Maxima Corporation v. The United States , 104 A.L.R. Fed. 629 ( 1988 )

PAULINE NEWMAN, Circuit Judge.

Maxima Corporation (“Maxima”) appeals the decision of the Board of Contract Appeals of the Department of the Interior (the “Board”) pertaining to Contract No. 68-01-6466 between Maxima and the Environmental Protection Agency (the “Agency”).¹ On cross motions for summary judgment the Board held that the Agency had properly invoked constructive termination for convenience, a year after completion of performance of the contract and final payment, and ordered Maxima to refund certain payment that had been made to it in accordance with the contract. We reverse.

Background

Maxima, through the Small Business Administration, entered into this contract to provide typing, photocopying, editing, and related services to the Agency. The contract set annual “Production Requirements ... Guaranteed Minimum”, specifying an annual minimum number of hours and pages for various categories of service. Maxima agreed to perform a minimum amount of work, as requested, up to a stated maximum, and the Agency agreed to pay Maxima the annual “Guaranteed Minimum” sum of $420,534² (plus an equipment sum not at issue). Maxima was required to present monthly reports of the work performed. The contract term was from October 1, 1981 to September 30, 1982, with two one-year options to renew by the Agency.

Before entry into the contract Maxima had proposed a different arrangement, whereby the Agency would compensate Maxima on a cost plus fixed fee formula that did not include a minimum obligation on either side. The Agency rejected Maxi-ma’s proposal, and insisted on the Agency’s terms whereby Maxima would stand ready to perform at the guaranteed minimum level. In consideration of the Agency’s increase in its guaranteed minimum payment, Maxima substantially reduced its hourly and page charges from those in the original proposal.³

Throughout the term of the contract the services ordered by the Agency fell short of the rate represented by the guaranteed annual minimum. The Board found that “[i]n several of the reports, Maxima noted a concern that the services were being underutilized on the contract.” Maxima, 86-2 BCA at 95,285. It is undisputed that the matter was raised by Maxima and that the government declined to change the contract terms. The Agency acknowledged in its termination decision that “[n]o action was taken by EPA in response to Maxima’s request for contract adjustment until the last month of the contract.”

Nearing completion of the contract year and in connection with negotiations for future arrangements, the parties agreed that Maxima would provide to the Agency an additional (thirteenth) month of services “without additional consideration” beyond the Total Guaranteed Minimum for the twelve months then ending, along with entry into a new contract for the subsequent year, now on a cost plus fixed fee formula. The unused contract minimum was billed to the Agency on October 31,1982, upon completion of the thirteenth month’s work, and was paid in December 1982.

The contract contained the “Termination for convenience of the government” clause that is usual in government contracts. The Agency did not invoke this clause during the term of the contract, nor for a year thereafter. On November 16, 1983 the Agency advised Maxima that the contract was constructively terminated for convenience on October 31, 1982, based on the Agency’s failure to have ordered the contractual minimum amount of services during the contract term. On appeal to the Board, the Agency was held liable only for the services actually ordered and received, at the rate set in the contract for the various services. Maxima was ordered to refund the balance of the contractual minimum that the Agency had paid the previous December.

The Issue

The issue on appeal, as it was before the Board, is “the central question of law, the question of whether the termination clause of the contract can be asserted retroactively where guaranteed minimum quantities have not been ordered.” Maxima, 86-2 BCA at 95,287. Our review of this question of law is governed by 41 U.S.C. § 609(b).

Constructive Termination for Convenience

In its myriad dealings in furtherance of the business of government, the United States enters into contractual obligations by constitutional authority, and through the laws of contract and the rules of commerce the government benefits from access to and interaction with the vast private sector of the nation. “When the United States, with constitutional authority, makes contracts, it has rights and incurs responsibilities similar to those of individuals who are parties to such instruments.” Perry v. United States, 294 U.S. 330, 352, 55 S.Ct. 432, 435, 79 L.Ed. 912 (1935). See also Lynch v. United States, 292 U.S. 571, 580, 54 S.Ct. 840, 844, 78 L.Ed. 1434 (1934) (“Punctilious fulfillment of contractual obligations is essential to the maintenance of the credit of public as well as private debtors”); Alvin, Ltd. v. United States Postal Service, 816 F.2d 1562, 1564 (Fed.Cir.1987) (“The government enters into contracts as does a private person, and its contracts are governed by the common law”).

One of the few exceptions to the common law requisite mutuality of contract is that here at issue. The “termination for convenience” concept, which serves only the government, arose from the unpredictable nature of governmental wartime procurement. The right to terminate a contract when there has been no fault or breach by the non-governmental party, that is, for the “convenience” of the government, appeared as a legal concept after the Civil War, to facilitate putting a speedy end to war production. See the historical review in Torncello v. United States, 681 F.2d 756, 764-66, 231 Ct.Cl. 20 (1982).

After World War II termination for convenience came to be applied to peacetime non-military procurement, in order to achieve the same fundamental purpose: to reduce governmental liability for breach of contract, by allocating to the contractor a share of the risk of unexpected change in circumstances. Id. at 765-66. Thus the contractor, instead of receiving compensation for governmental breach of contract based on classical measures of damages, is limited to recovery of “costs incurred, profit on work done and the costs of preparing the termination settlement proposal. Recovery of anticipated profit is precluded.” R. Nash & J. Cibinic, Federal Procurement Law 1104 (3d ed.1980).

The extensive jurisprudence generated by this concept illustrates its fairly uniform modern application. The courts have held that a governmental breach of contract may be construed as a termination for the convenience of the government when changed circumstances justify the reallocation of risk to the contractor. When such circumstances exist, the contract may be terminated by the government without incurring the consequences of breach:

The rule we have followed is that, where the contract embodies a convenience-termination provision as this one would, a Government directive to end performance of the work will not be considered a breach but rather a convenience termination — if it could lawfully come under that clause — even though the contracting officer wrongly calls it a cancellation, mistakenly deems the contract illegal, or erroneously thinks that he can terminate the work on some other ground.

G.C. Casebolt Co. v. United States, 421 F.2d 710, 712, 190 Ct.Cl. 783 (1970). As illustrated in Casebolt, the concept of constructive termination for convenience enables the government’s actual breach of contract to be retroactively justified. Such justification may be appropriate

in situations in which the government has stopped or curtailed a contractor’s performance for reasons that turn out to be questionable or invalid. Constructively, the clause can justify the government’s actions, avoid breach and limit liability.

Torncello, 681 F.2d at 759 (citing College Point Boat Corp. v. United States, 267 U.S. 12, 45 S.Ct. 199, 69 L.Ed. 490 (1925)).

Constructive termination for convenience is a judge-made doctrine, and remains unrecognized in the procurement regulations that authorize “actual” termination for convenience. Constructive termination is applied when the basis upon which a contract was actually terminated is legally inadequate to justify the action taken. The doctrine traces its origins to College Point, wherein the Supreme Court held:

A party to a contract who is sued for its breach may ordinarily defend on the ground that there existed, at the time, a legal excuse for nonperformance by him, although he was then ignorant of the fact. He may, likewise, justify an asserted termination, rescission, or repudiation, of a contract by proving that there was, at the time, an adequate cause, although it did not become known to him until later.

267 U.S. at 15-16, 45 S.Ct. at 200-201 (footnotes omitted).

College Point thus limited the government’s liability for “termination, rescission, or repudiation” of a contract during its term. Under the facts in College Point, as in ensuing cases, there was an actual stoppage, and therefore there had not been full performance by the contractor. In principle it was the justification that was retroactive, not the termination.

The jurisprudence makes clear that termination for convenience, whether actual or constructive, is not of unlimited availability to the government, that it is not an open license to dishonor contractual obligations. See, e.g., Torncello, 681 F.2d at 770, 772 (refusing to authorize termination for convenience that would “vitiate the consideration normally furnished” or allow the government to “dishonor, with impunity, its contractual obligations”); Kalvar Corp. v. United States, 543 F.2d 1298, 1304-05, 211 Ct.Cl. 192 (1976), cert denied, 434 U.S. 830, 98 S.Ct. 112, 54 L.Ed.2d 89 (1977) (authorizing constructive termination for convenience to moot claim for breach of the contract during its term, absent bad faith or clear abuse of discretion); Inland Container, Inc. v. United States, 512 F.2d 1073, 1082, 206 Ct.Cl. 478 (1975) (contract actually breached by government during its term; damages measured by convenience clause); Nolan Brothers, Inc. v. United States, 405 F.2d 1250, 1254, 186 Ct.Cl. 602 (1969) (government terminated contract after it was partly performed; convenience clause may be invoked to limit damages). The Claims Court has summarized the law in Municipal Leasing Corp. v. United States, 7 Cl.Ct. 43, 47 (1984):

The termination for convenience clause can appropriately be invoked only in the event of some kind of change from the circumstances of the bargain or in the expectations of the parties.... The termination for convenience clause will not act as a constructive shield to protect defendant from the consequences of its decision to follow an option considered but rejected before contracting with plaintiff.

No judicial authority has condoned use of the convenience clause to create a breach retroactively, where there was none, in order to change the government’s obligations under a completed contract.

Analysis

A

Maxima offers several arguments in support of its position that the contract is not subject to retroactive termination under the convenience clause. Maxima emphasizes that it was required to and did maintain the capability of providing the minimum services set in the contract, thereby providing the full contractual consideration. Maxima reminds us that the Agency had insisted on this form of contract, and that on this basis Maxima had reduced its unit prices. Maxima points to its offer and the Agency’s acceptance of a thirteenth month of services within the minimum payment established for the twelve-month contract, and the Agency’s payment of the contract amount. Maxima argues that a year after completion of performance, and final payment, is too late for the Agency to impose, retrospectively, new non-negotiable terms on Maxima.

The government argues that it is never required to pay for services it does not receive, whatever the circumstances. The government states that because there was no fraud, it is not restrained by the Tom-cello proscription against “dishonoring, with impunity, its obligations”. The government states that it erred in failing to terminate the contract during its term, in paying the contract minimum, and in accepting the thirteenth month of services, and must be allowed to correct these errors. Finally, the government argues that retroactive constructive termination must be permitted or the termination for convenience clause in the contract would be meaningless.

The Board, holding for the government, relied on College Point, which it states has “striking similarities to the instant case”. We discern scant similarity. In College Point, World War I ended less than three weeks after the contract with the Navy was signed; the Navy “suggested” that the contractor stop work, which it did; and the contractor then sought to recover its full prospective profits. The Supreme Court observed that the Navy did not appear to know at the time of its “suggestion” that it had an absolute right of cancellation based on a 1917 statute, and held that the government could retroactively rely on this statutory right. The Court held that there had been an anticipatory breach by the government, and the only question was the measure of damages:

As [the government’s] efforts to procure consent to cancel proved futile, stopping the work was an anticipatory breach. The question remains whether the measure of damages recoverable for this breach is the same as it would have been if the Government had not possessed the right of cancellation.

267 U.S. at 15, 45 S.Ct. at 200. College Point thus held that an anticipatory breach may be later (constructively) justified; but it does not authorize retroactive creation of a breach where there was none, and where the contract was fully performed on both sides.

The Board also relied on John Reiner & Co. v. United States, 325 F.2d 438, 163 Ct.Cl. 381 (1963), cert. denied, 377 U.S. 931, 84 S.Ct. 1332, 12 L.Ed.2d 295 (1964), as support for its position that the government can retrospectively change its payment obligation to Maxima, even though no action had been taken to terminate the contract during its term. In John Reiner the contract was cancelled by the government during its term, in fact soon after its inception, on the ground that the contract was improperly awarded. The Court of Claims held that although the actual cancellation was based on an invalid ground, there also existed a valid ground. Because of this valid ground the contract was held properly subject to the liability limitations of convenience termination. Id. at 443.

John Reiner is part of the established jurisprudence illustrating proper use of constructive termination for convenience when a contract would otherwise be deemed breached or prematurely terminated. In addition, the boards of contract appeals have treated constructive termination for convenience in a variety of situations, with varying, fact-dependent conclusions. The closest case on its facts is North Chicago Disposal Co., ASBCA No. 25535, 82-1 BCA 05,488 (1981). The Navy had contracted for garbage disposal services, wherein the contractor was obligated to handle all the Navy’s garbage for fixed monthly payments. The contractor appeared to remove the garbage, but very little was placed for removal. After the contract ended the Navy sought to recoup the sums paid on the theory of constructive termination for convenience. The board held that the Navy could not do so when the contractor had fully performed its obligations. In Charles Bainbridge, Inc., ASBCA No. 19949, 75-2 BCA (CCH) ¶ 11,414, 54,337 (1975), the government contracted to order a minimum (not designated as “guaranteed”) of $21,518 of house painting services. The government ordered less, and refused to pay the minimum sum. The board held that either the termination for convenience clause or damages for breach by the government could apply. In Bainbridge, there was no issue of standby capability to perform, no unreasonable delay by the government, and no payment of the minimum contractual amount. We do not share with the dissent the weight that it places on this holding by an administrative board.

These cases are in tune with the purpose of reducing the government’s risk based on unexpected events that occur during the term of a contract, by shifting some of this risk to the contractor.

B

The government argues that a ruling in favor of Maxima would render the termination for convenience clause superfluous, and thus would violate regulations which require inclusion of the clause in the contract. However, the issue is not whether the government could have invoked the termination for convenience clause during the term of the contract, for it did not do so. The purpose of the clause is not to authorize unilateral renegotiation of a contract after it has been fully performed.⁴

The government in its brief acknowledges the principle that “changed expectations” is a prerequisite to termination of a contract for convenience, under the authority of College Point and Court of Claims precedent. The government argues that the Agency’s failure to order the minimum quantities from Maxima is proof of changed expectations. However, this governmental action taken a year after completion of performance of the contract by both parties is not a cancellation based on changed expectations. It is, at best, a claim for retroactive adjustment in the contract price.

For the government to state a claim for retroactive adjustment following completion of performance, if the contract contains no clause setting an express time limit, the claim must be brought within a reasonable time. See American Western Corp. v. U.S., 730 F.2d 1486, 1489 (Fed.Cir.1984) (six weeks after final payment is not unreasonable for a claim based on reduction in the cost of raw materials during the contract term, when the contract provided for adjustment in the contract price upon such reduction and the contractor knew the cost had declined). The court in American Western relied on Roberts v. U.S., 357 F.2d 938, 946-47, 174 Ct.Cl. 940 (1966), wherein the court stated:

when the Government is acting in its proprietary capacity, it may be estopped by an act of waiver in the same manner as a private contractor. Such a result is justified by the plain language of the contract and accords with the principles of fair dealing.

The Roberts court favorably cited Appeal of Randall Construction Co., WDBCA 675, 2 CCF 1117 (1944), which held unreasonable a delay of more than one year after completion of work before the government attempted to reduce the contract price.

Here Maxima knew that the government was not meeting its minimum rate of orders but, unlike the contractor in American Western, Maxima brought the situation to the attention of the Agency during the contract term, and the government required Maxima to comply with the contract as written.⁵ This circumstance weighs on the side of Maxima’s argument that the government’s delay in raising any objection until a year after complete performance on both sides is unreasonable.

In denying Maxima the opportunity to negotiate the terms of the imposed termination for convenience, the Board cited the one-year contract limitation whereby “Clause 12 of the contract provides that the contractor’s termination claim shall be submitted within 1 year after the effective date of termination, and thereafter for the unilateral determination of the amount owing the contractor by the contracting officer.” Maxima, 86-2 BCA at 95,289. We assume the Board did not intend the curious result that Maxima’s claim was barred before it arose, which in any event is mooted by our decision. However, we do view this contract clause as supporting the conclusion that one year after completion of performance is in this case an unreasonable time to change the terms of performance.

C

The government dismisses its actions at the time the contract term expired, particularly the inclusion of the thirteenth month of services as part of the twelvemonth minimum payment, as unauthorized and therefore not binding on it. The government’s argument that its contracting officer erred because he did not know of the termination for convenience clause, a clause occupying four pages of the contract, does not relieve the government of its contractual obligations. Both parties to a contract are charged with knowledge of its terms. Neither the contractor nor the government can avoid its legal responsibilities by asserting ignorance. Further, the payment of the contractual minimum was not an “error” that was “discovered”, as the dissent describes it; it was the agreed payment timely made.

What the government asserts as legal error is its compliance with the terms of the contract. We discern no legal error in this behavior. Indeed the government also required Maxima to comply with the contract. The need for mutual fair dealing is no less required in contracts to which the government is a party, than in any other commercial arrangement. “It is no less good morals and good law that the Government should turn square comers in dealing with the people than that the people should turn square corners in dealing with their government.” St. Regis Paper Co. v. United States, 368 U.S. 208, 229, 82 S.Ct. 289, 301, 7 L.Ed.2d 240 (1961) (Black, J., dissenting). See also Brandt v. Hickel, 427 F.2d 53, 57 (9th Cir.1970) (“To say to these appellants, ‘The joke is on you. You shouldn’t have trusted us,’ is hardly worthy of our great government”), quoted in Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 61 n. 13, 104 S.Ct. 2218, 2224, n. 13, 81 L.Ed.2d 42 (1984).

The government argues that it is never barred from recovering monies erroneously paid, pressing (at oral argument) as “controlling precedent” United States v. Wurts, 303 U.S. 414, 58 S.Ct. 637, 82 L.Ed. 932 (1938). The reliance is curious. Wurts held that a two-year statute of limitations against recovery by the government of an erroneously paid income tax refund did not start until the erroneous payment was actually made. Id. at 418, 58 S.Ct. at 639. The issue in Wurts was not whether the payment was erroneous, but whether its recovery was time barred by statute; neither side had raised that issue.⁶

D

The government further takes the position that there was no guaranteed minimum price in the contract, and thus that it can not be obliged to pay the contract minimum. However, without a guaranteed minimum obligation on both sides, this would be a contract of the sort that has long been recognized to fail for lack of consideration and mutuality. See Willard, Sutherland & Co. v. United States, 262 U.S. 489, 493, 43 S.Ct. 592, 594, 67 L.Ed. 1086 (1923):

There is nothing in the writing which required the Government to take, or limited its demand, to any ascertainable quantity. It must be held that, for lack of consideration and mutuality, the contract was not enforceable.

The Court also observed that:

While the contract at its inception wasnot enforceable, it became valid and binding to the extent that it was performed.

Id. at 494, 43 S.Ct. at 594.

At least since Willard, Sutherland the government has refrained from entering into such contracts. See, e.g., Mason v. United States, 615 F.2d 1343, 1346 n. 5, 222 Ct.Cl. 436 (1980). “[A] Guaranteed Minimum Quantity clause [serves] to ensure mutuality of obligations, and to make the contract enforceable by both parties to it.” Id. at 1350. The government, and the dissent, ignoring the minimum obligations as negotiated and agreed by both sides, is asking the court to make a valid contract invalid. This contravenes the fundamental obligation to interpret contracts so as to preserve their validity, not to destroy it. Walsh v. Schlecht, 429 U.S. 401, 408, 97 S.Ct. 679, 685, 50 L.Ed.2d 641 (1977); Hobbs v. McLean, 117 U.S. 567, 576, 6 S.Ct. 870, 874, 29 L.Ed. 940 (1886); S. Williston, A Treatise on the Law of Contracts § 620 (3d ed.1961).

The government recognized at oral argument, as indeed it must, that no decision has upheld retroactive application of a termination for convenience clause to a contract that had been fully performed in accordance with its terms. The asserted partial constructive termination for convenience was improper. The Board’s judgment is reversed, with instructions to enter judgment in favor of Maxima.

REVERSED.

1 . Maxima Corp. v. United States, IBCA No. 1828, 86-2 BCA ¶ 18,888 (April 1, 1986).

2 . The contract shows the following on its first page, entitled “Award/Contract” and bearing the signatures of both parties:

Production Requirements Year 1— 419,009.00 Guaranteed Minimum

Equipment Charges — Year 1 79,689.00

Travel Charges — Year 1 — Guaran- 1,525.00 teed Minimum

Total Guaranteed Minimum 500,223.00

The "Quantity” and "Unit Price" columns are not otherwise filled, and the contract is described as "Fixed Price — Indefinite Quantity".

3 . Maxima was required to maintain work stations both off site and on site. The contract stated the guaranteed minimum and the maximum obligation as agreed for each activity; the maximum was twice the minimum (the contract said that Maxima exceeded this maximum at its risk). For example, following are representative two of the eleven specific services listed on contract “Attachment 1”:

3. footnote cont’d.

Yearly Production Requirements in Pages Completed

(By Type of Work Per Page) — Off Site — Year 1

Guaranteed Cost for 48 hr. Cost for 168 Item Minimum No. Maximum No. Turnaround per hr. Turnaround Description of Pages of Pages Page Per Page

Typing-Straight Text-NBI Diskettes 22150 44300 5.06 4.40

Typing-Straight Text & Equations-Mag Cards 788 1575 5.46 4.75

Attachment 2 describes the on-site requirements in similar detail. Attachments 3-4 list editing, proofreading, indexing, and graphical artwork services. The total guaranteed minimum dollars (see footnote 2 supra) was calculated as the minimum total services at the 168-hour turnaround rate, although the contract required Maxima to provide not only the minimum but up to the maximum number of pages and hours, and also to provide 48-hour turnaround when requested, both on-site and off-site. For this capability the agency guaranteed the minimum amount of payment stated in the contract.

4 . The Board, recognizing the consequences of its holding, warned that the "effect of the case law is to void any guarantees concerning minimum quantities promised by the Government by the operation of the Termination rights.” Maxima, 36-2 BCA at 95,289 n. 2. Such a warning can not legitimize the Board’s new theory of retroactive termination after full performance.

5 . Maxima wrote the agency in September 1982, during negotiations of the contract for the following year, for which the agency had an option at the same terms (and even larger volumes). Maxima stated that the lower volume of services ordered during the first year "resulted in significant operating losses” and "a potentially serious cash flow problem", and that “[although the contract guarantees provided some protection against losses at the end of each contract term, there was no contract provision for some sort of progress payments in accordance with the guaranteed minimum.”

The agency had ignored Maxima’s several earlier complaints and had held Maxima to the contract terms, such that the unused minimum accumulated unpaid until the end of October 1982 (the thirteenth month) when Maxima billed the entire annual minimum plus the October services, a total of J267,872.50. This was not, as the dissent states, payment for one month’s services. (Nor do we endorse the dissent’s other characterizations of the facts, the arguments, the authorities, and the holdings of our opinion.)

6 . The dissent also urges, without supporting authority, that the government can always change its contracts, even, as here, well after final payment and expiration of the period in which the contractor could file a claim. The dissent accuses the majority of "largesse”. The issue is not "largesse”, but law; the integrity of commerce with the government. The decisions of the Supreme Court and the Court of Claims not only support, but require, a just application of retroactive termination for convenience. The converse, that the government can always change the bargain, even long after performance of that bargain and whatever the facts, is anathema not only to the rule of law but to the principles of a great commercial nation.