The Court of Federal Claims issued a potentially very important decision in a Termination for Convenience case on April 2, 2013. In Tigerswan v. U.S., COFC 12-62C, Judge Firestone made a decision which could affect breach claims when the government acts in an illegal manner. With a number of potential terminations coming in the wake of sequestration, the nuances of this case may have a major impact.
The Contractor alleged two bases for its breach of contract claim:
1. The government had breached the implied duty of good faith and fair dealing in its T for C decision; and
2. The government abused its discretion in the T for C decision, or it never intended to honor its contract.
This is important because, generally, a Termination for Convenience leads only to recovery of costs incurred prior to the termination, plus reasonable G&A, overhead and profit. However, a breach of contract case, if proved, can lead to breach damages, i.e., anticipatory profit and consequential damages.
But this is true only if there is a
1. Termination in bad faith;
2. Abuse of discretion in deciding to terminate; or
3. The Government entered into a contract knowing it would not honor that contract.
Judge Firestone disposed of the first argument quickly, noting that, if the government has the right to terminate for convenience, then it may exercise that right without violating its duty to act in good faith, noting: “assertion of a legitimate contract right cannot be considered as violative of [the] duty of good faith and fair dealing.”
However, she importantly went on to decide that an improper termination for convenience claim can be supported by an abuse of discretion theory: “where the government has engaged in some form of improper self-dealing for its own benefit or to benefit another contractor”.
This leads to a reduced burden of proof for the contractor. In “bad faith” cases, the plaintiff/contractor needs “clear and convincing” evidence of the agency’s intent to injure the contractor. However, as Judge Firestone noted, a claim under the “abuse of discretion” standard can be made “in situations where [the agency] took action at the expense of the [contractor] without necessarily acting with animus toward the contractor”. Thus the burden on the contractor would be much easier than having to prove “specific animus” against the contractor, a much easier burden to meet, especially in light of the very limited “discovery” allowed in these cases.