December 19, 2024

"The Government's Just Not That into You"—Can a Prime Contractor Terminate Its Subcontractor Just Because Someone in the Government Says So?

6 min

Federal contracts famously include a clause permitting the government to terminate the agreement for the government's own "convenience"—even if the contractor did not default on its performance obligations. Aware of this possibility, prime contractors typically add terms to their subcontracts permitting them to terminate on a similar basis. But a recent court case highlights the limits and perils of such termination-for-convenience (T4C) clauses in subcontracts. The case and similar situations raise important questions: Is the government's direction to limit the subcontractor's participation in the program sufficient reason to terminate? What if the government's basis for its direction is questionable? Does it matter who within the government provides the direction? And what if the government would simply prefer another subcontractor based on interpersonal differences?

Contractors and subcontractors should read on and consider the potential implications for how they structure their own T4C clauses.

What is this case about?

TriPro Consulting, LLC was a subcontractor on CACI, Inc.-Federal's prime contract with the U.S. government. See TriPro Consulting, LLC, v. CACI, Inc.-Fed., No. 6:23-cv-568, 2024 WL 4957967, at *1 (M.D. Fla. Dec. 4, 2024).

The subcontract included a T4C clause permitting CACI to "terminate the Agreement in whole or in part if it is determined that a termination is in [CACI]'s and/or the [g]overnment's best interests or if the [g]overnment exercises its termination for convenience rights under the Prime Contract as defined in FAR 52.249-6." Id. The clause also provided that CACI "may terminate this Agreement by issuing a written notice of termination to [TriPro]" and that "[t]he written notice will include the termination effective date, justification[,] and actions to be taken by [TriPro]." Id.

Note that the T4C clause only provided for termination if the government terminated the prime for convenience, or if termination would be in the prime's or the government's "best interest." The invocation of the government's "interest" is similar to the language of the Federal Acquisition Regulation's (FAR) standard T4C clauses. See, e.g., FAR 52.249-2(a) ("The Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government's interest.").

After CACI invoked the subcontract's T4C clause to terminate TriPro, TriPro sued, alleging that the termination breached the terms of that same clause. See TriPro Consulting, LLC, 2024 WL 4957967, at *1.

Why did the prime contractor terminate the subcontractor for convenience?

CACI sent TriPro a notice stating it was terminating the subcontract "based on customer direction." Id. CACI later stated that TriPro's senior systems engineer had "lost the security clearance required for [TriPro] to perform work under" the prime contract. Id.

Moreover, CACI argued that the TriPro engineer had admitted in a deposition that TriPro's "termination was directly attributable to the deterioration between him and the branch chief of the [g]overnment." Id. at *2. CACI alleged that the "deterioration" arose from the engineer telling "a friend" that "a government employee with oversight of [CACI] and its contract with" TriPro had "maneuvered to have an individual with whom she was allegedly romantically involved … brought onto the project to work alongside [TriPro]." Id. at *3. When the government employee found out, she allegedly stated that TriPro's engineer "c[ould] never work here again." Id.

What was the subcontractor's reason for challenging the termination?

TriPro argued that CACI's termination "was based upon its own mistaken belief that [TriPro]'s facility clearance had lapsed," such that termination "was not in the government's best interest," and that the termination notice failed to include a "justification" as required by the subcontract. Id. at *1.

TriPro also disputed that the termination had resulted from the alleged "deterioration" in the relationship with the government customer. Instead, TriPro pointed to testimony from "one of CACI's deputy program managers" stating "that the decision to terminate the contract was predicated, at least in part, on [CACI's] belief that [TriPro] had lost its access," and that "the clearance issue was the primary, if not exclusive, factor." Id. at *4.

How has the Court addressed the dispute?

The Court denied CACI's motion for summary judgment, in part because "the parties have presented conflicting evidence concerning the termination of the contract," and it would "likely need to assess the credibility of the witnesses" in a trial. Id. In short, live testimony from witnesses may be required to resolve disputes over why CACI terminated the subcontract, and whether the termination complied with the terms of the subcontract.

What are the main takeaways for contractors and subcontractors?

One reason this dispute arose is that the subcontract's T4C clause made the prime contractor's right to terminate contingent on the prime contractor's or the government's "best interests." While this or similar language is common and consistent with the FAR's standard T4C clauses, it is somewhat subjective. Absent express provisions defining who makes this determination, or what factors should be considered when making it, reasonable people might disagree regarding whether a given termination is in the prime's or the government's best interest.

Prime contractors may prefer a T4C clause that provides maximum authority to terminate the subcontract. Although "[a] contracting officer's decision to terminate" a prime contract "for convenience is only conclusive in the absence of bad faith or clear abuse of discretion," JKB Sols. & Servs., LLC v. United States, 18 F.4th 704, 709 (Fed. Cir. 2021), state law may only require the prime contractor to provide the subcontractor advance notice of the termination. See, e.g., Aids Healthcare Found., Inc. v. Okaloosa Aids Support & Informational Servs., Inc., No. 4:23-cv-230, 2023 WL 11926188, at *11 (N.D. Fla. Oct. 10, 2023) ("Federal common law prohibits the government from invoking termination for convenience clauses in procurement contracts in bad faith or in clear abuse of its contracting discretion … Florida law, in contrast, maintains no such restriction, instead requiring only some consideration—such as a notice requirement—for the right to terminate.").

Alternatively, if a subcontractor will not accept such broad termination rights, a subcontract's T4C clause might specify that the decision of whether to terminate is within the prime contractor's exclusive discretion, subject only to the requirement that the determination be made in good faith. A prime contractor might also expressly provide that it has the right to terminate the subcontract at the government's direction.

By contrast, subcontractors might prefer a T4C clause that narrowly restricts convenience terminations to situations in which the government customer actually terminates relevant portions of the prime contract.

In summary, when negotiating subcontracts, both parties should carefully consider what circumstances will permit termination for either party's convenience and the ground rules that will govern that process. If necessary, counsel from lawyers experienced in federal contracting should be sought as well.