Termination for convenience under Part 12 - recovery of profit?

LindaF said:

Can anyone point me to case law that can help clarify this?

I suspect there will be no definitive example as case law depends in the specific facts of the contract and the T4C.  Find the briefing papers "Maximizing Termination For Convenience Settlements" by Seudman & Associates they might help.

Both of the cases cited below state that anticipatory profits are not recoverable following a termination for convenience under commercial contracts:

https://www.cbca.gov/files/decisions/2008/BORWICK_09-23-08_693-762__CORNERS_AND_EDGES,_INC_508.pdf  

https://casetext.com/case/praecomm

As you noted, the language in paragraph (l) of FAR Clause 52.212-4 (Current Version) prescribes that the Contractor “…shall be paid a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system, have resulted from the termination”. So the first part of this statement seemingly prescribes a pro-rated share of the contract price (which would include some profit) while the second part gives the Contractor a “safety valve” to recover other costs such as software licenses, equipment rentals, restocking fees, etc. (i.e. any reasonable sunk cost that the Contractor will continue to incur after the contract is terminated)

The Uniform Commercial Code (UCC) (https://www.law.cornell.edu/ucc/2/2-708#:~:text=§%202%2D708.,for%20Non%2Dacceptance%20or%20Repudiation.&text=Uniform%20Commercial%20Code%20%7C%20US%20Law%20%7C%20LII%20%2F%20Legal%20Information%20Institute) provides some relief regarding anticipatory profit when the buyer breaches a contract, but FAR Part 12 does not sync with commercial practices in this respect.

The next time FAR Clause 52.212-4 comes up for revision  in a Federal Acquisition Circular (FAC), it might be worthwhile to add a comment in the Federal Register. Certainly doesn’t hurt. As of now, Contractors are left to the relief currently identified in FAR Part 12.

M.Capovilla said:

The Uniform Commercial Code (UCC) [...] provides some relief regarding anticipatory profit when the buyer breaches a contract, but FAR Part 12 does not sync with commercial practices in this respect.

May be worth noting, just for additional context in comparing the UCC and the FAR, that a termination for convenience under contract clause 52.212-4 would not be a breach of contract.

RJ_Walther said:

May be worth noting, just for additional context in comparing the UCC and the FAR, that a termination for convenience under contract clause 52.212-4 would not be a breach of contract.

Agreed, it’s not a perfect comparison. My intent was to illustrate that the UCC does provide instances when anticipatory profit may be recovered when one party terminates a contract without cause, whereas FAR Part 12 does not. While a termination for convenience isn’t a breach of contract it may still harm the Contractor and give rise to damages in the form of a claim if the parties cannot come to agreement during settlement. The Contractor would still only be  able to recover the costs permitted by FAR Part 12 (which does not include anticipatory or lost profits).

Thanks for your comment, I appreciate the discussion very much.

@M.Capovilla What "discussion"?

The following is brief portion of a lengthy commentary on anticipatory profit that appeared in The Nash & Cibinic Report in 2019:

Quote

The Government often relies on FAR Part 49 rules to deny recovery of post-termination unabsorbed overhead and anticipatory profit. See Defense Contract Audit Agency Contract Audit Manual ¶ 12-305.7b concerning post-termination unabsorbed overhead and ¶ 12-307a concerning anticipatory profit. However, it appears reasonable to charge post-termination unabsorbed overhead and profit resulting from a termination for convenience of a commercial item contract. This is evident from Uniform Commercial Code § 2-708(2), applicable to private sector contracts, which defines “damages” as including “the profit (including reasonable overhead) that the seller would have made from full performance by the buyer.

* * *

Consideration should also be given to claiming anticipatory profit. As previously stated there is a cogent argument for the recovery of anticipatory profit based on FASA rules governing commercial item procurement. The Federal Circuit has not yet spoken on the issue. In Palantir v. U.S., 904 F.3d 980 (Fed. Cir. 2018), 60 GC ¶ 287, the Federal Circuit has shown that it will enforce statutory requirements relating to the acquisition of commercial items given short shrift by contracting personnel and rejected by the Government Accountability Office in Palantir USG, Inc., Comp Gen. Dec. B-412746, 2016 CPD ¶ 138. See Commercial Products and Services: Raising the Market Research Bar or Much Ado About Nothing?, 32 NCRNL ¶ 52.

See Postscript III: Terminaiton for Convenience Of FAR Part 12 Commercial Item Contract, 33 NASHCIBINIC-NL ¶ 26, May 2019. You can read the entire article:

https://75a2d0.a2cdn1.secureserver.net/wp-content/uploads/2016/08/TERMINATION-FOR-CONVENIENCE-OF-FAR-PART-12-COMMERCIAL-ITEM-CONTRACTS-Is-Fair-Compensation-Required-24-Nash-Cibinic-Report-37-August-2010.pdf

(Accessed this morning.)

That's only one article.

Now you have something to discuss.

Vern Edwards said:

@M.Capovilla What "discussion"?

The following is brief portion of a lengthy commentary on anticipatory profit that appeared in The Nash & Cibinic Report in 2019:

See Postscript III: Terminaiton for Convenience Of FAR Part 12 Commercial Item Contract, 33 NASHCIBINIC-NL ¶ 26, May 2019. You can read the entire article:

https://75a2d0.a2cdn1.secureserver.net/wp-content/uploads/2016/08/TERMINATION-FOR-CONVENIENCE-OF-FAR-PART-12-COMMERCIAL-ITEM-CONTRACTS-Is-Fair-Compensation-Required-24-Nash-Cibinic-Report-37-August-2010.pdf

(Accessed this morning.)

That's only one article.

Now you have something to discuss.

@Vern Edwards Hi Vern - Thanks for your comment and the article recommendation. Very insightful.

On 6/21/2024 at 1:09 PM, RJ_Walther said:

May be worth noting, just for additional context in comparing the UCC and the FAR, that a termination for convenience under contract clause 52.212-4 would not be a breach of contract.

Maybe maybe not.  In the non-commercial items arena, in the Krygoski decision, the CAFC held that a T4C done in bad faith would be a breach of contract.  If the government breaches a contract, the contractor is entitled to receive traditional breach of contract damages, which in many cases is the profit the contractor would have received if it had been permitted to complete the contract.  Although, I can find no case applying or rejecting this reasoning in regard to a contract for commercial products/services, I see no reason why it should not be applied in that context.