Deliberate breach of contract?

There are ethical, legal, financial and business considerations to this question that I for one would not begin to respond to. In any case, you should be talking to your contracting officer, putting all of your information on the table and be prepared to find a reasonable way to resolve your problem.

Simply walking away without even trying to work things out openly with the Government is unethical, irresponsible and would probably ensure your company would not be able to work with the Government for a long, long time. Not to mention financial penalties when the Government comes after you for compensation for the recompete costs, which walking away would expose the contract to. See FAR Part 49 for how the Government treats such actions.

If you wouldn't begin to respond why did you? I didn't ask for advice. I know Part 49 very well and I don't need to be lectured to. I don't want to talk to the contracting officer now. If I did I would. I know what she'd say. I came here for Wifcon opinions. There are opinions, including one by the Seventh Circuit Court of Appeals, 769 F.2d 1284 (1985), that suggest that such breaches are efficient and not necessarily unethical.

Suppose a breach would cost the promisee $12,000 in actual damages but would yield the promisor $20,000 in additional profits. Then there would be a net social gain from breach. After being fully compensated for his loss the promisee would be no worse off than if the contract had been performed, while the promisor would be better off by $8,000. But now suppose the contract contains a penalty clause under which the promisor if he breaks his promise must pay the promisee $25,000. The promisor will be discouraged from breaking the contract, since $25,000, the penalty, is greater than $20,000, the profits of the breach; and a transaction that would have increased value will be forgone.

On this view, since compensatory damages should be sufficient to deter inefficient breaches (that is, breaches that cost the victim more than the gain to the contract breaker), penal damages could have no effect other than to deter some efficient breaches.

My lawyer pointed that out to me. I know that the Government would trash our past performance if we walked away, that's why I asked whether the Government should recognize that deliberate breach might be a reasonable course of conduct in some circumstances.

If you would take the time to read my post more carefully, you would see that I did not say I would not respond, only that I would not respond to all of the considerations.

If you do not want to be lectured to, then do not ask any questions.

If you already have done the research and spoken to lawyers, why would you still be looking for answers on a website?

As far as a court deciding that the financial reward for a breach is compensation for the ethical violation, well, I suppose the court does not get the separation of church and state thing we have in our government. A financial crime is not made ethical by the financial gain, and welching on a deal for financial reasons is still welching on a deal. Ethics is more than a financial or "social gain" issue, it is right and wrong, standing by your word and signature on a contract. In this courts opinion, I guess the law is subservient to the dollar. I do not support that position, and I doubt that such a position would survive a tour of the Supreme Court. These days, I might be wrong about that.

You asked if the government should recognize that a deliberate breach might be a reasonable course of action. My recommendation above to bring the topic up with your contracting office is the ONLY way you can get an answer to that question, as it is up to that individual to make that determination.

dwgerard:

For once we have something interesting to talk about instead of answering basic questions about FSS contracts for the umpteenth time, and you insult the guy. He's right--he didn't ask for advice. He asked for an opinion about a particularly interesting policy question: efficient breach of contract. I'd much rather discuss something as interesting as that than answer Contracting 101 questions all the time and concluding with: Ask Your Lawyer. Not all questions warrant a lecture. Rather than assume that such a breach is unethical, why not discuss it? Maybe there is another view. Perhaps, under limited circumstances, efficient breach would be more ethical than performance.

The decision he mentioned is Lake River Corporation v. Carborundum Co., and is interesting because it was written by Judge Richard Posner, who is one of the founders of the Law and Economics school of legal philosophy. He has argued that efficient breach is better for society than penalty clauses and mindless demands for fulfillment of bad contracts. See Posner, Let Us Never Blame A Contract Breaker, 107 Michigan Law Review 1349 (June 2009):

My thesis is that concepts of fault or blame, at least when understood in moral terms rather than translated into economic or other practical terms, are not useful addenda to the doctrines of contract law.

See too the discussion in Shavell, Is Breach of Contract Immoral? 56 Emory Law Journal 439 (2006). See also Oliver Wendell Holmes, The Path of the Law, 10 Harvard Law Review 457 (1897):

The duty to keep a contract . . . means a prediction that you must pay damages if you do not keep it,--and nothing else . . . . But such a mode of looking at the matter stinks in the nostrils of those who think it advantageous to get as much ethics into the law as they can. Against this background, I ask in Part I of the Essay whether it is immoral to break a contract. To consider the question, one must, of course, state what constitutes moral behavior in the contractual context, and I employ a simple and natural definition: Performance is morally required in a contingency if and only if the parties did specify, or would have specified, performance in that particular contingency.

In other words, dw:

There are more things in heaven and earth...

Than are dreamt of in your philosophy.

Seeker

In my opinion, if we had a competent and sophisticated contracting officer corps one might be able to make an argument that efficient (deliberate) breach makes sense under limited circumstances and is better for both government and industry than enforcing a bad contract. Under such circumstances it might not be good to downgrade an offeror on past performance in reaction to a default. However, by the mass our contracting officers don't know enough and are not sophisticated enough to entertain such an idea or to implement it effectively. As one can see from the preceding exchange, we get instead the knee-jerk ethics argument. The average contracting officer would insist upon performance even if it would put 1,000 people out of work.

I don't think that there is much chance of the government ever officially agreeing to such an idea. I also don't think it's worth discussing with the average contracting officer. However, there are remedies such as amendment without consideration that might make efficient breach unnecessary. See FAR Subpart 50.1.

It's nice to have someone raise the level of discussion at this forum to a level higher than acquisition kindergarten. But you may have come to the wrong place to pose such an interesting question. Thanks for trying.

Vern,

I agree with the concepts that Judge Posner raises in that a breach of contract must have a price for such an action. That is the law, which is different than ethics. A person can be legally correct and ethically wrong, a state that seems to be worth one heck of a brass ring these days as so many of our leaders are seem to be trying to reach that nirvana.

Regarding the Judge Posner's position, have any of the other courts or judges accepted that position? Is it truly the case where our legal system is separating itself from ethics? I just had my annual ethics refresher training a few weeks ago, and it seems to be alive and well here at my command, but that is not contract law.

I don't really see my first post as lecturing, perhaps I am wrong in that understanding. If so, I apologize for that tone. I still stand by my advice though, there is only one individual who can say one way or the other which direction the breach will go, and that is the contracting officer. Seeker can get our opinions, legal opinions, and research all the cases, but without consulting with the contracting officer before the action occurs, they will have little or no impact on what happens to seeker's firm afterwards.

I have one experience in this area; a small business contemplated walking away from a contract to renovate a trailer at a military installation that I was adminstering. Perhaps in their innnocence, they contact me to ask what they should do. I did not lower the boom, throw the FAR at them, or otherwise try to exact a price for their asking, I started asking questions. When I found out why they wanted to walk away, I found a way for them to continue to work, adjusted some the terms of the contract other than the price, and the work was successfully completed, albeit later than originally planned on. A defeat for both was turned into a win for both.

Maybe I am unusual, but I do believe that a contractor is better off trying to work it out with the contracting officer before committing a breach than to commit a breach without at least trying to work it out. If contracting officers punish contractors who do try to work it out with them, without trying to mitigate the problem, then they are doing a disservice to their profession. We are the fulcrum between the private and public, the contractor and the government; we should be able to see both sides and help both to reach an equitable position so long as it is possible.

dwgerard:

Judge Posner's comments in the decision were dicta. He was stating an idea about why punitive damages are inappropriate in contract cases. I don't know if other courts have commented upon it. As for the idea that breach is not unethical, there is a big literature about that and varied opinions. The question for us is whether there are circumstances when default does not warrant a poor past performance rating. Justice Holmes believed that if the default arose from an unanticipated contingency (but not an excusable source of delay), then breach should not be considered immoral or unethical, just a matter of fact. I'm not saying that breach can never be unethical or immoral, only that we should not think it to be necessarily so.

I don't know the content of your ethics training. Were you told that deliberate breach in order to avoid a loss or to take advantage of a better deal is unethical? Did your training address that issue? In my opinion, the government is on shaky ground in that regard, since it insists upon the right to walk away from a contract at will for its own convenience and without paying expectancy damages (anticipatory profit). The government shoves that down contractors' throats and insists that its in a contract even when it's been omitted. A firm that wants to do business with the government has no alternative but to accept such a clause. The government can do that because of its overwhelming economic power. Is that ethical? Is it ethical for the government to be able to make a deal and then issue a deductive change order? If so, why? Because it's the government?

As for alternative courses of action, it was my impression that Seeker's question assumed that all other avenues had been considered and rejected. I didn't understand him to be seeking advice about alternatives, just asking about the possibility of a policy about efficient breach. Realistically, how many contracting officers are going to be willing to "work it out" if the contractor is able to do the job but wants out for business reasons and is willing to pay damages in order to get out. And you did kind of give him the standard lecture that we tend to give here: Talk the CO. Talk to your lawyer. I don't think he was looking for that. I saw the question as being rhetorical.

Vern,

Thanks for the information. I agree that each breach should be looked upon in terms of the contingency, which is what I did in my experience above. If the circumstances were different, say a large business rather than a mom and pop company (literally), my reponse might have been different. But then again, I have never had a large firm come to me openly and plainly the way that small business did. And it was the very first government contract that the mom and pop company had received.

The ethical training I received was "by the book" training, the law is the law, etc. etc. It implied that acquisition personnel were ethically obligated to the government, or taxpayer, depending upon the slide, and that we "had to be impecable in character and ethics".

Using my training as a guide, a contractor who deliberately breached should receive "reward" associated with that action, period. The contractor would have no recourse to mitigate that reward outside of court. Ethically, my belief is that we as contract professionals should, if the contractor is willing and the government is able, work with the parties to try to find a reasonable, fair and legal alternative to a deliberate breach and subsequent termination for default. That belief may not be true of everyone, but it is of me.

No, it is not ethical for the government to use its sovern power in unfair and unreasonable manners. I have fought that battle far more than I have had to deal with unethical contractors. I left one job in the government specifically for that reason. If it arises again in my career, I am prepared and willing to fight it again.

Rhetorically, what could seeker have gained by anything I could have said other than talk to the contracting officer? I could have tried to dissuade him or her from breaching the contract, or supported that breach using the arguement that the social benefit was greater in the breaking of the contract. In either case, I would be telling seeker what seeker wanted to hear or perhaps lecturing if it was not what seeker wanted to hear. Breaching a contract is serious business, and there are ramifications on multiple levels identified above that would be difficult to communicate in this forum.

In this day and age, it is not impossible that the results of a contract breach could, if newsworthy, could become far more than mere damages or being debarred. Only seeker and his or her business associates can answer whether or not that is the case. Is it wrong to breach a contract to save workers jobs or the company from going bankrupt? Perhaps not, but is seeker willing to simply accept the governments actions as a result of the breach? Maybe the contracting officer would not understand or help if seekers firm went to him or her first, but what would it cost if that effort failed? Conversely, what would seekers firm gain if the contracting officer was one of the rare ones that would be willing to work it out? Those two should also be in the business decision that needs to be made on whether or not to breach the contract.

dw:

Not to beat it to death, but here is what Seeker asked:

Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?

"Would it be wrong" and "should the government recognize" don't sound like "What should I do?" They seem to require yes or no answers, perhaps with explanation.

Some would say that the decision to breach and compensate the other party to make it whole is simply another business decision. There is no moral component to it. If the injured party is compensated, then it has no complaint. The moral question would arise only if the breaching party refused to compensate the injured party.

How about another alternative similar to one that we used in Saudi Arabia in the early 1980's. Contractor was failing and losing money on a large construction contract.

It was more convenient for us and better for the contractor to not default and for us to have to start over on the reprocurement. So, we allowed the contractor to subcontract completion of the project to another firm. The firm came in, took over the project and finished it, although the failing firm was still offcially the prime. The prime bore the cost to complete and the government got a very good job.

In addition, the prime paid liquidated damages up front based upon a new (later)completion date as consideration for subbing out the entire performance. The contractor would have had to pay the government all these costs and much more had it defaulted and it would have taken much longer to reprocure.

This was an Indonesian prime who got in over their head on what would now be about a $500 million contract. It was a win win for both parties. Yes, the contractor's performance evaluation did reflect the situation but it saved a lot of excess reprocurement and delay time and costs.

seeker - Having been through the experiences that closely follow your question twice in my career in the Government I offer the following.

You state - " I know that the Government would trash our past performance if we walked away" . From my view and that expressed as responses in the thread a CO that is looking at this from the view of equity and truthfulness would state that the contract was breached or terminated for default as the case may be but then offer the view as to what had occurred that gives due consideration as to why the breach or termination occurred. Performance evaluation systems I have experienced would allow this. Also, and as you probably know, a CO should give the opportunity to offer the firm?s view on any adverse performance information used as a basis not to consider the firm in a future procurement (FAR 15.306(a)(2). Noting this I would document your final conclusion to the CO and then provide that same document in the future (as part of future proposals might be one way) so that others do know the reasoning which then puts the matter squarely in the lap of the CO on the future procurement to determine whether the issue was adverse and has relevance or not to a future procurement. Hopefully a sound mind as discussed in the thread would prevail.

In my opinion, in contrast to some others, I think it would be beneficial to discuss your problem with the KO and offer to help mitigate the effort, time and cost to arrange for someone else to complete the contract, as opposed to just walking off and saying goodbye, get somebody else to do this and send me the bill.

Contrary to some peoples's opinion, there are actually some competent and reasonable contracting officers and support staff out there.

Win-win or least mitigating the hassle and impacts for both parties surely beats lose-lose.

If Seeker is trying to save the company or like stated save employee jobs becasue the obligation to fulfill the contract is more expensive than default; then why not. Maybe this is a morale obligation that ranks higher for the employer; is to keep employees at work vs. completing a contract at a loss.

Maybe this business builds trust and loyality by keeping employees employeed in a economic situation we are currently in. Having employees laid off isn't helping the government; we are going to pay their unemployment wages.

Especially if the contract isn't mission essential or vital (like a hosipital, or GWOT effort). Does the government what to force a company to drop employees and make the economic situation worse or help the business and the economy by accepting a default (maybe it could be completed at a later date).

The CO should think about this situation and doucment it so that past performance isn't killed.

Yes this isn't FAR DFAR; I have little experience being an Intern and work postaward; but I have learned alot from Wifcon. But why can't the CO consider a broader picture, not just the contract?

postaward - "But why can't the CO consider a broader picture, not just the contract? " Maybe it is already there, FAR 1.102. What do you think?

Carl - I have allot to learn.

I would say the CO has the responsibility from FAR 1.102 to consider the broader picture. If seeker can get the CO to view it from the perspective that it is more beneficial to both parties to keep people employed vs. just focusing on a completed contract.

Than the CO doesn?t need to degrade the past performance, just document an explanation why it was beneficial to both parties. Cost in ?people? was worth complete contract performance.

Refer to FAR 49.4 when the Contractor anticipates breaching the contract ("walking away"). The Government has the right to terminate the contract for default (see 49.402-1) in such a situation and probably will if the Contractor just decides to walk away, leaving the Government to find a way to get the contract completed.

However, the Contracting Officer may also consider other courses of action in lieu of terminating for default, which is what I was discussing as a possible alternative. See 49.402-4 for example procedures in lieu of TFD. If the Contractor knows it is going to be responsible for excess costs to reprocure and complete the work, it might be in its best interests to find someone or to help find someone to finish the job, whether as a replacement or as a subcontractor. That speeds up the process, which may very well reduce the re-procurement and/or impact costs. I'd advise a contractor to discuss its predicament and find better alternative than just walking off, facing a TFD, leaving the government to re-procure, then ZAP the guy.

In my opinion, in contrast to some others, I think it would be beneficial to discuss your problem with the KO and offer to help mitigate the effort, time and cost to arrange for someone else to complete the contract, as opposed to just walking off and saying goodbye, get somebody else to do this and send me the bill.

Contrary to some peoples's opinion, there are actually some competent and reasonable contracting officers and support staff out there.

Win-win or least mitigating the hassle and impacts for both parties surely beats lose-lose.

To all of you who keep advising me to talk to the KO, I don't mean to be rude, but we don't need your advice. Our situation is under control. We know what we want to do and we're doing it. We're fully qualified to do that and don't need your help. We know our business and our customer better than you do. I simply asked two philosophical questions. "Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" I was interested in opinions about those two questions because of a chat with our lawyer over coffee. Maybe I wasn't clear. But I can see that this is the wrong place to come to discuss matters of philosophy. I won't try it again.

I appreciate those of you who have responded in the spirit of my inquiry. Thanks.

"Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?"

Seeker,

I was just going to respond until I saw your latest post. My answers to these two questions is no, it would not be wrong to opt to default under those circumstances. As long as the two contracting parties understaood and recognized the events and the government was made whole, it's not wrong.

The other question is more difficult to answer. Should the government recognize the action as reasonable - yes, but can they is the real question? FAR 50.1 provides for extraordinary contractual relief but it took passgae of a law to allow it. A CO could write up the situation in a past performance report and explain the details but most COs and Source Selection Officials would almost certainly view it as negative regardless of how it's packaged when evaluating the contractor for consideration of a new contract. It just wouldn't go away.

To all of you who keep advising me to talk to the KO, I don't mean to be rude, but we don't need your advice. Our situation is under control. We know what we want to do and we're doing it. We're fully qualified to do that and don't need your help. We know our business and our customer better than you do. I simply asked two philosophical questions. "Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" I was interested in opinions about those two questions because of a chat with our lawyer over coffee. Maybe I wasn't clear. But I can see that this is the wrong place to come to discuss matters of philosophy. I won't try it again.

I appreciate those of you who have responded in the spirit of my inquiry. Thanks.

___________________

Obviously you know your business and the customer better than I or we do . You asked us "What if completing the contract would cause the contractor to take a loss so great as to require it to fire workers, but the excess cost of reprocurement and other damages to the Government would be slight and significantly less than the cost of finishing the job?" You are correct in saying that you weren't clear.

I don't understand what you mean by "...but the excess cost of reprocurement and other damages to the Government would be slight and significantly less than the cost of finishing the job?" Do you mean that you won't be responsible for the excess cost, if any over what you'd get paid, for somebody else to finish the job? I believe that assumption would probably be incorrect. Or, perhaps it would be cheaper for someone else to finish the job? That assumption invites a question from me. If it wont cost much if anything, why not get someone else to finish the job for you, then and avoid the termination or other consequences?

You have to decide what is most important to you. If the latter assumption above is correct, perhaps it wouldn't be wrong to just walk and let them bill you, if someone can finish the job for minimal extra cost. But it would be darned dumb in my opinion, when you could probably mitigate your monetary and reputation loss and still save your employees' jobs by finding somebody to finish the job cheaper than you could and working out a solution with the government. But - you know what you want to do and you're doing it. Glad you learned something and good luck to you!

I don't understand what you mean by "...but the excess cost of reprocurement and other damages to the Government would be slight and significantly less than the cost of finishing the job?" Do you mean that you won't be responsible for the excess cost, if any over what you'd get paid, for somebody else to finish the job? I believe that assumption would probably be incorrect. Or, perhaps it would be cheaper for someone else to finish the job? That assumption invites a question from me. If it wont cost much if anything, why not get someone else to finish the job for you, then and avoid the termination or other consequences?

You have to decide what is most important to you. If the latter assumption above is correct, perhaps it wouldn't be wrong to just walk and let them bill you, if someone can finish the job for minimal extra cost. But it would be darned dumb in my opinion, when you could probably mitigate your monetary and reputation loss and still save your employees' jobs by finding somebody to finish the job cheaper than you could and working out a solution with the government. But - you know what you want to do and you're doing it. Glad you learned something and good luck to you!

[deleted]

Formerfed, thank you for your response.

To all of you who keep advising me to talk to the KO, I don't mean to be rude, but we don't need your advice. Our situation is under control. We know what we want to do and we're doing it. We're fully qualified to do that and don't need your help. We know our business and our customer better than you do. I simply asked two philosophical questions. "Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" I was interested in opinions about those two questions because of a chat with our lawyer over coffee. Maybe I wasn't clear. But I can see that this is the wrong place to come to discuss matters of philosophy. I won't try it again.

I appreciate those of you who have responded in the spirit of my inquiry. Thanks.

I think your two philosophical questions are reasonable questions but you can not accept the opinions of the SMEs here at WIFCON. Maybe because you already have a decision and your sticking to it. But on the other hand, I have to admit that I learned a lot by reading this thread.

I can understand his/her aggravation. Seeker did not ask what he should do or for alternatives. He made that clear in his second post, yet people like Joel keep wanting to tell him what he ought to do or suggest alternatives. What's up with that? He simply posed two questions for discussion: (1) would it be wrong for a contractor to deliberately breach to avoid a loss and (2) should the government recognize the efficiency of such a breach under certain circumstances. I guess the denizens here are so used to trying to help the helplessly clueless that they don't recognize when someone is neither helpless nor clueless but just wants to discuss some ideas.

My answers to the questions are: (1) No, it would not be immoral to breach if the breach was the result of unexpected events and the contractor could compensate the government for its damages. However, there would be some cases when no compensation would be enough. If the contractor is producing body armor for use by our troops, then I think it would be immoral to walk away to avoid a loss if the result would be to delay delivery of the product to the troops and if a way to perform could be found that would not destroy the firm. (2) Yes, the government should recognize the efficiency of a breach under certain circumstances and not penalize the contractor by giving it a poor past performance rating. Such a circumstance might include a situation in which something happened that no one expected and that will cost the contractor a lot of money for which the government is not liable and for which the contract provides no monetary relief.

You know, after a person tells you a couple of times that he/she does not want your advice and does not need suggested alternatives, you ought to consider that a hint. To keep repeating "Go see the contracting officer" is annoying.

Such a circumstance might include a situation in which something happened that no one expected and that will cost the contractor a lot of money for which the government is not liable and for which the contract provides no monetary relief.

Vern,

Can you provide an example of such a situation?

Vern,

Can you provide an example of such a situation?

Sure. Unusually severe weather is an excuse for late performance, but the contractor must bear the burden of any cost increase. In such a case it may be possible for the contractor to perform with a time extension offered by the government, but the cost impact may be so great as to make it more economical to breach and compensate the government than to perform at the increased cost. The contractor can perform, but chooses not to do so in order to avoid the additional cost, which is more than it will have to pay the government in compensatory damages. In other words, breach may be more efficient than performance.

Sure. Unusually severe weather is an excuse for late performance, but the contractor must bear the burden of any cost increase. In such a case it may be possible for the contractor to perform with a time extension offered by the government, but the cost impact may be so great as to make it more economical to breach and compensate the government than to perform at the increased cost. The contractor can perform, but chooses not to do so in order to avoid the additional cost, which is more than it will have to pay the government in compensatory damages. In other words, breach may be more efficient than performance.

Vern,

In your example, did the contractor choose not to insure itself?

Instead of asking me question after question, strung out over hours or days, as you are sometimes inclined to do, tell me what you're thinking. I won't answer another question until you do.

nevermind

Seeker said ""Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" The short answer for the first questioni is that it depends. "Wrong" is a relative term based on the ethical, legal or moral standard that applies to the decision. As we cannot tell based on the question, the answer cannot be determined.

As far as the second question, it also depends upon who is deciding what is or is not reasonable, and introduces another variable, ie "circumstances". What is reasonable for seeker and company may not be reasonable for the Contracting Officer. One or both judgements may or may not be acceptable to the judges and reviewing officials that may be involved at different stages of the termination process. How they are impacted by an undefined variable, the circumstances, makes an answer virtually impossible without further information

The only way to resolve the questions is to: a. know what ethical, legal or moral system applies to the question and b. know who it is that will determine reasonable and what the circumstances are.

We can hazard guesses and have "philosophical" discussions, but in the real world, that does not equal a small hill of dried beans. Perhaps my and others advice to "ask the KO" is an attempt to actually try to answer the question in a reasonably accurate manner, as opposed to winging a guess at what seeker is looking for.

But, as this is defined as a philosophical question, my answer is simply this: Using my personal ethics, morals and understanding of the law; it is not wrong to default on a contract to save jobs. With that, I believe it IS legally objectionable, so seeker and company should expect and accept the price for making a morally correct decision. As far as whether or not the government "should" see the action as reasonable, I personally would say a qualified yes IF the contractor made an attempt to mitigate the impact on the government and was honest and open with the government AND the circumstances warranted such a determination.

This discussion is also very similar to a situation I was involved in as an intern/GS-5 and 7 trainee working for senior contract specialist and a CO.

A company proposed a very low price to receive a contract for a large share of production of munitions. Competition was restricted to a pool of national defense suppliers so each company essentially received a contract award. However the companies with the most favorable prices received larger contracts for greater quantities of production.

The contractor based the exceptionally low price on using new technology to make production faster and more efficient. However once they began to set up for production, the new technology wasn't available to them even with the priority rating of the contract. They proceeded with performance in any event while hoping to still acquire the new technology. After several months, the contractor realized that full performance of the contract would bankrupt them.

They first met with the CO and the CO's management seeking a no cost cancellation without success. They sought assistance from their Congressional representatives. Working with the agency, they applied for relief under PL 85-804 (FAR 50.1) but the affected government agencies would not support the claim that the company was essential to the national defense. The issue was escalated to the highest level of DoD but kept being pushed back to the agency and CO like a hot potato.

The contract was then terminated for default and the contractor was later assessed the excess costs for re-procurement. This forced the contractor into Chapter 11 bankruptcy. Ultimately the contractor survived financially and was acquired a few years ago by one the huge defense contractors.

If the ultimate goal can be distilled to how to get out of the contract and avoid an adverse past performance evaluation, without getting into ethics and morality, perhaps it would be possible to assign or sell the contract to another business or create a joint venture ? essentially no longer be the prime contractor. It may be that no other company or joint venture partner would ever want the contract, but you don?t know - what is bad for one company may be good for another, or the deal can be sweetened in any number of ways. Keep the government out of the equation. The government just needs to sign the novation agreement after the deal has been cut.

Instead of asking me question after question, strung out over hours or days, as you are sometimes inclined to do, tell me what you're thinking. I won't answer another question until you do.

I don't have a problem with the concept of efficient breach nor do I think that a contractor has necessarily acted unethically if they choose such a course of action. However, I'm having a hard time imagining a situation in which a breach would not justify an adverse performance evaluation.

I don't have a problem with the concept of efficient breach nor do I think that a contractor has necessarily acted unethically if they choose such a course of action. However, I'm having a hard time imagining a situation in which a breach would not justify an adverse performance evaluation.

According to the DOD CPARS CONTRACTOR PERFORMANCE ASSESSMENT REPORTING SYSTEM (CPARS) POLICY GUIDE (FEB 2009), these are the ratings that may be given a contractor for its performance:

Dark Blue/ Exceptional

Performance meets contractual requirements and exceeds many to the Government?s benefit. The contractual performance of the element or sub-element being assessed was accomplished with few minor problems for which corrective actions taken by the contractor was highly effective.

To justify an Exceptional rating, identify multiple significant events and state how they were of benefit to the Government. A singular benefit, however, could be of such magnitude that it alone constitutes an Exceptional rating. Also, there should have been NO significant weaknesses identified.

Purple/Very Good

Performance meets contractual requirements and exceeds some to the Government?s benefit. The contractual performance of the element or sub-element being assessed was accomplished with some minor problems for which corrective actions taken by the contractor was effective.

To justify a Very Good rating, identify a significant event and state how it was a benefit to the Government. There should have been no significant weaknesses identified.

Green/ Satisfactory

Performance meets contractual requirements. The contractual performance of the element or sub-element contains some minor problems for which corrective actions taken by the contractor appear or were satisfactory.

To justify a Satisfactory rating, there should have been only minor problems, or major problems the contractor recovered from without impact to the contract. There should have been NO significant weaknesses identified. Per DOD policy, a fundamental principle of assigning ratings is that contractors will not be assessed a rating lower than Satisfactory solely for not performing beyond the requirements of the contract.

Yellow/ Marginal

Performance does not meet some contractual requirements. The contractual performance of the element or sub-element being assessed reflects a serious problem for which the contractor has not yet identified corrective actions. The contractor?s proposed actions appear only marginally effective or were not fully implemented.

To justify Marginal performance, identify a significant event in each category that the contractor had trouble overcoming and state how it impacted the Government. A Marginal rating should be supported by referencing the management tool that notified the contractor of the contractual deficiency (e.g., management, quality, safety, or environmental deficiency report or letter).

Red/ Unsatisfactory

Performance does not meet most contractual requirements and recovery is not likely in a timely manner. The contractual performance of the element or sub-element contains a serious problem(s) for which the contractor?s corrective actions appear or were ineffective.

To justify an Unsatisfactory rating, identify multiple significant events in each category that the contractor had trouble overcoming and state how it impacted the Government. A singular problem, however, could be of such serious magnitude that it alone constitutes an unsatisfactory rating.

An Unsatisfactory rating should be supported by referencing the management tools used to notify the contractor of the contractual deficiencies (e.g., management, quality, safety, or environmental deficiency reports, or letters).

NOTE 1: Plus or minus signs may be used to indicate an improving (+) or worsening (-) trend insufficient to change the assessment status.

NOTE 2: N/A (not applicable) should be used if the ratings are not going to be applied to a particular area for evaluation

Perhaps there should be ratings: Orpiment/Marginal with mitigating circumstances and Salmon/Unsatisfactory with mitigating circumstances.

Maybe add to the (+) and (-) qualifiers: a (^) for true ethical and moral behavior and a ($) for attempts to rationalize behavior as ethical and moral, or outright unethical and immoral behavior

Why should the contractor get a rating of unsatisfactory or marginal, by whatever fish or mineral denominated?

Isn't the point of efficient breach that the government was entirely made whole by the contractor's compensation? If the government uses the past performance system to determine whether it should contract with one vendor rather than another, why label a contractor who has not caused the government any loss whatsoever, whom other government agencies take no risk in contracting with in the future?

Perhaps some kind of neutral rating would be more appropriate.

Why should the contractor get a rating of unsatisfactory or marginal, by whatever fish or mineral denominated?

Isn't the point of efficient breach that the government was entirely made whole by the contractor's compensation? If the government uses the past performance system to determine whether it should contract with one vendor rather than another, why label a contractor who has not caused the government any loss whatsoever, whom other government agencies take no risk in contracting with in the future?

Perhaps some kind of neutral rating would be more appropriate.

At the risk of coming in late to the party, I would say, contractor100, that the government likely did not get what it needed. You say "entirely made whole by the contractor's compensation" but that is not the entirety of the situation. Originally the government needed an item or service, and now receipt of that item or service will be delayed. Sure, the taxpayers aren't out of pocket any extra cash, but what about the fulfillment of the need?

I concur that the final performance evaluation should take into account that the contractor didn't provide what had been contracted for -- perhaps for good and sufficient and efficient causes. But still.

Just tryin' to help ....

Perhaps there should be ratings: Orpiment/Marginal with mitigating circumstances and Salmon/Unsatisfactory with mitigating circumstances.

Perhaps some kind of neutral rating would be more appropriate.

Regardless, applying a rating less than satisfactory is the kiss of death. Even with narrative describing mitigating circumstances, what source selection official would pick that source? It would take a proposal with extraordinary merit to offset such a past performance rating.

Even a neutal rating, and I'm not sure neutral would even be appropriate, keeps most proposals from being considered for award. I get to see a few acquisitions conducted plus I read about quite a few ones in GAO decisions, and the instances where the selected source has a neutral rating are very few.

Here 2 help:

The premise of the theory of efficient breach is that the promisee is fully compensated, isn't it? Per Judge Posner:

"After being fully compensated for his loss the promisee would be no worse off than if the contract had been performed, while the promisor would be better off by $8,000. "

That is, a breach is efficient (and arguably should not be discouraged by law or regulation or giving a Ktr a bad performance reference) when:

(Bnefit to promisor by breaching) minus (full compensation to promisee) > zero

I, too, am late to the party. To Seeker's question, I believe it would not necessarily be wrong to walk away from the contract under the circumstances described and that the Government should recognize a deliberate breach as a reasonable course of conduct under certain circumstances. A contractor always has the power to breach a contract. Whether that power should be exercised in a particular case depends on the harm that would be inflicted by either breaching or performing.

I suspect, though, that in the current climate a reasoned discussion of this in a particular case is unlikely. What would be more likely is that an IG/auditor/qui tam plaintiff or some such person would paint it as some windfall to the contractor. And, someone would point to FAR 9.406-2((1)(i), which makes "[w]illful failure to perform in accordance with the terms of one or more contracts" a basis for debarment and commence a debarment proceeding. A "deliberate breach," of course, would be a "[w]illful failure to perform."

Of course, I am somewhat thick. However, if Seeker's firm "walked away" from one of my contracts, we would have to reprocure and endure the delay of reprocuring whatever Seeker had promised to perform or provide. Then we'd have to go to the extra trouble, expense and effort of having to obtain reimbursement and to apply those funds to the proper accounts to cover my added costs (difficult), my customer's delay costs (very difficult) and the additional procurement costs, (less difficult but labor intensive).

Why would I want to rate Seeker's performance as though I'd be interested in hiring him again? Why would I want to rate the firm's performance in a manner that could be used as a recommendation to other government contracting officials to hire Seeker's firm?

Joel - So are you saying, for instance, that one intentional breach of a contract, a breach that is done under truthful and honest disclosure that supports that it is in fact based on sound rationale, is the dagger that would prevent you from contracting with the firm ever again?

While I understand the above is not part of the general scenario that Seeker provided in posing the initial question, Seeker did say "What if completing the contract would cause the contractor to take a loss so great as to require it to fire workers, but the excess cost of re-procurement and other damages to the Government would be slight and significantly less than the cost of finishing the job?" Taken as facts this information suggests something less complicated than your recent post explores.

With the above noted my response to your "Why" is offered by the following less than exacting examples. One is that a firm could survive being listed on the Excluded Parties List to be used in future procurements. A further example is that I personally have purchased Chrysler products after the company?s poor performance in the 1980's and it appears that folks will buy GMC products after the last couple of years of poor performance.

Award of a future contract to a contractor that has intentionally breached a current contract will depend on all the facts. Facts that must be represented by an honest performance rating. The familiar "It depends" that is found in many threads in this forum is the likely real answer to your "Why".

Joel - So are you saying, for instance, that one intentional breach of a contract, a breach that is done under truthful and honest disclosure that supports that it is in fact based on sound rationale, is the dagger that would prevent you from contracting with the firm ever again?

Carl, I didn't say that. Besides, the past performance ratings are only used for certain time periods, which vary according to the contract type (service or supply, construction, etc.).

While I understand the above is not part of the general scenario that Seeker provided in posing the initial question, Seeker did say "What if completing the contract would cause the contractor to take a loss so great as to require it to fire workers, but the excess cost of re-procurement and other damages to the Government would be slight and significantly less than the cost of finishing the job?" Taken as facts this information suggests something less complicated than your recent post explores.

Carl, Seeker's second of four (Seeker asked FOUR, not "two" - questions) asked "If a contractor would come out better by breaching the contract and then making the Government whole by paying damages, would it be wrong for the contractor to deliberately walk away from the contract? " I suggested that it would be much better not to "walk away from the contract" but to help find someone to take it over or to subcontract it in order to minimize the impacts to both Seeker and the Government. Seeker rejected that scenario, as they know what they are going to do and know their business better than us (obviously). If Seeker "walks away from the contract", we would have to figure out how to get the service performed or the product that Seeker contracted to provide. We would have to terminate for default, reprocure, then go back to Seeker for reimbursement of delay costs, our labor costs, the excess costs to finish the contract, if any, etc. It is sometimes very difficult and usually time consuming to reimburse the various cost accounts or appropriations that the various government impact costs are charged to. It is technically "wrong" to breach a contract. I'm not inclined to rate a firm neutrally or favorably, if they "walk away from a contract", leaving us to incur the above outlined efforts, delays, impact time/costs. The firm apparently created its own problem, then decides not to help minimize the time and cost impacts to the buyer. The performance rating is used by contracting offices looking for firms willing and hopefully capable of performing related work during the next several years.

With the above noted my response to your "Why" is offered by the following less than exacting examples. One is that a firm could survive being listed on the Excluded Parties List to be used in future procurements. A further example is that I personally have purchased Chrysler products after the company?s poor performance in the 1980's and it appears that folks will buy GMC products after the last couple of years of poor performance.

Award of a future contract to a contractor that has intentionally breached a current contract will depend on all the facts. Facts that must be represented by an honest performance rating. The familiar "It depends" that is found in many threads in this forum is the likely real answer to your "Why".

Carl, Seeker's fourth question asked "Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" While I agree that there can be factors that have to be weighed in order to decide whether or not to breach one's contract responsibilities, the firm can certainly help everyone by cooperating in getting the job finished and we might well reflect that in the performance rating accompanying comments. I've been involved in several TFD's, the reprocurements and the settlements. The defaulting firm and/or bonding company has either made things easier or tougher on both us and them.

One of the best threads in a long time. Lots of good discussion in here.

Joel focuses, quite rightly, I think, on the administrative nuisance of a default and reprocurement. In effect, he is saying that there is no way to make the government whole through payment of damages. A contractor who walks away will inconvenience the bureaucracy, and money damages won't fix that or earn forgiveness.

Joel - Thanks for the response. As the one that first responded in this thread regarding the connection to a performance rating I agree with you completely that the performance rating should not be neutral or favorable. I do not like the idea of adding an additional rating category either. My post #11 of this thread intended to pass this along but missed the mark a little. I support an adverse rating that is truthful and represents why there was a breach and leave it to future CO's considering the firm for a contract to determine whether they believe the rating of "Red" to be adverse to future contracts or not.

Interesting paper pertinent to this thread: "Why Breach of Contract May Not Be Immoral Given the Incompleteness of Contracts," by S. Shavell, Harvard Law School, March 1, 2009.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1372170

Interesting paper pertinent to this thread: "Why Breach of Contract May Not Be Immoral Given the Incompleteness of Contracts," by S. Shavell, Harvard Law School, March 1, 2009.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1372170

I had a long answer written then accidentally hit the tab button - dang it - wiped it out.

I'm not a lawyer. But I think that the premise of the article - incomplete contracts - might be really discussing risk allocation. My background is primarily in design and construction contracting, so my perspective might be different than someone in manufacturing, sales or services. However, there is pretty well developed risk allocation in construction contracting to allocate many risks to the party - theoretically - best qualified to manage it. The contractors often add some type of risk factor or contingencies and they look for weaknesses in the specs to hope to make up for later in changes. They also buy various types of hazard and risk insurance.

I also thought that the example the author used to justify his position was kind of weak, albeit from my perspective. As a boy, I used to shovel and snowblow walks and driveways in Minnesota (my Alabamian wife calls it "Minnesnowta"). If my dad's snowblower was stolen - after killing me - he would have filed an insurance claim, I suppose or would have made me pay it back, if I didn't perish from the beating. OK - OK - I admit that my customers would probably have excused me from performance because they could easily find another kid to take over! But I didnt have a written contract, either.

But - so could the contractor in the lawyer's example in the article. They could have gotten somebody to cover their contractual obligation, plus they would probably have insurance on their equipment, unless they were careless or ignorant. If they were intending to stay in business, then they would have bought another snowblower.

So, where would one draw the line on leaving out some contingency in a construction contract, as an excuse to breach, where there are many shared risks and many allocated risks? I suppose you draw the line when it becomes too risky to continue. Then the bonding company wipes out what assets you have left after the default...

Sure wish I could get a full copy of that paper, as all I could get from the link was the abstract.

Sure wish I could get a full copy of that paper, as all I could get from the link was the abstract.

Turn on your "cookies", refresh the screen and a "download" button will magically appear on the upper bar...

Thanks Joel, unfortunately the network adminstrators here have locked out any changes to the internet options, so I cannot turn on the "accept cookies" feature. I'll download it at home later tonight on my home computer.

To all of you who keep advising me to talk to the KO, I don't mean to be rude, but we don't need your advice. Our situation is under control. We know what we want to do and we're doing it. We're fully qualified to do that and don't need your help. We know our business and our customer better than you do. I simply asked two philosophical questions. "Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" I was interested in opinions about those two questions because of a chat with our lawyer over coffee. Maybe I wasn't clear. But I can see that this is the wrong place to come to discuss matters of philosophy. I won't try it again.

I appreciate those of you who have responded in the spirit of my inquiry. Thanks.

I think the "right" or "wrong" lies in the eyes of the beholder. It sounds like it is the "right" thing to do for the contractor, and I'm sure it is the "right" thing to do for the contractor's employees who would otherwise be laid off." But the Government may look at it as the "wrong" thing - particularly depending on how it was done. Walking off a job with no warning, with no discussion about alternative solutions, etc., would be more "wrong" to the Government, in my opinion, than walking off the job after trying to work out alternative solutions with the Government. One of the big problems with contractor default is that even if the Government is made financially whole, there is no way for excess reprocurement costs to cover the ill will such a default creates towards the contracting agency by their customers, especially if the customers are external to the agency. If, for example, I'm doing a construction project in a judge's chambers and the default causes him to be out of his chambers for an extra 6 months, he's going to be VERY mad, and obtaining financial compensation for the default won't help that at all.

That being said, in most cases I don't think contract breach is an ethical issue. For example, if you have an early cancellation fee on a cell phone contract of $200, but switching to a new carrier will save you $300 over the period remaining on your current contract, I seriously doubt anyone on this board (I would hope) would consider cancelling the contract unethical. Now some may argue that is not contract breach, because the specific cancellation cost is already built into the contract, but contractual remedies are already built into our federal contracts.

So, yes, I could see deliberate breach of contract being reasonable in some circumstances, but the specifics of the circumstances and how the breach was done would be the key issues for me in determining whether a breach was "reasonable."

Mike,

If right and wrong is in the eye of the beholder, so is the concept of whether or not an intentional contract breach is ethical. I see a signed contract as a formal agreement to perform, something that in the past was done with a handshake. I have also been taught that my word is my bond, and if I promise to do something, to do otherwise is wrong.

Not everyone believes that, and it may not be taught in Harvard either, but perhaps many of the scandals of the last decade or so may have been avoided if such a system was still taught as it was in the past.

Mike,

If right and wrong is in the eye of the beholder, so is the concept of whether or not an intentional contract breach is ethical. I see a signed contract as a formal agreement to perform, something that in the past was done with a handshake. I have also been taught that my word is my bond, and if I promise to do something, to do otherwise is wrong.

Not everyone believes that, and it may not be taught in Harvard either, but perhaps many of the scandals of the last decade or so may have been avoided if such a system was still taught as it was in the past.

"My word is my bond" makes sense when we're talking about transactions between individuals, but what sense does it make when we're talking about transactions between complex organizations, like a government and a corporation? Whose word is supposed to be the bond? The agent of the organization? If that's the case, then the government is immoral quite often, since it will not hesitate to disavow a contract made by an agent who didn't follow instructions. Think about the Christian Doctrine. I hope Harvard Business School does not teach "my word is my bond" as any kind of general business principle.

Mike,

If right and wrong is in the eye of the beholder, so is the concept of whether or not an intentional contract breach is ethical. I see a signed contract as a formal agreement to perform, something that in the past was done with a handshake. I have also been taught that my word is my bond, and if I promise to do something, to do otherwise is wrong.

Not everyone believes that, and it may not be taught in Harvard either, but perhaps many of the scandals of the last decade or so may have been avoided if such a system was still taught as it was in the past.

Dw - if a contractor has a contract with both his employees and with the Government, and in order to honor one contract he has to break the other, what is the right thing for the contractor to do?

The Government contracting process provides remedies (although as I mentioned in a previous post, these remedies often never truly make the Government whole, and others have pointed out how Government T4C's don't really make the contractor whole either) and both the Government and the contracting parties agree to play within those rules. As long as both parties are truthful with each other and operate in good faith, I don't see how ethics enter into the equation. If a contractor tells me he has to walk off a project because he'll go bankrupt otherwise I will not be at all happy about it, but I wouldn't consider his action unethical, but I'd likely terminate the contract for default, apply excess reprocurement costs, etc. Similarly, it isn't unethical for the Government to terminate a contract for convenience.

Going back to my cell phone example, are you saying you think it's unethical to break a cell phone contract early?