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Seeker

Deliberate breach of contract?

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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? 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? 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?

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Guest carl r culham

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.

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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.

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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?

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Guest carl r culham

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?

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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.

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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.

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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.

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"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.

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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!

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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.

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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.

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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.

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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?

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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.

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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?

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