Terminations for Default/Terminations for Cause
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Washington, DC 20015
A Termination for Default is the complete or partial termination of a contract because of a contractor’s actual or anticipated failure to meet its contractual obligations. A Termination for Cause is the term used for a Termination for Default in a FAR PT 12 contract for the acquisition of commercial items.
The significance of a Termination for Default is stated as follows in Paul J. Seidman and Robert D. Banfield, “How to Avoid and Overturn Terminations for Default,” Briefing Papers No. 98-12 at 1-2, November 1998:
A termination of a contract for default can have disastrous consequences for the contractor. There is a sudden loss of work and its contribution to overhead. An opportunity to make a profit is lost. The contractor also faces the prospect of being forced to return progress payments, of being liable to the Government for any excess costs of reprocurement, and of having to resort to litigation to resolve the dispute. To make matters even worse, having a default termination on its record may limit the contractor’s ability to obtain additional Government work.
The standard “Default” clauses used in fixed-price Government contracts generally give the Government the right to terminate a contract for default if a contractor fails to (a) deliver supplies or to perform the services or work within the time specified in the contract, (b) make progress so as to endanger contract performance or to prosecute the work with the diligence that will ensure its completion, or (c) perform and other provisions of the contract. The clauses would appear to permit the Government to terminate based on any failure by the contractor to strictly comply with the contract. However, court and agency board of contract appeals decisions have limited the Government’s right to terminate by requiring the Contracting Officer to exercise sound discretion and by recognizing various contractor defenses.
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When the Government terminates a contract for default, the Government may be entitled to recover from you, the contractor, unliquidated progress payments, the excess costs of reprocuring the same or similar items, services, or work, and any other damages resulting from your failure to perform. The excess costs of reprocurement are the difference between the price of the affected deliverables in the defaulted contract and what the Government pays to reprocure the supplies or services to complete the work.
Even if you are ultimately able through litigation to overturn the Government’s decision to terminate your contract for default, you still may incur substantial losses. Litigation is costly and disruptive. Time of key personnel is diverted from income-producing work to litigation-related tasks such as responding to interrogatories and requests for production of documents, depositions, and meetings with lawyers. In addition, a default termination results in poor past performance evaluations and negative responsibility determinations for your company that can seriously impede your ability to obtain other Government work.
Seidman & Associates has handled cases where an agency threatened a termination for default because of a failure to meet the original delivery schedule. After the agency threatening to terminate for default was shown that delays were due to defective specifications the agency terminated the contract for convenience and the contractor recovered termination costs.
For more information about preventing and responding to Terminations for Default, see Paul J. Seidman and Robert D. Banfield, “How to Avoid and Overturn Terminations for Default,” Briefing Papers No 98-12, November 1998.
For more information on Terminations for Convenience, see the following publications from Seidman & Associates, P.C.:
- Paul J. Seidman, David J. Seidman; “Maximizing Termination for Convenience Settlements/ Edition II – Part I,” Briefing Papers No. 08-3, February 2008.
- Paul J. Seidman, David J. Seidman; “Maximizing Termination for Convenience Settlements/ Edition II – Part II,” Briefing Papers No. 08-5, April 2008.
- Paul J. Seidman and Robert Banfield, “Preparing Termination for Convenience Settlement Proposals for Fixed-Price Contracts,” Briefing Papers No. 97-11, October 1997.
- Paul J. Seidman, “TERMINATION FOR CONVENIENCE OF FAR PART 12 COMMERCIAL ITEM CONTRACTS: Is Fair Compensation Required?”, 24 Nash & Cibinic Report ¶ 37, August 2010.
- Professor Ralph C. Nash and Paul J. Seidman, “Postscript: Termination for Convenience of FAR PT 12 Commercial Item Contracts”, 25 Nash & Cibinic Report ¶ 37, August 2011.
- Paul J. Seidman, “Postscript II: Termination for Convenience of FAR PT 12 Commercial Item Contracts”, 29 Nash & Cibinic Report ¶ , April, 2015.
The aforementioned statement of general principles applicable to terminations for default and terminations for cause is not intended as legal advice. In order to obtain legal advice applicable to specific facts a consultation is required.