Terminating existing government contracts has emerged as one of the primary goals for the new administration. While the government has traditionally enjoyed broad discretion in terminating contracts for its convenience, there are limits to this discretion that the current administration appears to be testing. Historically, the only bases to challenge a termination for convenience have been bad faith or abuse of discretion. Based on the current administration's methods of terminating contracts, however, a new basis to challenge the terminations may be possible – arguing that the terminations are a de facto impoundment in violation of the Impoundment Control Act (ICA). Successfully challenging a termination for convenience likely will not resurrect the contract, but may increase a contractor's recovery. Below, we explore each basis and how government contractors can most effectively use them to challenge these terminations. 

Bad Faith Challenges

When asserting that a termination was executed in bad faith, a contractor faces a fairly steep burden. Courts have generally only been willing to find that a contract was terminated in bad faith where the government did so to get a better bargain, entered into the contract with no intention of honoring it, or where the government terminated the contract because of particular animus towards or with an intent to injure an individual contractor. 

Because the administration appears to be terminating most contracts with the intent to essentially cut the programs they serve and therefore without the intent to resolicit the requirements, it is unlikely that most contractors will be able to successfully argue that their contract was terminated in bad faith to allow the government to get a better deal on a subsequent contract. And because most, if not all, contracts currently being terminated were entered into during the prior administration when there likely was an intent to honor the contract, contractors will similarly have a tough time successfully challenging their terminations on the basis that the government never intended to honor the contract. Finally, proving that an agency terminated a contract due to bias against a contractor is difficult because such allegations can usually be refuted by an agency providing a legitimate alternative reason for the termination. See Northrop Grumman Corp v. United States, 46 Fed. Cl. 622 (2000). Such arguments are made even more difficult given the facts likely involved in most current terminations – broad terminations impacting thousands of contractors seemingly indiscriminately. That said, as is often the case, facts matter. And depending on a contractor's particular circumstances, they may have a viable claim that their contract was terminated in bad faith.  

Abuse of Discretion Challenges

When deciding whether a contracting officer (CO) abused his or her discretion in terminating a contract for the government's convenience, courts typically look at four factors: (1) the CO's bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation. As with bad faith termination challenges, the facts are critical to analyzing how these four factors will (or will not) support your improper termination claim. For example, if your contract was terminated as a result of an executive order (E.O.), the legality of which is currently being challenged, you will want to pay close attention to how that litigation is resolved. If the E.O. giving rise to your termination is found to be illegal, that determination could support challenging the termination as an abuse of discretion under the fourth factor above – that the termination stemmed from the violation of an applicable statute or regulation. 

Abuse of Discretion via the Impoundment Control Act

An alternative and novel theory is to assert that the administration's extensive and sweeping contract terminations are an attempted end-run around the ICA, and result in a de facto impoundment in violation of the ICA. The violation of the ICA would be used to allege the violation of an applicable statute in support of an abuse of discretion claim as described above. In this regard, the ICA places strict limitations on the executive branch's authority to block the expenditure of funds appropriated by Congress, i.e., "impound" the funds. In doing so, the ICA distinguishes between two types of impoundments: deferrals and rescissions. Deferrals are merely delays in the expenditure or "obligation" of appropriations, whereas rescissions are cancellations of appropriations. The executive may "defer" the expenditure of appropriated funds "to provide for contingencies," "to achieve savings made possible by or through changes in requirements or greater efficiency of operations," or "as specifically provided by law," though he must notify Congress of the deferral (which then has the authority to override the deferral) and may not extend deferrals beyond the fiscal year. On the other hand, the authority to "rescind" appropriated funds lies only with Congress, though the president may propose rescissions to Congress and pause expenditures for a specified period of time while Congress considers the president's proposal. 

Because of the scope of the ongoing contract terminations, the seeming underlying intent to use terminations to eliminate certain appropriated programs, and the administration's non-use of the procedural steps necessary to designate the terminations as deferrals or rescissions, it is possible that a contractor could successfully argue that the termination of a contract is an improper impoundment of appropriated funds in violation of the ICA. One challenge in asserting such a claim could be demonstrating standing, as there is currently an open question regarding whether the ICA creates a private right of action. Because the ICA violation in this scenario would only be used to demonstrate the violation of an applicable statute to support an abuse of discretion claim, however, there is a good argument that the ICA standing question is likely irrelevant. In this regard, just last week, Judge John J. McConnell, Jr., in State of New York, et al. v. Donald Trump, et al., 25-cv-39, a case challenging the federal funding freeze that is pending in the District Court for the District of Rhode Island, held that because the plaintiffs (various states and non-profit organizations) only alleged an ICA violation in support of their Administrative Procedure Act (APA) claim, the plaintiffs did not need independent standing under the ICA. 

Abuse of Discretion via Lack of CO Discretion 

Another potentially viable theory to support an abuse of discretion claim under the current circumstances is to argue that the CO did not exercise their own business judgment in terminating the contract. Generally, decisions to terminate contracts for the government's convenience must be made by a CO and must be the product of the CO's independent business judgment as to whether the termination was appropriate and in the government's best interests. Pac. Architects & Eng'rs, Inc. v. United States, 491 F.2d 734, 744 (Ct. Cl. 1974) (quoting N.Y. Shipbuilding Corp. v. United States, 385 F.2d 427, 435 (1967)); see also Darwin Constr. Co. v. United States, 811 F.2d 593, 598 (Fed.Cir.1987). In other words, a CO that terminates a contract solely because they were directed to do so by their superiors has arguably abused their discretion. Id.; id. Given the volume and rate at which contracts are being terminated, it is possible (if not likely) that COs are terminating contracts solely at the direction of their superiors and have not independently analyzed, and documented, whether a termination is in the government's interests, as is required. Id.; id. That said, because an agency must only demonstrate that the CO's decision "was rational based on the objective evidence that was available to the CO at the time," TigerSwan, Inc. v. United States, 118 Fed. Cl. 447, 454–55 (2014), it is possible that a tribunal could find that a presidential or appropriate government agency directive to an agency head, that is then delegated to COs, to terminate contracts could constitute a rational basis for a CO to terminate a contract for the government's convenience.

One last point to consider here is who the CO is. It remains an open question whether certain agency heads have independent contracting authority by virtue of their positions. The one case that indirectly addressed this issue, Sam Gray Enterprises, Inc. v. United States, stated in dicta that an agency head had contracting authority simply by virtue of their position. 43 Fed. Cl. 596, 603 (May 5, 1999) (citing 48 C.F.R. § 1.601). However, the decision was affirmed on appeal on other grounds and did not analyze or answer who, by virtue of their office, has contracting authority. Sam Gray Enterprises, Inc. v. United States, 2000 WL 701733, at *3 (Fed. Cir. May 31, 2000). As such, contractors will want to consider who the terminating CO is and how, if at all, that person or position changes their strategy to challenge the termination. 

Why Does It Matter?

A challenge to a termination for convenience at a board of contract appeals or the Court of Federal Claims is unlikely to result in reinstatement of the contract. And contractors whose contracts are terminated for convenience are already entitled to various costs such as the costs associated with winding down the contract, including a fair and reasonable profit on work performed. So, you may be asking yourself, what is the benefit of challenging a termination for convenience? The answer is additional termination costs and damages. Where a termination for convenience of the government is found to be a breach of the contract due to bad faith or an abuse of discretion, contractors may be able to recover anticipatory profits and consequential damages. See e.g., Sigal v. Constr. Corp., CBCA 508, May 13, 2010, 10-1 BCA ¶34,442; J.R. Mannes Govt. Services Corp., CBCA 5638, Nov. 17, 2017, 17-1 BCA ¶36911; Krygoski Construction Co. v. United States, 94 F.3d 1537, 1541 (Fed. Cir. 1996). In deciding whether the costs of litigation are worth the potential recovery, contractors should consider the potential value of any recovery, taking into account the dollar value of their terminated contract. Smaller dollar contracts that likely have proportionally smaller recovery potential may not represent a worthwhile return on the investment of litigation. On the other hand, larger dollar contracts that likely carry correspondingly larger recovery potential may justify the investment in pursuing a challenge.

Key Takeaways

While the government's authority to terminate contracts for its convenience is broad, it is not without limit. In considering whether to challenge a termination for the government's convenience, including which basis to rely on, contractors should carefully consider their risk tolerance, the potential outcomes, and how the specific facts of their case fit within the theories of the case described above. While some of the theories outlined above are novel, the unprecedented actions of the executive branch may call for creative and aggressive legal solutions. Recent judicial opinions addressing the numerous challenges to the administration's actions, including the federal funding freeze cases, indicate a willingness on behalf of the judiciary to not only consider these claims, but enforce the limits on the executive branch's authority. 

If you would like to explore challenging a termination for convenience, please contact one of the attorneys listed below. 

Scott N. Flesch, sflesch@milchev.com, 202-626-1584

Ashley Powers, apowers@milchev.com, 202-626-5564

Jason N. Workmaster, jworkmaster@milchev.com, 202-626-5893

Alex L. Sarria, asarria@milchev.com, 202-626-5822 

Robert Cetrino, rcetrino@milchev.com, 202-626-1572

Connor W. Farrell, cfarrell@milchev.com, 202-626-5925

Elissa B. Harwood, eharwood@milchev.com, 202-626-5890

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