Primes and subs know well how a government contracting principle incorporated into a subcontract agreement can generate unique legal issues. The confluence of FAR provisions and commercial contract terms often result in conflicting provisions, confusion, unintended risk shifting, and disputes that turn into full-blown litigation. An example of such a circumstance is when a subcontract includes both a termination for convenience and a risk of loss clause.
In Tamimi Glob. Co., Ltd v. Kellogg Brown & Root, L.L.C., 483 S.W.3d 678 (Tex. App.--Hous. [14th Dist.] 2015), the government contracted with Kellogg Brown & Root (“KBR”) to provide certain services to the military during Operation Iraqi Freedom. KBR in turn subcontracted with Tamimi Global (“Tamimi”) to provide dining services to military personnel. The subcontracts included termination for convenience and risk of loss clauses. Parallel to the FAR, the termination for convenience provision provided Tamimi with the opportunity to recover certain costs as a result of the termination. The risk of loss clause indicated that Tamimi bore the full risk of loss of items associated with its work under the subcontract. KBR terminated for convenience, indicating the final dining service may occur within a fourteen-day window before or after the end of July. In mid-July, however, the facility had to be evacuated, forcing Tamimi to abandon assets totaling $228,000.
Tamimi argued that KBR should have compensated it for its damages as a result of the evacuation because KBR had already terminated for convenience. KBR maintained the damages were not related to the termination but to the evacuation contingency and therefore the risk of loss provision governed. The court agreed with KBR. It determined that Tamimi’s claim was for the lost assets, not for termination for convenience remedies, and was thus barred by the risk of loss provision. The analysis was straightforward: Tamimi lost its assets as a result of the evacuation not the termination.
The overriding lesson from this case is that characterization of damages matters when there is both a termination for convenience and a risk of loss provision. Tamimi unsuccessfully attempted to plead its losses as related to the termination and therefore potentially reimbursable. From its perspective, every “cost” incurred after KBR’s notice was subject to the termination for convenience provision and reimbursement protocols. The court viewed the loss as related to the evacuation, not the termination. Without the risk of loss provision, Tamimi likely would have survived summary judgment on this issue and lived to fight its reimbursement fight. Accordingly, primes and subs that include a termination for convenience and a risk of loss provision in their subcontracts will want to ensure that the agreement makes it clear what damages are and are not covered by any termination for convenience.