378.2319
david.hendel huschblackwell.com