Federal Circuit Clarifies Narrow Scope of Torncello and Proper Standard for Reviewing Termination for Convenience

Krygoski Constr. Co., Inc. v. United States,
94 F.3d 1537 (Fed. Cir. August 1, 1996)

Government need not show “changed circumstances” in order to justify convenience termination; rather, termination is proper in absence of bad faith or abuse of discretion.

The Army Corps of Engineers entered into a $414,696 contract with Krygoski Construction Company, Inc. (“Krygoski”) for the demolition of an abandoned Air Force airfield and missile site. The work included some asbestos abatement, and estimated quantities of the materials that contained asbestos were included in the contract, along with unit prices for removal of different categories of asbestos-containing materials.

Upon surveying the site prior to demolition, it was discovered for the first time that the tile and flashing in one of the buildings to be demolished contained asbestos. Although the contract did not contain a unit price for such materials, Krygoski offered to apply the same unit price it had bid for removal of asbestos tank and duct insulation, $8.78 per square foot. At the quantities estimated by the Corps, the removal of the newly-discovered material would add approximately $320,000 to the $414,696 contract.

Because the proposed price increase exceeded 33% of the original contract price, the contracting officer considered the price increase to be a cardinal change. He terminated the contract under the termination for convenience clause, in accordance with the Corps’ policy regarding changes of this magnitude, so that the contract could be reprocured competitively under the Competition in Contracting Act.

Upon rebidding, Krygoski was no longer the low bidder, and the work was awarded to a different contractor. Krygoski sued in the Court of Federal Claims, alleging that the Corps had breached its contract with Krygoski by terminating for convenience. Relying on language in Torncello v. United States, 231 Ct. Cl. 20, 681 F.2d 756, 772 (1982) which required a change in the circumstances of the bargain or the expectation of the parties in order to justify a convenience termination, the Court of Federal Claims held that the termination was improper. In the alternative, the court found that the termination was improper under the bad faith/abuse of discretion standard set out in Kalvar Corp. v. United States, 211 Ct. Cl. 192, 543 F.2d 1298, 1301-02 (1976), cert. denied, 434 U.S. 830 98 S. Ct. 112 (1977). Krygoski was awarded damages plus interest, including anticipatory lost profits.

On appeal, the Federal Circuit reversed. The Court first traced the case law and historical setting in which convenience termination developed. It then cited the rule that developed that “[w]hen tainted by bad faith or an abuse of contracting discretion, a termination for convenience causes a contract breach.” 94 F.3dd at 1541 (citing, among other cases, the
Kalvar decision). The Court emphasized the heavy burden of overcoming the presumption that the Government acts in good faith.

The court then turned to a discussion of the Torncello case, in which the Navy entered into a contract it never had any intention of keeping, and then attempted to terminate for convenience. The Court noted that in Torncello, although the existing bad faith Kalvar test would have required a finding that the termination was improper, a plurality of judges articulated a new and broader “changed circumstances” test as a basis for their decision.

Next, the Court discussed the recently-enacted Competition in Contracting Act (“CICA”), Pub. L. No. 98-369, 98 Stat. 1175 (codified as amended in scattered sections of 10, 31 and 41 U.S.C.) noting that it permits a liberal convenience termination standard and that it requires rebidding of where modifications outside the scope of a contract occur. Finally, the Court cited several of its post-Torncello decisions in which it applied a bad faith standard rather than a “changed circumstances” test.

Relying on all these authorities, the Federal Circuit held that the court below had erred in applying the “changed circumstances” test to the contracting officer’s decision to terminate after discovery of the additional asbestos at the airfield site. The Court clarified that the scope of Torncello is extremely limited, stating that “Torncello applies only when the government enters a contract with no intention of fulfilling its promises.” 94 F.3d at 1545.

Analyzing the contracting officer’s decision to terminate in this case under the bad faith/abuse of discretion standard exemplified by Kalvar, the Federal Circuit found that the contracting officer had acted properly in terminating the contract. The Court held that the magnitude of the change in the expected quantity of asbestos provided ample justification for a competitive rebidding under CICA. Accordingly, the case was reversed and remanded for a calculation of convenience damages only.

 

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