CONTRACT TERMINATION

Contract Termination

Contract Termination

Introduction

FAR 49.401 defines termination for default (T4D) as generally the exercise of the Government's contractual right to completely or partially terminate a contract because of the contractor's actual or anticipated failure to perform (Bastianelli et al 2003). The clause, even when agreed to liquidated damages are to be assured, is not intended to be used for punitive purposes; it is included in the contract to protect the Government from loss. Indeed, the Government has an obligation to mitigate damages to the defaulted contractor. This paper explores how contracts for default termination are dealt with by the law. For the purpose of understanding, the paper takes a case study of 'Applied', whose contract is being terminated by the government on grounds of default.

Body: Discussion and Analysis

Termination for Default clauses (FAR 52.248-8); provide the government with the right to terminate a contract for cause. The three general bases for default termination are:

1.Failure to deliver or perform on time;

2.Failure to make progress which endangers performance; or

3.Failure to perform any other material provision of the contract.

The Situation Facing Applied

To comply with the Army's urgent need for air conditioning units, Applied agreed to a production schedule that required the company to perform considerable work on production units prior to approval of First Article Tests (FAT). The revised schedule specified the FAT report was due on 22 May and delivery of the first 300 production units was due on 8 July. On 11 June Applied advised it was ready to test the First Article. The Government could not witness the tests until 18 June at which time it required Applied to rerun other tests that Applied objected to as unnecessary. In execution of the contract, the following events took place:

On 19 June the Government sent Applied a Show Cause and Cure Notice, citing failure to submit the FAT report and giving Applied ten days to respond.

On 21 June Applied advised the Government that the FAT report would be submitted on 1 July, with the first 100 production units to be delivered on 8 July and the next 200 by 31 July.

On 24 June the Government's industrial specialist following an inspection of Applied's plant, reported that it could meet its proposed delivery schedule.

On 12 July the Government terminated the contract for default, citing failure to deliver timely the FAT Report and the production units.

Available Options for Applied

Wrongful termination is itself a breach of contract. It relieves the contractor of liability for any preceding breaches and discharges the surety of any obligation under its performance bond. The government or owner bears the burden of proof with respect to whether the termination for default was justified, regardless of the forum and regardless of whose “claim" is being asserted. A default termination is a drastic sanction that should be “imposed (or sustained) only for good grounds and on solid evidence. Since Applied failed to meet its FAT compliance at the first instant, the subsequent waiver by the government (FAT by 28 June) does not hold ...