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. MORE