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Is a FAR Clause Inapplicable to the Contract Type but Included as a Term Still Binding?

The Federal Circuit has held that it is not, at least as to terminations for convenience. The court determined that a termination for convenience clause prescribed by the Federal Acquisition Regulation (FAR) for commercial item contracts that was inserted into a contract for services had no effect. As a result, the government was not able to rely on the express terms of the agreement to limit its liability for canceling the contract. The court remanded the case back to the Federal Court of Claims to determine whether the appropriate termination for convenience clause should be read into the contract via the Christian doctrine or if not, whether the government can rely on a constructive termination for convenience argument.

The Case: JKB Sols. and Services, LLC v. U.S., 18 F.4th 704 (Fed. Cir. 2021)

The Army and JKB entered into a three-year IDIQ contract for instructor services for fourteen classes per year. The Army did not use the services for this required minimum. And while it paid JKB for what it did use, it refused to pay for the remainder. JKB sued for breach of contract at the Court of Federal Claims (COFC). During a preliminary conference, the government raised the issue of whether JKB’s damages should be limited to termination for convenience costs only because FAR 52.212-4 was incorporated by reference into the agreement. The COFC granted summary judgment in favor of the government on this issue.

JKB appealed to the Federal Circuit, which vacated the COFC judgment on the basis that FAR 52.212-4 does not apply to contracts that are not for commercial items (the Army had stipulated that the IDIQ was a services contract). The Army argued that irrespective of the applicability of the FAR clause, it was incorporated by reference as a term in the agreement and therefore should be binding on the parties. But the court rejected that contention. It held that the government incorporated the wrong FAR provision for the contract type; therefore it has no effect irrespective of it appearing in the contract.

The court acknowledged that the correct FAR clause regarding termination for convenience may be incorporated by operation of law into the contract via the Christian doctrine. It also recognized that the alternate theory of constructive termination for convenience may apply. But the court did not decide those issues. Instead, it remanded the case to the COFC for such consideration.

JKB’s Precedential Impact To-Date

Few tribunals have considered the enforceability of an improper FAR clause appearing as a term in the contract since the JKB decision. Of note, however, the Armed Services Board of Contract Appeals undertook the matter in App. of - Heartland Energy Partners LLC, ASBCA No. 62979, 22-1 B.C.A. (CCH) ¶ 38200 (A.S.B.C.A. Sept. 12, 2022). While the board held that JKB was inapplicable because the task order at issue was in fact a commercial item contract, it made it quite clear that “even if the task order were a non-commercial services contract, [it] would read the applicable termination for convenience clause into the task order pursuant to the Christian doctrine.” It remains to be seen whether the COFC will take the same approach.

The Take Away

The JKB decision reiterates the necessity for contractors, at all levels of sophistication, to take great care in reviewing the terms of the government contract and cross-referencing those with whether they apply to the procurement. Since JKB, it is not a given that bargained-for terms are going to be enforceable. Although the ruling relates to terminations for convenience, as with many legal theories, it is to be expected that parties will attempt to use the court’s reasoning to expand its ruling to other clauses.

This case also raises concerns regarding subcontracting. If a prime flows down a FAR clause deemed inapplicable and therefore unenforceable at the government/prime level, then unless the parties have chosen federal public contract law as the governing law of the subcontract agreement, it will be a hard-fought (and likely losing) endeavor for a prime to make the argument that the lack of enforceability at the government level should flow down to the subcontract level.

And finally, the court’s opinion presents a doctrine in procurement law of which contractors should be aware: constructive termination for convenience. Here, even if a contracting officer does not exercise its termination for convenience rights but its actions impermissibly impede performance by the contractor, the government may still have a defense by claiming the termination for convenience clause constructively justified the contracting officer’s actions and therefore limits the government’s liability.

The JKB decision is well worth a read both to consider the holding regarding enforceability of an inapplicable FAR clause appearing as a term in the contract and for concise overviews of the Christian doctrine and constructive termination for convenience.

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