847 F.2d 1549 (Fed. Cir. 1988), 86-1292, Maxima Corp. v. United States

Docket Nº:86-1292.
Citation:847 F.2d 1549
Party Name:MAXIMA CORPORATION, Appellant, v. The UNITED STATES, Appellee.
Case Date:May 24, 1988
Court:United States Courts of Appeals, Court of Appeals for the Federal Circuit
 
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Page 1549

847 F.2d 1549 (Fed. Cir. 1988)

MAXIMA CORPORATION, Appellant,

v.

The UNITED STATES, Appellee.

No. 86-1292.

United States Court of Appeals, Federal Circuit

May 24, 1988

Page 1550

Joe R. Reeder, Patton, Boggs & Blow, Washington, D.C., argued for appellant. With him on the brief were Richard M. Stolbach and Dean M. Dilley.

Thomas W. Petersen, Commercial Litigation Branch, Dept. of Justice, Washington, D.C., argued for appellee. With him on the brief were Richard K. Willard, Asst. Atty. Gen., David M. Cohen, Director, and Stephen J. McHale. Also on the brief were Francis S. Blake, Gen. Counsel, Thomas A. Darner, Asst. Gen. Counsel, Richard D. Feldman and Anthony G. Beyer, E.P.A., of counsel.

Before SMITH, NIES and NEWMAN, Circuit Judges.

PAULINE NEWMAN, Circuit Judge.

Maxima Corporation ("Maxima") appeals the decision of the Board of Contract Appeals of the Department of the Interior (the "Board") pertaining to Contract No. 68-01-6466 between Maxima and the Environmental Protection Agency (the "Agency"). 1 On cross motions for summary judgment the Board held that the Agency had properly invoked constructive termination for convenience, a year after completion of performance of the contract and final payment, and ordered Maxima to refund certain payment that had been made to it in accordance with the contract. We reverse.

Background

Maxima, through the Small Business Administration, entered into this contract to provide typing, photocopying, editing, and related services to the Agency. The contract set annual "Production Requirements ... Guaranteed Minimum", specifying an

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annual minimum number of hours and pages for various categories of service. Maxima agreed to perform a minimum amount of work, as requested, up to a stated maximum, and the Agency agreed to pay Maxima the annual "Guaranteed Minimum" sum of $420,534 2 (plus an equipment sum not at issue). Maxima was required to present monthly reports of the work performed. The contract term was from October 1, 1981 to September 30, 1982, with two one-year options to renew by the Agency.

Before entry into the contract Maxima had proposed a different arrangement, whereby the Agency would compensate Maxima on a cost plus fixed fee formula that did not include a minimum obligation on either side. The Agency rejected Maxima's proposal, and insisted on the Agency's terms whereby Maxima would stand ready to perform at the guaranteed minimum level. In consideration of the Agency's increase in its guaranteed minimum payment, Maxima substantially reduced its hourly and page charges from those in the original proposal. 3

Throughout the term of the contract the services ordered by the Agency fell short of the rate represented by the guaranteed annual minimum. The Board found that "[i]n several of the reports, Maxima noted a concern that the services were being underutilized on the contract." Maxima, 86-2 BCA at 95,285. It is undisputed that the matter was raised by Maxima and that the government declined to change the contract terms. The Agency acknowledged in its termination decision that "[n]o action was taken by EPA in response to Maxima's request for contract adjustment until the last month of the contract."

Nearing completion of the contract year and in connection with negotiations for future arrangements, the parties agreed that Maxima would provide to the Agency an additional (thirteenth) month of services "without additional consideration" beyond the Total Guaranteed Minimum for the twelve months then ending, along with entry into a new contract for the subsequent year, now on a cost plus fixed fee formula. The unused contract minimum was billed to the Agency on October 31, 1982, upon completion of the thirteenth month's work, and was paid in December 1982.

The contract contained the "Termination for convenience of the government" clause that is usual in government contracts. The Agency did not invoke this clause during the term of the contract, nor for a year thereafter. On November 16, 1983 the Agency advised Maxima that the contract was constructively terminated for convenience on October 31, 1982, based on the Agency's failure to have ordered the contractual minimum amount of services during the contract term. On appeal to the Board, the Agency was held liable only for the services actually ordered and received, at the rate set in the contract for the various services. Maxima was ordered to refund the balance of the contractual minimum that the Agency had paid the previous December.

The Issue

The issue on appeal, as it was before the Board, is "the central question of law, the question of whether the termination clause of the contract can be asserted retroactively where guaranteed minimum quantities have not been ordered." Maxima, 86-2 BCA at 95,287. Our review of this question of law is governed by 41 U.S.C. Sec. 609(b).

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Constructive Termination for Convenience

In its myriad dealings in furtherance of the business of government, the United States enters into contractual obligations by constitutional authority, and through the laws of contract and the rules of commerce the government benefits from access to and interaction with the vast private sector of the nation. "When the United States, with constitutional authority, makes contracts, it has rights and incurs responsibilities similar to those of individuals who are parties to such instruments." Perry v. United States, 294 U.S. 330, 352, 55 S.Ct. 432, 435, 79 L.Ed. 912 (1935). See also Lynch v. United States, 292 U.S. 571, 580, 54 S.Ct. 840, 844, 78 L.Ed. 1434 (1934) ("Punctilious fulfillment of contractual obligations is essential to the maintenance of the credit of public as well as private debtors"); Alvin, Ltd. v. United States Postal Service, 816 F.2d 1562, 1564 (Fed.Cir.1987) ("The government enters into contracts as does a private person, and its contracts are governed by the common law").

One of the few exceptions to the common law requisite mutuality of contract is that here at issue. The "termination for convenience" concept, which serves only the government, arose from the unpredictable nature of governmental wartime procurement. The right to terminate a contract when there has been no fault or breach by the non-governmental party, that is, for the "convenience" of the government, appeared as a legal concept after the Civil War, to facilitate putting a speedy end to war production. See the historical review in Torncello v. United States, 681 F.2d 756, 764-66, 231 Ct.Cl. 20 (1982).

After World War II termination for convenience came to be applied to peacetime non-military procurement, in order to achieve the same fundamental purpose: to reduce governmental liability for breach of contract, by allocating to the contractor a share of the risk of unexpected change in circumstances. Id. at 765-66. Thus the contractor, instead of receiving compensation for governmental breach of contract based on classical measures of damages, is limited to recovery of "costs incurred, profit on work done and the costs of preparing the termination settlement proposal. Recovery of anticipated profit is precluded." R. Nash & J. Cibinic, Federal Procurement Law 1104 (3d ed.1980).

The extensive jurisprudence generated by this concept illustrates its fairly uniform modern application. The courts have held that a governmental breach of contract may be construed as a termination for the convenience of the government when changed circumstances justify the reallocation of risk to the contractor. When such circumstances exist, the contract may be terminated by the government without incurring the consequences of breach:

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The rule we have followed is that, where the contract embodies a convenience-termination provision as this one would, a Government directive to end performance of the work will not be considered a breach but rather a convenience termination--if it could lawfully come under that clause--even though the contracting officer wrongly calls it a cancellation, mistakenly deems the contract illegal, or erroneously thinks that he can terminate the work on some other ground.

G.C. Casebolt Co. v. United States, 421 F.2d 710, 712, 190 Ct.Cl. 783 (1970). As illustrated in Casebolt, the concept of constructive termination for convenience enables the government's actual breach of contract to be retroactively justified. Such justification may be appropriate

in situations in which the government has stopped or curtailed a contractor's performance for reasons that turn out to be questionable or invalid. Constructively, the clause can justify the government's actions, avoid breach and limit liability.

Torncello, 681 F.2d at 759 (citing College Point Boat Corp. v. United States, 267 U.S. 12, 45 S.Ct. 199, 69 L.Ed. 490 (1925)).

Constructive termination for convenience is a judge-made doctrine, and remains unrecognized in the procurement regulations that authorize "actual" termination for convenience. Constructive termination is applied when the basis upon which a contract was actually terminated is legally inadequate to justify the action taken. The doctrine traces its origins to College Point, wherein the Supreme Court held:

A party to a contract who is sued for its breach may ordinarily defend on the ground that there existed, at the time, a legal excuse for nonperformance by him, although he was then ignorant of the fact. He may, likewise, justify an asserted termination, rescission, or repudiation, of a contract by proving that there was, at the time, an adequate cause, although it did not become known to him until later.

267 U.S. at 15-16, 45 S.Ct. at 200-201 (footnotes omitted).

College Point thus limited the government's liability for "termination, rescission, or repudiation" of...

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