Torncello v. United States
231 Ct. Cl. 20, 681 F.2d 756 (1982)
Rule of Law:
The standard 'termination for the convenience of the government' clause does not permit the government to escape its obligations under a requirements contract by diverting work to another party for a lower price that was known to the government at the time of the contract award. A termination for convenience is proper only to allocate the risk of a post-award change in the circumstances of the bargain or the expectations of the parties.
Facts:
- The U.S. Navy solicited bids for a one-year grounds maintenance contract covering 12 types of work for six housing projects, specifying that the award would be made on an 'all or none basis'.
- Soledad Enterprises, Inc. submitted a bid that included a price of $500 per call for 'Plant Disease, Insect and Rodent Control' (Item 8), justifying the high price due to the potentially expensive and open-ended nature of the work.
- The Navy awarded the full 12-item contract to Soledad, even though it was aware at the time of the award that a competing bidder, the Department of Navy Public Works, had submitted a lower bid for Item 8.
- During the contract term, the Navy developed a need for pest control services, specifically gopher control.
- The Navy did not issue any work authorizations to Soledad for pest control services under Item 8 of the contract.
- Instead, the Navy diverted all of its pest control requirements to Public Works, the competing bidder with the lower price.
- Soledad eventually discovered the diversion of work and subsequently went bankrupt.
Procedural Posture:
- Soledad Enterprises, Inc. filed a claim with the government's contracting officer, who denied it.
- Soledad appealed the denial to the Armed Services Board of Contract Appeals (ASBCA).
- The ASBCA, assuming a breach occurred, held the government's actions were justified under a 'constructive termination for convenience' theory and ruled against Soledad.
- Soledad appealed the ASBCA's decision to the U.S. Court of Claims.
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Issue:
Does the standard 'termination for the convenience of the government' clause in a federal requirements contract permit the government to divert the contracted work to another contractor based on a lower price that was known to the government before the contract was awarded?
Opinions:
Majority - Bennett, J.
No. The termination for convenience clause does not permit the government to dishonor its contractual obligations by diverting work to a competitor for a lower price that was known at the time of the award. The court first determined that the agreement was an enforceable requirements contract, which obligated the Navy to give all of its needs for the specified services to Soledad. An unlimited right to terminate for convenience, especially for a reason known before the contract was awarded, would render the government's promise illusory and void the contract for lack of consideration. The clause's history shows it was developed to allocate the risk of significant, unforeseen changed circumstances, such as the end of a war, not to serve as an exculpatory tool for a bargain the government knowingly made and later regretted. To the extent it holds otherwise, the court overrules its prior decision in Colonial Metals Co. v. United States.
Concurring - Friedman, C.J.
No. The government cannot constructively terminate a requirements contract for convenience when it enters the contract already knowing it can obtain a covered item for a lower price and intending to do so. The holding should be limited to these specific facts.
Concurring - Davis, J.
No. A termination for convenience clause cannot be properly used to end a requirements contract where the government knew at the time of contracting that it could obtain a better price elsewhere. The majority's broad reasoning regarding the history of the clause and contract law principles is unnecessary. The government's action in this case was a clear abuse of discretion and could be considered bad faith, which is a sufficient and narrower basis to find for the plaintiff.
Concurring - Nichols, J.
No. The government's constructive termination in this scenario constitutes an abuse of discretion. The Navy solicited bids and made the award on an 'all or none' basis. Having done so, it would be an abuse of discretion and inconsistent with the bidding rules to essentially terminate items with unfavorable prices while retaining the benefit of items with favorable prices. The administration of the contract must be consistent with the rules used to evaluate the bids.
Analysis:
This decision significantly restricts the government's power to use the 'termination for convenience' clause as an instrument of exculpation. By overruling the broad interpretation from Colonial Metals, the court re-establishes that the clause is not a tool to escape a bad bargain but a mechanism to allocate the risk of unforeseen, post-award changes in circumstances. This holding strengthens the principle that the government's promises in a requirements contract are not illusory and must be supported by consideration. The case provides greater certainty for government contractors, ensuring the government cannot use the clause to dishonor an agreement based on information it possessed before the award.
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