Due to our Government’s current fiscal realities, we may see an increase in terminations for convenience in the coming months. As a result, contractors need to be prepared to deal with potential terminations – a proactive contractor will be in a better position to maximize its settlement position. On the flipside, contractors who do not understand the intricacies of FAR part 49 may place themselves at risk when trying to recover. This is the lesson learned in Sigma Construction, Inc. a/k/a Sigma Services, Inc., COFC No. 12-865 where the COFC found that the Government was not bound by the parties’ alleged oral termination for convenience settlement, essentially allowing the Government to renege on the parties’ prior oral understanding.
In this case, the contractor and the CO negotiated a $485,000 termination for convenience settlement during a December 1 telephone conference, and the CO indicated that a written confirmation was forthcoming. A few days after the call, the CO sent a letter to the contractor indicating that the parties’ agreement would be issued as a “final supplemental modification to the [C]ontract” and executed by the contractor “prior to final execution by the Government.” Almost two months later, the CO informed the contractor that the “final modification requires a review by the GSA’s Regional office.” Then on April 20, the CO advised that “pursuant to GSA’s internal review, the GSA concluded that the ‘[prior] negotiated settlement has not been deemed acceptable and w[ould] not be approved without a complete third party audit.’” The CO explained that GSA desired to reopen negotiations to avoid any further audit. At this point, a dispute arose, and the contractor submitted a CDA claim, which it ultimately appealed to the COFC.
After reviewing the arguments, Judge Braden dismissed the contractor’s claim that the Government breached an alleged oral settlement agreement. First, she determined that the FAR imposes certain requirements that must be met before a termination settlement can be binding. For example, FAR 49.109-1 states that “[w]hen a termination settlement has been negotiated and all required reviews have been obtained, the contractor and [terminating contracting officer] shall execute a settlement agreement on Standard Form 30” which amounts to a “written modification” to the contract. Thus, she concluded that a termination settlement must be in writing; it cannot be oral. Second, she found that the CO did not have authority to enter into the alleged oral agreement because the CO could not waive the FAR requirement that the settlement be in writing. (Judge Braden also dismissed the contractor’s secondary claim based on an alleged breach of the implied duty of good faith and fair dealing.)
While we believe the holding in this case should be limited to the specific facts, it still provides important guidance to contractors negotiating a termination for convenience settlement: a “final” oral negotiated position likely won’t amount to a binding termination settlement agreement until it is in writing and has met other requirements in FAR Part 49. In other words, the parties’ oral understanding should be taken with a grain of salt. That being said, contractors should carefully document all negotiations because another set of circumstances potentially could yield a viable claim if the Government reneges on the parties’ oral understanding.