United States Court of Appeals for the Fourth Circuit Holds Recovery on Contractor’s Claim for Wrongful Termination Limited by Provisions of Termination for Convenience Clause; Contractor’s Suit Dismissed Because Claim Was Subject to Contractually Prescribed Disputes Procedures

Hancock Electronics Corp. v. Washington Metropolitan Area Transit Authority, 81 F.3d 451 (4th Cir. 1996).

In the spring of 1994, the Washington Metropolitan Area Transit Authority (“WMATA”) awarded Hancock Electronics Corporation (“Hancock”) a contract to provide replacement braking systems for approximately 300 rail cars. The contract required Hancock to design, manufacture and install the braking systems. The contract further required Hancock to demonstrate its contract performance to WMATA and provide certain technical data about the braking systems.

Because it apparently did not possess the ability to monitor the testing of the brake systems’ software, WMATA subcontracted the testing function to a third party. In addition, as part of the testing process, WMATA requested Hancock to provide certain technical documentation, including the brake systems’ software. WMATA sought Hancock’s permission to provide the technical data to the third party responsible for testing, who had agreed to enter into a lifetime nondisclosure agreement. Hancock refused.

Citing the proprietary nature of its software, Hancock argued that WMATA’s insistence on the software constituted a breach of contract. Hancock further claimed that WMATA’s breach prevented and excused Hancock’s further performance of the contract, and therefore, that Hancock was treating the contract as terminated. Hancock sued WMATA for in excess of $2 million in damages including loss of anticipated profits.

In response, WMATA informed Hancock that it was terminating the contract pursuant to the contract’s Default Clause, citing Hancock’s cancellation and failure to deliver the technical information. Further, the contracting officer stated that his decision was a “`Final Decision . . . appealable under the Disputes Clause of the contract.'” WMATA also filed a motion to dismiss Hancock’s complaint, alleging that Hancock had not exhausted its contractually prescribed administrative remedies. The district court granted WMATA’s motion to dismiss, concluding that even if WMATA had breached its contract, the “termination for convenience” clause limited WMATA’s liability and required Hancock to avail itself of the specified administrative remedies. Hancock appealed.

The Court of Appeals addressed three clauses to the contract between Hancock and WMATA. First, the Disputes Clause provided “except as otherwise provided . . . any dispute concerning a question of fact arising under This Contract which is not disposed of by agreement shall be decided by the Contracting Officer.” The Disputes Clause further provided Hancock the right to appeal the Contracting Officer’s final decision to WMATA’s Board of Directors or the Army Corps of Engineers Board of Contract Appeals.

Second, the Default Clause permitted WMATA to declare the contractor in default, and set forth the applicable procedures. Significantly, if the parties were unable to resolve their differences, the disagreement would constitute a “dispute concerning a question of fact within the meaning of the Disputes article of this Contract.”

Third, the Termination for Convenience Clause provided WMATA the option of terminating the contract “whenever the Contracting Officer shall determine that such termination is in the best interest of [WMATA].” The contractor was to be compensated for already rendered performance on a quantum meruit basis. Again, disputes about a termination for convenience were governed by the Disputes Clause.

Citing “settled law,” the Court of Appeals held that even if WMATA breached or wrongfully terminated Hancock’s contract, such an event constituted a “constructive termination” and was governed by the Termination for Convenience Clause. Thus, Hancock would be limited to a quantum meruit recovery, and not the anticipated profits sought in its complaint.

Seeking to invoke an exception to above rule, Hancock argued that WMATA’s testing requirements constituted a “cardinal change” to the contract. The Court noted that a cardinal change occurs when “the government demands a contractual alteration so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for,” and allows the contractor to sue for damages in court.

The Court held that WMATA’s demands, even if outside the scope of the contract, did not effect a cardinal change to the contract so as to nullify the contract’s dispute resolution mechanism. The Court reasoned that WMATA was entitled to test the replacement brakes, including the electronic aspects. Reduced to its basics, the Court viewed the dispute as whether Hancock was required to release the software that it had already created. Whether the software fell within the contract’s requirement of the production of certain technical data was unclear; however, the Court held that WMATA’s demand did not amount to a cardinal change to the contract.

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