The United States Court of Federal Claims recently decided a case that addresses a contractor’s remedy in the event of a government breach of contract and provides a useful reminder regarding managing expectations in the negotiation of contract prices with the government. Praecomm, Inc. v. United States, 78 Fed. Cl. 5 (Aug. 9, 2007).
To make their bids more attractive, contractors naturally strive to offer the government favorable pricing terms, including discounted prices. Where circumstances surrounding the solicitation suggest that success in an initial competition will render the winner the "sole source" for the products or services for years to come, the temptation to "sharpen the pencil" even more and further reduce prices – perhaps to at or below cost – grows even greater. Praecomm, however, reminds us that, while offering attractive pricing may play a role in securing a pending contract award, it does not translate into a guarantee of receiving any subsequent work. Regardless of how aggressive the contractor perceives its pricing to be or how optimistic the contractor is that "facts and circumstances" will lead to follow-on work, the government’s contractual obligations will be defined primarily within the four corners of the parties’ agreement.
Praecomm had offered the government deeply discounted prices in anticipation of becoming the sole source "long-term" provider of follow-on contractual services for radio equipment it was to deliver under the contract. Ultimately, the government did not install the Praecomm radio equipment as contemplated at the time of award of the contracts and, as a result, the prospect of future work for Praecomm in connection with the equipment did not come to fruition. While the Court of Federal Claims had difficulty in identifying any Government breach of contract, it nevertheless held that the government’s actions amounted to, at most, a constructive termination for convenience. As such, it also concluded that the contractor was not entitled to any monetary recovery since it had already been paid the full contract price. Several salient "lessons learned" can be discerned from Praecomm’s predicament.
First, the Court of Federal Claims will not hesitate to enforce those contract provisions that shield the government from the consequences of a breach of contract. If a contractor’s agreement with the government contains a standard termination for convenience clause, the Court will retroactively re-characterize a government failure to order goods or services under a contract as a constructive termination for convenience rather than a breach of contract, even though the government did not invoke the clause. Although the Court in Praecomm acknowledges certain exceptions to the government’s broad authority to terminate a contract for convenience (i.e., bad faith, abuse of discretion, or "enter[ing] a contract with no intention of fulfilling its promises"), a contractor nevertheless will be required to make a heightened showing to preclude the application of the constructive termination for convenience doctrine, especially in light of the presumption of good faith that shrouds government actions. The Court has, therefore, reaffirmed the proposition that a contractor’s recovery for a government breach of an obligation to order products, services, or construction will be limited, in most instances, to termination for convenience costs, thereby circumscribing a contractor’s prospect of recovering anticipatory profits and consequential damages.
Second, a contractor must make certain that the language contained within its agreement with the government accurately and completely captures the parties’ expectations. The contractor in Praecomm apparently believed that it was entitled to receive follow-on work in connection with the radio equipment it delivered. The Court, however, was not persuaded that the plain language of Praecomm’s contracts reflected such an intention. While Praecomm may have made a reasonable business decision to offer heavily discounted prices in the hopes of receiving additional work in the long-run based on the facts and circumstances surrounding the initial procurement, no contract term supported that outcome. In fact, the Court stated that "the pertinent question is whether the contracts contained any obligations as to future contracts" and it ultimately concluded that "Praecomm’s contractually agreed prices were not made contingent upon receipt of further orders." See Opinion at 13-14. The Court, of course, would have been more receptive to Praecomm’s argument if the underlying contractual documentation had included unambiguous language supporting the company’s position. Whether the government would ever agree to the inclusion of such language is doubtful, however, and that fact alone should serve as a revealing indicator to an offeror preparing its price of the government’s true understanding of the scope of the agreement.
Third, the Praecomm decision offers important insight to the interpretation of, and remedies under, government contract teaming arrangements. The sorts of arguments advanced by Praecomm have been raised frequently in the context of such teaming arrangements. Where the teaming agreement either terminates upon award of the initial subcontract or is silent regarding the right to future or related work, disappointed team members often argue that the "special facts and circumstances" surrounding the negotiation and execution of the teaming agreement translates into a binding commitment to award future subcontracts. The disappointed team member argues that the future work obligation should remain in effect because of the team member’s substantial up-front investment and because of the long-term connotations purportedly inherent in the teaming agreement. In the face of Praecomm, entitlement to follow-on work, absent specific contractual language to the contrary, is, for the most part, a "hard sell." Equally important, the presence of a termination for convenience provision granting the prime contractor broad termination discretion as a standard term in the awarded subcontract, suggests that, even if the obligation to award a subcontract for future work can be established, such success may well represent a pyrrhic victory. The limitation on recoverable damages established by the termination clause renders a meaningful recovery of damages remote.
Finally, Praecomm demonstrates that it is imperative that the issues raised in litigation before the Court of Federal Claims be fully ventilated. It is unclear whether the Court afforded Praecomm’s "misrepresentation" argument the attention that it should have received. Putting aside whether an independent "misrepresentation" argument was raised fully by Praecomm (which is not apparent from the text of the opinion), the Court concluded that the plain language of the parties’ agreement was unambiguous – that it did not evidence entitlement to any follow-on work – and, as a result, resort to extrinsic evidence would be improper. However, the contractor had suggested that the government "misrepresent[ed] the status of the [rival]  system" and had "told  it that it would be the long-term provider . . . ." See Opinion at 14. (In addition, the final footnote to the decision suggests that further evidence on this issue might be available. See Opinion at 15 n.11.) In this regard, it is well-established that extrinsic evidence is admissible to prove that a written agreement was only entered-into as a result of a misrepresentation, even in the face of unambiguous contractual language. See, e.g., C&H Commercial Contractors, Inc. v. United States, 35 Fed. Cl. 246, 254 (1996). Therefore, while the Court may have concluded ultimately that the contractor would not prevail on a "misrepresentation" claim, it appears that the Court could have considered Praecomm’s scenario from this additional perspective, especially since it does not appear from the text of the published opinion that the government ever denied making the representations. Indeed, the Court’s discussion of the limitation on damages effect of the termination for convenience clause after finding no clear underlying breach of contract might suggest that evidence supporting a representation of future contracts may have been made – providing the "breach of contract" the court otherwise found elusive.
In conclusion, in the event the government does not fulfill its obligations under the contract as written, the contractor should expect the Court to rely on the termination for convenience clause when determining the appropriate remedy. A broad reading of the Praecomm decision confirms that the presence of a termination for convenience clause could, in certain circumstances, minimize the government’s exposure to breach of contract damages arising from an alleged failure to order goods or services. Moreover, an offeror must keep in mind that "facts and circumstances" indicating future work do not necessarily result in legally binding obligations on the part of the Government to award that work. Strategic price concessions in the initial competition must be tempered by this legal fact.
Marko W. Kipa, an associate at Sheppard Mullin Richter & Hampton and former law clerk at the United States Court of Federal Claims.