Most government contracts are covered by the Federal Acquisition Regulations (“FAR”) and include a termination-for-convenience clause which governs the costs a contractor is entitled to recover when the government exercises its right to terminate the contract for its convenience. In fact, even on the rare occasions when a FAR covered contract does not explicitly include a termination for convenience clause, courts and boards of appeal will typically hold that the standard termination for convenience clause should be read into the contract by operation of law. Under the FAR, future profits that would have been earned by a contractor but for the government’s termination of the contract are not recoverable.

However, a recent Armed Services Board of Contract Appeals (“ASBCA”) decision found that in situations where a government contract is not covered by the FAR and does not include an express termination-for-convenience clause, a contractor’s recovery for the government’s termination of its contract should be calculated using commercial breach of contract principals which includes the profits the contractor would have earned but for the government’s termination.

In the Appeal of Flatland Realty, LLC (ASBCA No. 63409), the Board first ruled that the Government’s termination for default of a lease assigned to Flatland Realty, LLC (Flatland) was improper. Then citing Krygoski Const. Co., Inc. v. United States, 94 F.3d 1537, 1540-41 (Fed. Cir. 1996) the Board found that “Because the lease lacks a termination-for-convenience clause, the unjustified revocation is, consequently, a breach.” This finding is unusual in the world of government contracting because if the contract had been covered by the FAR and or included an express termination-for-convenience clause, the government’s improper termination for default would have simply been converted to a termination-for-convenience and therefore prohibited recovery of lost future profits. Here, because the contract was not covered by the FAR and did not include an express termination-for-convenience clause, the Board allowed recovery for the value of the business lost due to the premature termination of the subject lease which inherently included future profits that Flatland would have earned during the remainder of the lease period.

Click here for a copy of the Court’s decision in Flatland Realty

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