Jump to content
The Wifcon Forums and Blogs

Darby8001

Termination of Requirements Contract

Recommended Posts

Hello all, while I have enjoyed this site for years this is my first time to post. Below is a scenario that played out sometime back and is settled in its entirety. However, as this caused a good deal of discussion in my office I am curious to see the opinions of the posters on this board. I tried to synopsize the pertinent fact without droning on but let me know if you need any additional info to provide your opinion.

A competitive 8(a) set aside was solicited and awarded as requirements type contract without discussion under Part 15 for commercial transportation services(base year + 4 option years).

As this was an 8(a) the pre-award notice normally sent out under 15.503(a) was not required.

After award notices were sent out and the unsuccessful competitors were debriefed, an unsuccessful offeror filed a timely size challenge.

The awardee was found to be ?other than small? by the SBA. Under appeal the OHA agreed with the SBA?s ruling.

Due to the nature of the service the awardee was allowed to perform while the matter was pending resolution. The agency issued one task order for 3 months of service.

At the end of the 3 months of service the agency had received the opinion of both the SBA and OHA and decided to terminate the contract for convenience using the clause 52.212-4.

The one task order issued was completed and paid in its entirety. As there were no outstanding task orders so the termination applied to the basic contract.

The contractor submitted a T4C settlement proposal for a substantial amount of money citing proposal costs and losses due to selling off fleet and several other smaller issues.

Now I would like to pose a couple ?what would you do? questions.

1.Since the set aside was for 8(a) and the contractor was found to be ?other than small?, is the T4C appropriate or would you have attempted a T for Cause?(no proof of any malicious intent)

2.Would you entertain settling the cited cost (over $100K) or deny it due to the only order issued is paid in its entirety?

Share this post


Link to post
Share on other sites
In answering your questions, are we to assume that the offeror's representation was made in good faith?

That is a tricky question. While I personally believe the awardee knew exactly what they were doing there is no firm proof of this.

Basically the company has 10+ mini companies that are formed to get 8(a) certification and then once contract end the companies close. My understanding is that once the mini-company files a final tax return with the IRS the earnings of that mini-company no longer apply when determining size. In this instance the owner had too many mini-companies open at the same time and did not file a final tax return to close a larger one until after the challenge.

My belief is that someone with the knowledge to do all that successfully, knows well and good and well what they are doing. But.....then again no proof of "bad faith". So, I guess you have to assume good faith?

Share this post


Link to post
Share on other sites
That is a tricky question. While I personally believe the awardee knew exactly what they were doing there is no firm proof of this.

Basically the company has 10+ mini companies that are formed to get 8(a) certification and then once contract end the companies close. My understanding is that once the mini-company files a final tax return with the IRS the earnings of that mini-company no longer apply when determining size. In this instance the owner had too many mini-companies open at the same time and did not file a final tax return to close a larger one until after the challenge.

My belief is that someone with the knowledge to do all that successfully, knows well and good and well what they are doing. But.....then again no proof of "bad faith". So, I guess you have to assume good faith?

Then I will qualify my answer. If the offeror made the representation in bad faith, then the contract would be void. If the offeror made the representation in good faith, then I would terminate for convenience and negotiate a reasonable settlement.

Share this post


Link to post
Share on other sites
Then I will qualify my answer. If the offeror made the representation in bad faith, then the contract would be void. If the offeror made the representation in good faith, then I would terminate for convenience and negotiate a reasonable settlement.

Don,

What are your thoughts on providing for a settlement in excess of the total of all delivery orders combined? If the one and only task order was 100% utilized and 100% paid and there is no remaining obligated balance, what would you limit your obligation to?

Share this post


Link to post
Share on other sites

I would limit my obligation to what it says in the contract. See FAR 52.212-4(l):

(l) Termination for the Government?s convenience. The Government reserves the right to terminate this contract, or any part hereof, for its sole convenience. In the event of such termination, the Contractor shall immediately stop all work hereunder and shall immediately cause any and all of its suppliers and subcontractors to cease work. Subject to the terms of this contract, the Contractor shall be paid a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system, have resulted from the termination. The Contractor shall not be required to comply with the cost accounting standards or contract cost principles for this purpose. This paragraph does not give the Government any right to audit the Contractor?s records. The Contractor shall not be paid for any work performed or costs incurred which reasonably could have been avoided.

The clause provides for a settlement that includes more than just prices paid for work performed. Why should this T4C settlement be different?

Share this post


Link to post
Share on other sites

Just out of curiosity, you said you were doing a competitive 8(a). Even if your agency has an MOU with SBA allowing the agency to conduct the competition directly, you still generally need to have SBA verify the 8(a) eligibility before you award the contract. Did you do that? If so, was the issue of the offeror's size not reviewed by SBA when verifying 8(a) eligibility?

Share this post


Link to post
Share on other sites
Now I would like to pose a couple ?what would you do? questions.

1.Since the set aside was for 8(a) and the contractor was found to be ?other than small?, is the T4C appropriate or would you have attempted a T for Cause?(no proof of any malicious intent)

2.Would you entertain settling the cited cost (over $100K) or deny it due to the only order issued is paid in its entirety?

I would terminate the contract for convenience and I would not pay them a nickel. See FAR 52.216-21, Requirements (OCT 1995), paragraph (B): "Delivery or performance shall be made only as authorized by orders issued in accordance with the Ordering clause."

If the government terminates the contract when no order is underway, how could it owe the contractor anything? Owe what based on what?

Share this post


Link to post
Share on other sites

.

I've never heard of that trick, forming a daughter corporation and then closing the daughter out after completion of a contract as a way to prevent the SBA from knowing about affiliates and accurately determining the parent firm's size.

If true, that sure suggests bad faith to me. Actually, I think that qualifies as fraud, which may always indicate bad faith.

.

Share this post


Link to post
Share on other sites

Civ_1102 ? The Company was identified by SBA as 8(a). However, there was apparently some errors in their vetting process and they corrected them once the challenge was formed.

Brian ? I would venture to say it happens quite a bit.

Don/Vern

I went the direction of Vern and denied the proposal in its entirety. Using the language at 52.216-21(d)

?The Government is not required to purchase from the Contractor requirements in excess of any limit on total orders under this contract.?

In my office the disagreement with my stance was the excerpt Don pulled from 52.212-4(l)

?Contractor shall be paid a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate?

My argument is this. Regardless of how the company received and lost their 8(a) status they have a duty to themselves to protect the interest of their company. They knew the contract was being challenged and they only had an order for 3 months of service. I would think a prudent person would not commit to anything in excess of the total task orders. If they do that is on them.

Suppose you have a 1 year requirements contract for an estimated 1000 pies. At the onset of the contract you issue one order for 200 pies. The pie maker anticipating 1000 pies acquires the materials for all 1000. If over the rest of the year you never order any more pies, then you wouldn?t be responsible for the remain 800 pies worth of material would you?

Share this post


Link to post
Share on other sites

This question is more interesting than I first thought. I found the following in Administration of Government Contracts, Fourth Edition, on p. 1120:

If a requirements contract is terminated for convenience, the contractor's recovery is not limited by the ordered amount or by a nominal minimum quantity, Albano Cleaners, Inc. v. United States, 197 Ct. Cl. 450, 455 F.2d 556 (1972).

The relevant passage Albano Cleaners, Inc., states:

Defendant also defends upon the basis of the ?Indefinite Quantities? section of the contract. Under this provision, defendant's contractual obligation to plaintiff was to ?order supplies hereunder having an aggregate value at the unit prices specified herein of not less than $10.00.? Defendant says that the amount of cleaning and repair service of foul weather gear that would be required could not be known in advance, and that, since the Supply Center actually did order more than $10 worth of services, it has satisfied its obligations under the contract.

This contention too is unacceptable. The controversy here is not based upon a failure to supply a specified amount of business during the contract term. The quantity of services was, to be sure, only estimated, to be paid for at unit prices for whatever amount of orders defendant placed (the estimated amount of the contract being $61,774.44). The controversy is, instead, about terminating a one-year's contract after less than a month. Over the contract term plaintiff did not have a right to any specific amount of business (the amount in part depending on the needs of incoming vessels), but it did have a right to receive whatever business of the type covered by the contract was generated in the specified contract areas (?Zones?) for the full one-year contract period. Defendant could not, after ordering $10 worth of services, thereupon further disregard the contract and order the identical services elsewhere. If defendant decided, in its best interests, to terminate the contract, the contract afforded a proper method of so doing, since it contained the standard ?Termination For Convenience? provisions. However, a termination under these provisions requires, in fairness to the contractor, compensating him in accordance with a specified formula. The contractor is at least entitled to recover the expenses he incurred in preparing to fulfill his contractual obligations. An attempted termination under the indefinite quantities clause after ordering the minimum services there specified and without any further responsibility would plainly conflict with the obligations imposed by the termination-for-convenience provisions. Whatever the permissible scope of such an indefinite quantities provision is ( see, e. g., The Tennessee Soap Co. v. United States, 126 F.Supp. 439, 130 Ct.Cl. 154 (1954)), such an unusual and unfair interpretation of the clause here involved as defendant proposes could hardly have been in accord with ?the rational intention of the parties? when they entered into this contract, Ozark Dam Constructors v. United States, 127 F.Supp. 187, 191, 130 Ct.Cl. 354, 360 (1955), and the court would not be justified in adopting it.

What's interesting is that the same does not hold true for IDIQ contracts. In this respect, Administration of Government Contracts states the following:

If the contract is an indefinite delivery/indefinite quantity contract and the government is not bound to place orders, the termination settlement will be limited to the ordered amount or the minimum quantity, whichever is greater. These problems were present in Okaw Indus., ASBCA 17863, 77-2 BCA P 12,793, in which the board held that the contract price was to be calculated according to the ordered services, so long as the amount ordered exceeded the contract minimum. It did not matter that the amount ordered was less than the "estimated amount," since there was adequate consideration to bind both parties.

Share this post


Link to post
Share on other sites

Is there a way to avoid the contract without concluding (or having reason to believe) the contractor engaged in fraud? "An award is plainly or palpably illegal if the award was made contrary to statutory or regulatory requirements because of some action or statement by the contractor, or if the contractor was on direct notice that the procedures followed were unlawful." Maintenance Serv. & Sales Corp., 70 Comp. Gen. 664 (1991), discussed in Cibinic & Nash, Administration of Government Contracts (3d Ed. 1995), at 25. While the contractor may not have known that its rep & cert (or whatever document it provided to the SBA) was false, that fact is that it was, and but for the contractor's (likely negligent) representation, no award under 8(a) would have occurred.

Share this post


Link to post
Share on other sites

Now we are getting to the interesting (to me anyway) parts of this discussion. So it appears the courts treat the T4C of a requirements contract different than an IDIQ. I have seen the reference Don provided and would like to add the DOTBCA went into in more detail here:

Aviation Specialists, Inc., DOT BCA 1967, O2-1 BCA 31.788 (December 30, 1990)

Robert Witte wrote a good digest of the case in a 2003 NCMA article:

http://www.ncmahq.org/files/Articles/4733B_CM_Nov03_p44.pdf

?FAA argued that this ?requirements? contract, with no specified minimum, could have been allowed to run its course without ordering and would have incurred no further

liability. It contended that it should not be penalized for terminating the contract for convenience. The board noted that ? termination,? the procedure chosen by FAA,

altered the rights and obligations of both parties?.

And later

?Concurrently, ?FAA gained a valuable right; it no longer had to purchase its requirements from [ASI].? If a new requirement arose, the FAA could solicit another source. To avoid this ?requirements? feature without breaching the contract, FAA established in the contract the ?termination? mechanism, which is to be enforced even if the resulting payment to ASI is greater than it might have been if the contract were not terminated.?

If courts allow termination cost in excess of the total orders on a requirements contract, the government is stuck between a rock and a hard place.

Now, go back to the termination itself. Is the T4C still the most appropriate? Or, would a termination for cause fit the bill more. Look at 52.212-4(m), emphasis added in bold:

?The Government may terminate this contract, or any part hereof, for cause in the event of any default by the Contractor, or if the Contractor fails to comply with any contract terms and conditions, or fails to provide the Government, upon request, with adequate assurances of future performance.?

If the contractor is found to be ?other than small? after award on an 8(a) set aside are they complying with the terms and conditions of the contract?

Share this post


Link to post
Share on other sites
Is there a way to avoid the contract without concluding (or having reason to believe) the contractor engaged in fraud? "An award is plainly or palpably illegal if the award was made contrary to statutory or regulatory requirements because of some action or statement by the contractor, or if the contractor was on direct notice that the procedures followed were unlawful." Maintenance Serv. & Sales Corp., 70 Comp. Gen. 664 (1991), discussed in Cibinic & Nash, Administration of Government Contracts (3d Ed. 1995), at 25. While the contractor may not have known that its rep & cert (or whatever document it provided to the SBA) was false, that fact is that it was, and but for the contractor's (likely negligent) representation, no award under 8(a) would have occurred.

Jacques,

If you research some of the decisions dealing with misrepresentation of size status, there is usually some discussion as to whether the representation was made in bad faith. If it was, then the contract is void. However, if the representation was made in good faith then the contract is not void, but it should be terminated. In other words, it seems that an offeror is required to make a good faith representation of its size status, but it is not required to be right.

Share this post


Link to post
Share on other sites
If the contractor is found to be ?other than small? after award on an 8(a) set aside are they complying with the terms and conditions of the contract?

What's the term or condition that they would be failing to comply with?

Share this post


Link to post
Share on other sites
What's the term or condition that they would be failing to comply with?

I would say that the contract was written on the condition that the winning contractor was an 8(a) business. Since they are not, they do not meet the terms and conditions of the contract.

When this scenario was actually happening I had a brief conversation with a member of the SBA legal staff on this issue(don't recall his name). He mentioned he didnt recall anyone attempting to terminate for cause on this issue.

That said I didnt pursue it any futher but now I am curious what other think.

Share this post


Link to post
Share on other sites
That, under a requirements contract, recovery is not limited by the ordered amount.

I'm not sure the case you cited stands for that as a general proposition. It strikes me that the holding in that case was very fact specific. But let me ask you this: Do you know whether the termination for convenience "provision" in that contract read the same as todays? Did the Requirements clause? A 1972 decision is old. A lot has happened since 1972. That decision has a complex and lengthy legal history, and many of the cases that followed and cited it departed from it in some way. The current clause for fixed-price contracts was changed as recently as 2004. The Requirements clause was changed in 1995. Have you done thorough legal research?

Did the Court of Claims in 1972 adhere to the same "plain language" standard of contract interpretation now applied by the COFC and the Federal Circuit?

Moreover, the decision is a little obscure. The judge describes the contract as if it were a requirements type, but refers more than once to an "indefinite quantity" provision.

I'm not saying that you are wrong, but you haven't convinced me that you are right.

Share this post


Link to post
Share on other sites
If you research some of the decisions dealing with misrepresentation of size status, there is usually some discussion as to whether the representation was made in bad faith. If it was, then the contract is void.

Is bad faith the same thing as intentional misrepresentation or fraud? If it isn't, then perhaps the CO isn't stripped of authority by FAR 33.210(B).

I'm familiar with the intentional misrepresentation cases (e.g., Joseph H. Morton Co. v. U.S., 757 F.2d 1273 (Fed. Cir. 1985); C&D Const., Inc., ASBCA 38661, 90-3 BCA ? 23256; J.E.T.S., Inc., ASBCA 28642, 87-1 BCA ? 19569, affd., 838 F.2d 1196 (Fed. Cir. 1988)). I'm not familiar with any cases finding a contract void or voidable on the basis of a negligent misrepresentation. Likewise, I haven't been able to find any cases to the effect that the CO lacked authority to award the contract to a contractor who was, in fact, ineligible. I haven't done enough research to say definitively there are no such cases, but it isn't looking promising.

Share this post


Link to post
Share on other sites

This is a really interesting subject and discussion - one of the best in a long time.

However I think the contractor is an opportunist and takes advantage of the 8(a) program with their forming and closing corporations. If I were the CO I would tell the contractor "I'm not sure what you are entitled to other than getting paid for whats in the single order issued. If you claim you are due more, I need to gather additional information and determine the facts about your company, its size, and how you represented the situation. I don't have the capability and experience to do that so I'm asking the IG to conduct an investigation and provide me with their findings." I bet that's the last I hear from them.

Share this post


Link to post
Share on other sites
I would say that the contract was written on the condition that the winning contractor was an 8(a) business. Since they are not, they do not meet the terms and conditions of the contract.

Be more specific. What particular term or condition?

Share this post


Link to post
Share on other sites
Be more specific. What particular term or condition?

The OP said

Since the set aside was for 8(a) and the contractor was found to be ?other than small?

They misrepresented themselves. Determing size standards isn't rocket science - it's based upon annual revenues.

Share this post


Link to post
Share on other sites
I'm not sure the case you cited stands for that as a general proposition. It strikes me that the holding in that case was very fact specific. But let me ask you this: Do you know whether the termination for convenience "provision" in that contract read the same as todays? Did the Requirements clause? A 1972 decision is old. A lot has happened since 1972. That decision has a complex and lengthy legal history, and many of the cases that followed and cited it departed from it in some way. The current clause for fixed-price contracts was changed as recently as 2004. The Requirements clause was changed in 1995. Have you done thorough legal research?

Did the Court of Claims in 1972 adhere to the same "plain language" standard of contract interpretation now applied by the COFC and the Federal Circuit?

Moreover, the decision is a little obscure. The judge describes the contract as if it were a requirements type, but refers more than once to an "indefinite quantity" provision.

I'm not saying that you are wrong, but you haven't convinced me that you are right.

For a more recent decision, see the case that darby cited--Aviation Specialists, Inc., DOT BCA 1967, O2-1 BCA 31.788 (December 30, 1990). In that case, the contractor was able to recover considerably more than what was ordered under the contract.

I have not compared the 1984 version of the Fixed-price termination clause with the current version. I have looked at the 1984 version of the Requirements clause and it states: "Delivery or performance shall be made only as authorized by orders issued in accordance with the Ordering clause."

Share this post


Link to post
Share on other sites
Is bad faith the same thing as intentional misrepresentation or fraud? If it isn't, then perhaps the CO isn't stripped of authority by FAR 33.210(:huh:.

I don't know. You're the attorney, you tell us.

I'm familiar with the intentional misrepresentation cases (e.g., Joseph H. Morton Co. v. U.S., 757 F.2d 1273 (Fed. Cir. 1985); C&D Const., Inc., ASBCA 38661, 90-3 BCA ? 23256; J.E.T.S., Inc., ASBCA 28642, 87-1 BCA ? 19569, affd., 838 F.2d 1196 (Fed. Cir. 1988)). I'm not familiar with any cases finding a contract void or voidable on the basis of a negligent misrepresentation. Likewise, I haven't been able to find any cases to the effect that the CO lacked authority to award the contract to a contractor who was, in fact, ineligible. I haven't done enough research to say definitively there are no such cases, but it isn't looking promising.

Let us know what you find.

Share this post


Link to post
Share on other sites
Guest
This topic is now closed to further replies.

×