Did you know that the Government can terminate your contract at any time for any reason? Well, so long as there is no bad faith or a clear abuse of discretion that is. Every Government contract has a termination for convenience clause. These clauses are found at FAR 52.249-1 through -10, depending upon the type of contract. Although these clauses are not mandatory flow down clauses for subcontractors, prime contractors would be taking undue risk if they don't flow them down to their subcontractors - if the Government terminates the prime, the prime will certainly need to do the same to its subcontractors.
The Government has the right to terminate a contract at will under the termination for convenience clause and, absent bad faith or a clear abuse of discretion, the contracting officer's decision is final.
How would a contractor go about proving the contracting officer acted in bad faith? Its not easy. It is well established that Government officials are presumed to act in good faith. To prove that a Government official acted in bad faith, a contractor must show a specific intent to injure by clear and convincing evidence. That requires a showing of "well-nigh irrefragable proof of malice" or a specific intent to injure. Due to this heavy burden of proof, contractors have rarely succeeded in demonstrating the Government's bad faith.
A party to a contract cannot use an implied duty of good faith and fair dealing to expand another party's contractual duties beyond those in the express contract or create duties inconsistent with the contract's provisions. As a result, if the government has the contractual right to terminate a contract for convenience (and it does), the Government may exercise that right without breaching the duty of good faith and fair dealing. Seems obvious, right, but contractors have tried that argument.
If a contract is terminated, contractors are entitled to costs that have not already been reimbursed, a portion of the fee that was earned, and settlement costs.
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