Government Contracts Discontinuance of Funding Didn’t Breach Implied Duty
Wednesday, April 22, 2020

Discontinuance of Funding Didn’t Breach Implied Duty

By Government Contracts Editorial Staff

According to the Civilian Board of Contract Appeals, discontinuing funding of a cost-reimbursable, incrementally funded research and development contract did not constitute a breach of the implied duty of good faith and fair dealing or bad faith, because the government persuasively and credibly explained the basis of the decision and there was no evidence any government personnel intended to harm the contractor. The government discontinued funding the contract to develop a system to detect bio-threats pursuant to the contract’s FAR 52.232-22 Limitation of Funds clause due to concerns with the contractor’s performance and progress. The clause stated that the government had no obligation to reimburse the contractor for costs incurred in excess of the total amount of funds allotted to the contract. After the government terminated the contract for convenience and paid the contractor its performance costs in the amount of the funds allotted to the contract, as well as its termination costs, the contractor sought additional compensation. To recover costs in excess of the total allotted amount of an incrementally funded contract, a contractor must demonstrate that the LOF clause does not apply (Ebasco Services, Inc. v. U.S., FedCl, 41 CCF ¶77,082). According to the contractor, the contract did not expire because the discontinuing of funding and termination for convenience constituted a breach of the implied duty of good faith and fair dealing.

Proper Exercise of Authority. The board explained that “[a]ny analysis of a question of [g]overnmental bad faith must begin with the presumption that public officials act ‘conscientiously in the discharge of their duties’” (Ebasco). Here, the contractor did not present any evidence to overcome the presumption. The agency directors involved in the decision to discontinue funding credibly testified that they had concerns about the rate of spending on the contract, and their actions did not demonstrate unfair dealing, intent to harm the contractor, or bad faith by them or other government personnel. One director testified that the administration of the contract was among the most “irregular” he had seen in his career with regard to the number of changes and the deletion of tasks in the statement of work that had been previously performed, funded, and paid. He was concerned that the project manager did not have an arm’s length relationship with the contractor, and that the manager and the science advisor were not forthright as to the status and goals of the project. He was also concerned with the amount of funding that the government had expended in excess of the initial projected ceiling without a guarantee of a working prototype. The director properly exercised his authority and the government’s contractual right to discontinue funding pursuant to the LOF clause, and the contract expired upon the discontinuance of funding. (NVS Technologies, Inc. v. Dept. of State, CBCA, ¶95,974)

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