United States: Federal Circuit Holds Termination For Convenience Clause Inoperative In Services Contract

In a recent decision, the Court of Appeals for the Federal Circuit held that FAR 52.212-4(l), the Termination for Convenience clause used in commercial items contracts, had no effect in a services contract—even though the services contract explicitly incorporated the clause. The case could have significant implications not just for services contracts that borrow commercial-items clauses, but also for contractors evaluating whether new clauses added into their contract (like clauses requiring COVID-19 vaccines) are operative.

Facts of the case and lower court decision

The case, JKB Solutions and Services v. United States,¹ involved an indefinite-delivery indefinite-quantity (IDIQ) contract under which JKB was to provide instructor services for the Army's "Operational Contract Support" course. The contract—a services contract—explicitly incorporated FAR 52.212-4, "Contract Terms and Conditions—Commercial Items," including that provision's termination for convenience clause (FAR 52.212-4(l)).

When a dispute arose about the number of courses for which the Army had to pay JKB during each contract period, JKB filed suit in the Court of Federal Claims ("COFC"). The Army moved for summary judgment, arguing that under the constructive termination for convenience doctrine (which limits a contractors recovery when an agency could have, but did not, terminate for convenience), JKB could only recover termination-for-convenience costs that its complaint did not seek. Agencies can only constructively terminate for convenience contracts that have a termination for convenience clause. So the question for the COFC was, in part, whether JKB's contract with the Army had an applicable termination for convenience clause.

The COFC said yes: the contract expressly incorporated FAR 52.212-4(l). The fact that the clause came from a FAR section dealing with commercial items contracts, the COFC held, did not matter. Although the provision mentioned "commercial items" in its heading, nothing in the FAR limits its applicability to commercial item contracts. And letting JKB escape an expressly-incorporated clause just because it was initially intended for commercial items contracts would deny the Army the benefit of its bargain. Thus, the COFC held, the contract had a termination for convenience clause that could support the constructive termination for convenience theory. The COFC granted summary judgment in the Army's favor.

The Federal Circuit's reversal

In an appellate decision issued in November, the Federal Circuit disagreed. Though the parties incorporated FAR 52.212-4 into their contract, the court held, that provision applies only to commercial items contracts and had no effect on JKB's services contract. In so holding, the court appeared to draw a bright line between commercial-items and services contracts—that is to say, the Federal Circuit did not consider the possibility that JKB's services could be commercial items.²

In reaching its conclusion, the court rejected the COFC's reasoning that limiting FAR 52.212-4 to commercial items contracts would deny the Army the benefit of its bargain. "Giving the incorporated termination for convenience clause no effect," the court explained, "does not 'deny the Government the benefit of its bargain' ... In drafting the contract, the government simply incorporated a FAR provision that, on its face, applies only to commercial item contracts."³ Put differently, the Army had simply bargained for a meaningless clause. Since the Army could not constructively terminate for convenience without an effective termination for convenience clause, the court vacated the COFC's decision and remanded the case.

Looking forward

The holding of JKB could have broad implications for government contractors, in a few different ways. First, the Federal Circuit's reasoning could mean that a range of commercial-items clauses, including FAR 52.212-4(l), could be inoperative when incorporated into services contracts (and vice versa). Contractors should review their contracts' clauses to gauge which might be ineffective in light of JKB.

Second, in a time when agencies are adding vaccination clauses into their contracts (and seeing a broad range of resulting legal challenges), contractors may see JKB as a new angle for attacking vaccine clauses when incorporated into contracts that fall beyond the scope of the applicable executive order and guidance (like those listed in Section 5(b) of the Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors).

The Federal Circuit's decision remanded the case for the COFC to decide whether other legal principles (specifically, the Christian doctrine) provided a termination for convenience clause applicable to JKB's contract. A new decision from the COFC might add some more nuance to these issues. 

Footnotes

1 18 F.4th 704 (Fed. Cir. 2021).

2 The court did note that the parties did not dispute that the contract was a services contract. 18 F.4th at 710 n.2.

3 2021 WL 5348537, at *5 (citations omitted).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.