New Federal Circuit Decision Addresses Applicability of Commercial Item Termination for Convenience Clause to Noncommercial Service Contracts

A new Federal Circuit decision, JKB Solutions & Services, LLC v. United States, held that the government could not rely on the commercial item termination for convenience clause—FAR 52.212-4—as a defense for incomplete performance in a noncommercial service contract that expressly included that clause.¹ The Federal Circuit reversed the holding of the Court of Federal Claims (COFC)² that the government could constructively terminate what all parties agreed was a noncommercial services contract based on the commercial item termination for convenience clause. Although on remand, the lower court may still rule in favor of the government based on the Christian doctrine, the Federal Circuit's analysis offers contractors an avenue to argue against the applicability of clauses appearing in their contracts if it is possible to devise a reason the clauses should not apply to their work.

Contractual and COFC Background

JKB Solutions (JKB) and the Army entered into a three-year indefinite-delivery/indefinite-quantity (IDIQ) contract for JKB to provide instructor services for military personnel. The contract specified that JKB would provide instruction for up to 14 classes per year and required the Army to issue a task order for each ordering period. The Army issued three one-year task orders under the contract; for each task order, the Army used less than the 14-class maximum, and instead used its own instructors to teach some portion of the classes. The Army paid JKB for only the classes the contractor taught and refused to pay the total 14-class price specified in each of the three task orders. The contract incorporated FAR 52.212-4, “Contract Terms and Conditions—Commercial Items,” which includes a termination for convenience provision.³ Of note, the parties agreed that the contract was a noncommercial services contract and not a commercial item contract for purposes of summary judgment.⁴ Id. n.2.

JKB filed a claim with the COFC arguing that the government breached the contract when it refused to pay JKB for the full 14 classes allocated for each ordering period. The government first responded that the contract only required it to pay for the number of classes for which JKB actually provided instruction, not the full 14-class maximum,⁵ and later argued that it had in fact constructively terminated the contract for convenience (so, the contractor’s recovery was limited to termination for convenience costs).⁶ The government argued in the alternative that even if the parties were not bound by the commercial termination for convenience clause expressly included in the contract, a termination for convenience clause was included by operation of law pursuant to the Christian doctrine.⁷

The COFC agreed with the government’s constructive termination for convenience theory based on the clause expressly included in the contract and did not rule on the government’s alternative Christian doctrine argument.⁸ While the Army never explicitly terminated JKB’s task orders or the IDIQ contract for convenience, the contracting officer did issue unilateral change orders closing each task order. The COFC reasoned that “when the Government no longer requires all of the services it has ordered, ‘the deletion of work . . . resulted in a [constructive] termination for convenience.’”⁹ Because JKB had not claimed termination costs in its complaint, the COFC granted the government summary judgment.¹⁰

The Circuit Reverses

The Federal Circuit reversed the COFC’s decision. The circuit recognized the government’s general power to constructively terminate a contract for convenience in the absence of bad faith or a clear abuse of discretion. But, the circuit found the commercial item termination for convenience clause in JKB’s contract was inapplicable to the agreed-to noncommercial services contract:

[T]he Claims Court erred by holding that JKB Solutions’ contract contained an applicable termination for convenience clause. The Claims Court relied solely on the contract’s incorporation of FAR 52.212-4 by reference. JKB Sol’ns II, 150 Fed. Cl. at 256. But, as explained below, FAR 52.212-4 governs the termination of commercial item contracts for the government’s convenience, and it does not apply to service contracts, such as the contract at issue in this case. . . . Because FAR 52.212-4 applies only to commercial item contracts and because, for purposes of this summary judgment motion, JKB Solutions' contract is not a commercial item contract, the Claims Court erred in relying on FAR 52.212-4 to supply an applicable termination for convenience clause.¹¹

In its decision, the Federal Circuit rejected the government's arguments that the type of contract at issue lacked relevance. Applying a plain language analysis, the court held that the commercial item termination for convenience clause in JKB’s contract, FAR 52.212-4, is limited to commercial items contracts.¹² The circuit found that the existence of other FAR termination for convenience clauses support this conclusion—for example, FAR 49.502 prescribes the insertion of FAR 52.249-4, “Termination for Convenience of the Government (Services) (Short Form)” in all contracts for services, excluding “commercial item contracts awarded using part 12 procedures.”¹³ Based on the distinctions between FAR 52.212-4 and FAR 52.249-4, the circuit found that the “FAR’s own distinction between termination for convenience clauses based on types of contracts confirms that FAR 52.212-4’s termination for convenience clause does not apply to JKB Solutions’ service contract.”¹⁴

The government argued in the alternative that regardless of FAR 52.212-4’s applicability to noncommercial services contracts, the clause became a binding term on the parties because it was incorporated into the contract by reference. The circuit rejected this argument, noting that despite its presence in the final signed contract between the parties, the inapplicable clause had no effect on the service contract.¹⁵ The circuit reasoned: “Giving the incorporated termination for convenience clause no effect does not ‘deny the Government the benefit of its bargain,’ as the Claims Court found . . .the government simply incorporated a FAR provision that, on its face, applies only to commercial item contracts.”¹⁶

The circuit accordingly vacated the COFC’s finding and remanded the case for further consideration. The circuit suggested that on remand, COFC “may consider whether the Christian doctrine applies to incorporate a termination for convenience clause and whether…the doctrine of constructive termination for convenience applies in these circumstances.”¹⁷

Impact

The victory for the contractor in JKB Solutions may be short lived if the COFC on remand reads an applicable termination for convenience clause into the contract under the Christian doctrine (which itself was a termination for convenience case).¹⁸ Nevertheless, the decision may prove helpful to contractors (or subcontractors) to show that inapplicable clauses included in their contracts do not actually apply in the event of a later dispute. Just because a government contract contains any of the litany of FAR clauses the government (or prime contractor) elects to include does not automatically render those clauses effective; instead, a proper analysis must consider whether the clause was rightfully included and actually applies in the present situation. While the ability of the government to terminate a contract for convenience will likely be read in under Christian doctrine regardless, this is not necessarily the case for other clauses. The best practice is to seek removal of inapplicable clauses from a contract before signing to avoid confusion later on, but this decision may serve as an important tool in contractors’ kits should the government later attempt to weaponize inapplicable clauses in a future dispute.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.