Jump to content

Hotel K, Software License K clause: Early termination of contract not result in a refund to govt


govt2310

Recommended Posts

I have seen this in proposed, draft hotel contracts and also in proposed, draft software license agreements: the contractor's boilerplate agreement includes a clause that says something like "early termination of agreement shall not result in a refund to the Government, and if the Government has not yet paid for the remainder of the period of performance, the Government is still liable to the Contractor for the remainder of the period of performance."

My agency once took over the administration of a contract for another agency, and that contract had this clause. Because the original agency had incrementally funded the contract, and it had a period of performance that included options, we were able to successfully defend the government's termination of the contract and the unenforceability of this clause, as this clause violated the Anti Deficiency Act (the clause obligated the govt to pay the remainder of the contract if the govt terminated, yet, with incremental funding, we had no guarantee that the agency would get sufficient funding for this contract for the option years/future fiscal years).

I have seen this clause in hotel conference leasing contracts and have always been able to negotiate them out.

Now I am seeing this clause again, this time in a software license agreement, and I have the feeling the contractor will not just back down and delete the clause. I need to have a solid justification. If this is a one year period of performance, fully funded from the beginning, would you say this clause still violates the ADA? Is there any other justification that supports the agency's position that this clause is unlawful/unenforceable?

Link to comment
Share on other sites

In the case of software, the license is a one time charge to use the software for a stated period of time like one year. Is that what you have? If so, that makes sense from the software providers point of view. They don't want to sell you the software, have you use it for a week to complete some task, and return it for a refund.

You aren't fully funding a period of performance in advance - you are purchasing a license.

Link to comment
Share on other sites

FAR 52.249-2(f), regarding Termination for Convenience, states:

(f) Subject to paragraph (e) of this clause, the Contractor and the Contracting Officer may agree upon the whole or any part of the amount to be paid or remaining to be paid because of the termination. The amount may include a reasonable allowance for profit on work done. However, the agreed amount, whether under this paragraph (f) or paragraph (g) of this clause, exclusive of costs shown in paragraph (g)(3) of this clause, may not exceed the total contract price as reduced by (1) the amount of payments previously made and (2) the contract price of work not terminated. The contract shall be modified, and the Contractor paid the agreed amount. Paragraph (g) of this clause shall not limit, restrict, or affect the amount that may be agreed upon to be paid under this paragraph.

We may have bought the license, but the license is has a timelife built in to it, it is not like a tangible item that we buy and own forever like a piece of hardware. It is almost like leasing, and leasing is a service. THerefore, if we T/C, the Govt has not received a benefit, no work was "done," for the remainder of the Period of Performance, and according to FAR 52.249-2(f), the contractor is not to be compensated beyond the contract price of work not terminated.

So it looks to me like the Contractor's proposed clause is unacceptable because it conflicts with the FAR.

Link to comment
Share on other sites

The Contractor's proposed language sounds very similar to the FAR cancellation clause 52.217-2. This clause does not conflict with the ADA, what you need to do is fund the possible cancellation charge with current year funding. SOP.

Link to comment
Share on other sites

The Contractor's proposed language sounds very similar to the FAR cancellation clause 52.217-2. This clause does not conflict with the ADA, what you need to do is fund the possible cancellation charge with current year funding. SOP.

A Multiyear Contract is a type of Requirements Contract. Yes, Multiyear Contracts can have a Cancellation Ceiling/Cancellation Charge. However, the situations I have presented do not involve a Multiyear Contract. But even if our agency were to agree to a cancellation charge clause, we do not have sufficient current year funding to fund such a cancellation charge, which I think is the common case for a lot of agencies in this type of situation.

Link to comment
Share on other sites

Well it sounds like you need to negotiate - which means that you need to offer something in return. Some contractors may be willing to accept the risk of cancellation under certain specific conditions, one of them being annual appropriations (not incremental funding). This means that you can not cancel the license simply because you decide you don't want it or you do not use good faith to secure funding. I have even seen some finance institutions accept this risk and allow the contractor to sell their anticipated revenue stream to them and cash them out up front without recourse. You need to negotiate fairly and in good faith.

Link to comment
Share on other sites

Govt2310,

If this is commercial software, I think your reference to FAR 52.249-2 is misplaced. Consider 52.212-4, as prescribed in FAR 12.403(a).

In any case, I would offer that the contractor's performance is complete when it grants the government the license, regardless of what the government does with it. To put it in the language of the FAR, when terminating a commercial item contract for convenience, the contractor shall be paid "the percentage of the contract price reflecting the percentage of the work performed prior to the notice of the termination..." FAR 12.403(d)(1)(i)(A). As all the work to be performed has been, the percentage is 100%. If I contract for the construction of a building that burns down the day after I accept, I don't expect money back from the contractor.

Link to comment
Share on other sites

Jacques,

Right answer. You beat me to it.

Govt2310,

There's no period of performance in the contract. You purchased a license. The contractor gets paid when the license is delivered.

What if it is a software license + software mntc services? And the services price is not separable from the license fee? Then the govt is paying for mntc services for say 12 months,, but if a T/C happens, the agency still has to pay the KTR for remaining perf period (the mntc services do have a period of performance in my view)?

Link to comment
Share on other sites

What if it is a software license + software mntc services? And the services price is not separable from the license fee? Then the govt is paying for mntc services for say 12 months,, but if a T/C happens, the agency still has to pay the KTR for remaining perf period (the mntc services do have a period of performance in my view)?

If the maintence services are identified and priced separately, I would try and negotiate maintenance separately. However if the contractors normal and accepted practice is that maintence is part of the pre-paid amount like the license and gets paid upfront, you will have a very difficult time.

Many of the GSA Schedule contractors for license and maintence include clauses such as this where if you cancel before the end of the term, you get nothing. This is from one contractors GSA contract and pricelist.

Term licenses and/or maintenance may be discontinued by the ordering activity on thirty (30)

calendar days written notice to the Contractor; however, no refunds shall be provided by

Contractor.

Link to comment
Share on other sites

The earlier traffic expressed some concern about advance payment, which I didn't see as problematic if all we were talking about was a license on existing commercial software. However, you may want to revisit the advance payment question as it relates to the maintenance, if it is literally maintenance and not a warranty. Was the maintenance paid for in advance? Is this a commercial item? If so, note FAR 32.202-1(B)(6) (Prior to any performance of work under the contract, the aggregate of commercial advance payments shall not exceed 15 percent of the contract price). If not, note FAR Subpart 32.4 (restricting advance payments for noncommercial items to certain circumstances).

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
×
×
  • Create New...