Maxima Corporation v. The United States

Citations: 847 F.2d 1549; 34 Cont. Cas. Fed. 75,497; 104 A.L.R. Fed. 629; 1988 U.S. App. LEXIS 6990; 1988 WL 50722Docket: 86-1292

Court: Court of Appeals for the Federal Circuit; May 24, 1988; Federal Appellate Court

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Maxima Corporation appeals a decision by the Board of Contract Appeals regarding Contract No. 68-01-6466 with the Environmental Protection Agency (EPA). The Board ruled in favor of the EPA, determining that a constructive termination for convenience was valid, even after the contract's performance and final payment, and ordered Maxima to refund certain payments. The appellate court, however, reversed this decision.

Maxima, through the Small Business Administration, entered the contract to provide various services, agreeing to a minimum annual payment of $420,534 in exchange for fulfilling specified production requirements. Initially, Maxima proposed a different cost-plus fixed fee arrangement, which the EPA rejected in favor of a guaranteed minimum model. Consequently, Maxima lowered its service rates significantly.

Throughout the contract, the EPA did not utilize the agreed minimum services, leading Maxima to express concerns about underutilization, which the EPA did not address until the final month of the contract. As the contract year ended, both parties agreed that Maxima would provide an additional month of services without extra payment, in anticipation of a new contract under a cost-plus fixed fee arrangement. This additional month was billed and paid after completion.

The contract included a "Termination for convenience of the government" clause, a standard provision in government contracts. The Agency did not invoke this clause during the contract's duration or for one year after its expiration. On November 16, 1983, the Agency notified Maxima that the contract was constructively terminated for convenience retroactively to October 31, 1982, citing the Agency's failure to order the minimum required services. Upon appeal, the Board determined the Agency was liable only for the services actually ordered and received, directing Maxima to refund the surplus of the contractual minimum previously paid.

The central legal question on appeal was whether the termination clause could be applied retroactively in instances where the minimum guaranteed quantities were not ordered, governed by 41 U.S.C. Sec. 609(b). The United States, when engaging in contracts, holds rights and responsibilities akin to those of private parties under common law. However, the "termination for convenience" clause, which primarily benefits the government, developed from the need for flexibility in wartime procurement and was later adapted for peacetime contracts to limit governmental liability. This clause allows the government to terminate contracts without fault or breach on the contractor's part, shifting some risk of unforeseen changes to the contractor, who is then limited to recovering costs incurred, profit on work completed, and expenses related to preparing termination proposals, while anticipated profit is not recoverable.

Governmental breach of contract can be interpreted as a termination for convenience when circumstances warrant a shift in risk to the contractor. In such cases, the government may terminate the contract without facing breach consequences, provided the contract includes a convenience-termination clause. Mischaracterization by the contracting officer, such as calling a termination a cancellation or deeming the contract illegal, does not affect this interpretation. The concept of constructive termination for convenience allows the government to retroactively justify its actions, even if they were based on questionable reasons. Constructive termination is a judicial doctrine not explicitly recognized in procurement regulations, applied when the actual basis for termination is legally insufficient. This doctrine originated from the Supreme Court's ruling in *College Point*, which affirmed that a party may defend against breach claims by demonstrating a legal excuse for nonperformance, even if that justification became apparent only later.

The jurisprudence establishes that termination for convenience, whether actual or constructive, is not unlimited and does not grant the government a free pass to evade contractual obligations. Cases such as *Torncello* and *Kalvar Corp.* illustrate that unjustified terminations that undermine contractual consideration or allow the government to evade its obligations are impermissible. Furthermore, the convenience clause can be used to mitigate damages in cases where the government has partially performed or breached the contract, provided there is no bad faith or clear abuse of discretion.

The Claims Court in Municipal Leasing Corp. v. United States established that a termination for convenience clause can only be invoked due to changes in the circumstances of the bargain or the parties' expectations. It cannot retroactively justify a breach where none existed, nor alter the government's obligations under a completed contract. Maxima argues against retroactive termination, asserting it fulfilled its contractual obligations and that the Agency insisted on the contract terms, which included a thirteenth month of services at established prices. Maxima contends that imposing new terms a year after contract completion is inappropriate. Conversely, the government claims it should not pay for unreceived services and argues that it made errors by not terminating the contract earlier and incorrectly accepting the extra month of service. The government maintains that allowing retroactive termination is necessary to preserve the relevance of the convenience clause. The Board sided with the government, citing College Point as precedent, which involved a scenario where the Navy retroactively justified its actions based on a statutory right. However, the current case differs significantly from College Point, where anticipatory breach was present, and does not support the retroactive creation of a breach in a fully performed contract.

The Board referenced John Reiner Co. v. United States to support the idea that the government could retroactively alter its payment obligations to Maxima, despite not terminating the contract during its term. In John Reiner, the government cancelled a contract shortly after its start due to an improper award, but the Court of Claims found that a valid ground existed for cancellation. This case illustrates the concept of constructive termination for convenience, which is applicable when a contract is considered breached or prematurely ended. 

The excerpt also discusses various cases from boards of contract appeals that have addressed constructive termination for convenience. In North Chicago Disposal Co., the Navy sought to recover payments after a contractor seemingly failed to perform, but the board ruled that the contractor had fully met its obligations. Similarly, in Charles Bainbridge, Inc., the government did not fulfill its minimum order and faced potential claims for breach or termination for convenience, but the circumstances did not support a simple application of these concepts.

The government contended that ruling in favor of Maxima would undermine the termination for convenience clause, which is mandated in contracts. However, the core issue is not whether the government could have invoked this clause during the contract term, but that it did not do so. The clause is not intended for unilateral contract renegotiation post-performance. The government acknowledged that "changed expectations" must precede a termination for convenience, but argued that its failure to order minimum quantities from Maxima indicated such a change. Yet, this action occurred a year after contract performance was completed, constituting a claim for retroactive price adjustment rather than a valid cancellation due to changed expectations.

For the government to pursue a retroactive adjustment after contract performance, a claim must be made within a reasonable timeframe if no express time limit exists in the contract. A six-week delay post-final payment is considered reasonable for claims related to cost reductions of raw materials when such adjustments were contractually stipulated and known to the contractor. The court in American Western emphasized that the government can be estopped from asserting claims due to waiver, paralleling private contractors' obligations. The Roberts case highlighted that a delay exceeding one year in seeking a price reduction was unreasonable. 

In this instance, Maxima alerted the government about its failure to meet minimum order rates during the contract, contrasting with the contractor in American Western, thus supporting Maxima's position that the government's year-long delay in objections was unreasonable. The Board's reliance on a one-year claim submission limitation post-termination suggests that Maxima's claim could be preemptively barred, although this was later deemed moot. 

The government argued that actions taken at contract expiration, including a thirteenth month of services, were unauthorized, and claimed ignorance of the termination clause did not absolve it of its contractual duties. Both parties are assumed to know their contract terms, and ignorance cannot be used as a defense. The payment made was not an error but a contractually agreed obligation. The government's assertion of legal error in its compliance is unfounded, as mutual fair dealing is expected in government contracts. The sentiment expressed highlights the importance of trust and integrity in government dealings, likening it to the expectations in private contracts.

The government contends it can recover erroneously paid funds, citing United States v. Wurts, which determined that the two-year statute of limitations for recovering erroneous income tax refunds begins only upon the actual erroneous payment. The central issue in Wurts was not the erroneous nature of the payment but whether recovery was time-barred. The government's argument that there was no guaranteed minimum price in the contract implies it is not bound to pay a contract minimum, leading to potential contractual failure due to lack of consideration and mutuality, as established in Willard, Sutherland. Co. v. United States. The contract lacked required obligations for both parties, rendering it unenforceable. However, the court noted that while the contract was initially unenforceable, it became valid and binding upon performance. The government has avoided such contracts since Willard, with a Guaranteed Minimum Quantity clause essential for enforceability. The government is criticized for disregarding the negotiated minimum obligations, which undermines the principle of contract validity. The government acknowledged that no precedent supports retroactive application of a termination for convenience clause to a fully performed contract, deeming the claimed partial constructive termination improper. The Board's judgment favoring the government is reversed, with instructions to enter judgment in favor of Maxima. In dissent, Circuit Judge Nies highlights that Maxima performed services worth $32,236.85 but was erroneously paid $267,872.50 based on a misunderstanding of the contract terms, leading to a claim for overpayment after an audit. The Board upheld the government's claim for the return of the erroneous payment, citing it as unauthorized and mistaken, requiring a refund per DiSilvestro v. United States.

The board determined that the government accurately calculated the overpayment for unperformed services. It addressed a potential setoff by Maxima, which had not filed a claim, ultimately deciding against remanding the case due to its lengthy duration. The board approved the government’s voluntary deduction based on an estimate of Maxima's termination for convenience costs, ruling that the termination for convenience clause permits the government to avoid breach of contract damages, even retroactively, referencing College Point Boat Corp. v. United States.

The majority opinion contended that the government could not retroactively terminate for convenience but did not remand for Maxima to prove breach of contract damages. Instead, it found that Maxima "fully performed" its indefinite quantities contract by maintaining the capability to provide the minimum services specified. Consequently, Maxima could not be required to refund payments made according to the contract. 

The majority established several key principles for standard indefinite quantities contracts: (1) full performance is achieved through the capability to deliver the guaranteed minimum quantity; (2) the government does not breach by failing to order the minimum quantity and cannot retroactively terminate for convenience; (3) if the government does not terminate before contract expiration, it must pay for the guaranteed minimum; and (4) failure to pay the full price would void the contract for lack of consideration. 

These principles were announced as precedential rulings, not merely ad hoc decisions. In dissent, it was argued that basic contract law requires actual delivery of goods or services for entitlement to full payment, and an innocent contractor is entitled only to damages, not the full contract price, if they have not fully performed.

The majority opinion fails to distinguish between fixed-quantity/fixed-price contracts and indefinite-quantity/fixed-price-per-item contracts, asserting that there is no basis for such a distinction. It erroneously concludes that since payment was made, the contract was fully performed, leading to the flawed premise that a fully performed contract cannot be terminated retroactively for convenience. This dissent does not dispute the premise but argues against the majority's rationale for awarding the full contract price to Maxima. The dissent maintains that Maxima was not entitled to the final payment based on the contract terms, pointing out that the majority offers no supporting contract provision for the payment or explanation for the expiration of Maxima's claim filing period.

The dissent emphasizes that precedent allows for breach of contract damages (lost profits), not the full contract price, when the contractor has not fulfilled the agreed-upon services. Maxima did not support the majority's claim of "full performance" and instead proposed a complex defense based on a supposed second contract, asserting entitlement to a payment of $267,872.50 regardless of service completion. However, the board found no evidence of this second contract, a conclusion supported by the dissent. The majority does not accept Maxima's argument regarding this second contract, yet it contradicts its own reasoning by dismissing Maxima's position on the payment's purpose. The dissent argues that the majority's decision to grant summary judgment based on an unadvanced theory by Maxima, which has not been adjudicated by the board and raises unresolved factual issues, violates due process rights. The dissent highlights that even the government, representing taxpayers, deserves due process in this matter.

The case centers on whether the government mistakenly paid Maxima for services that were not performed under the original contract. The parties agreed that the government did not order and Maxima did not deliver the guaranteed minimum services, meaning the contract was not fully executed, which eliminates any obligation for payment for those services. Without accepting Maxima's "second contract" theory, the government is entitled to recover the amount paid for undelivered services. The concept of termination for convenience does not affect the government's right to reclaim erroneous payments or determine the amount owed to it. The contractor has not filed any claims against the government to date, prompting the board to address the potential quantum of such a claim due to the prolonged nature of the case. However, the board mistakenly limited its assessment to termination for convenience costs; thus, the government should receive partial summary judgment regarding its claim and any ruling regarding Maxima's setoff should be vacated. Maxima is not entitled to the contract price for services that were not performed, and is only entitled to seek damages on remand. The majority's opposition to the government's summary judgment motion and support for Maxima's theory of full performance is deemed legally unsound and unprincipled. The contract stipulates that Maxima is entitled to payment only for actual service delivery and not for mere readiness to perform. Consequently, the board correctly granted summary judgment in favor of the government’s claim.

On April 23, 1981, the EPA solicited proposals for a fixed-price, indefinite quantity contract for various services, to which Maxima Corporation submitted a proposal. Maxima suggested that due to undefined quantities and high fixed costs, a cost reimbursement or labor hour agreement might be more appropriate. The EPA deemed Maxima's initial prices excessive but agreed to increase the minimum quantities, leading to a significant reduction in Maxima's proposed prices. The contract was subsequently awarded to the Small Business Administration (SBA) under the 8(a) program, which subcontracted the work to Maxima, effective October 1, 1981, with a performance period of one year and two optional years.

The contract included a "Termination for Convenience" clause and specified guaranteed minimum and maximum quantities for services. The total guaranteed minimum for the first year was calculated at $500,223, based on fixed prices for estimated minimum quantities. Throughout the contract, Maxima reported that actual service demands were well below these minimums, expressing concerns about underutilization. Near the end of the first year, the EPA opted not to renew under the current terms but sought to transition to a cost reimbursement contract, requesting a one-month extension of the existing contract for continuity. 

Maxima submitted a cost reimbursable proposal on September 13, 1982, asserting it should be compensated for the initial contract term based on the negotiated prices and minimum guarantees. During a meeting on September 24, 1982, the parties discussed the contract extension, but they disagreed on the outcomes of the discussions. In a follow-up letter on September 27, 1982, Maxima stated it would agree to extend the contract for 30 days without additional consideration if the EPA accepted specific terms.

EPA is negotiating a sole-source contract with Maxima Corporation for word processing and production services, structured as a cost-plus-fixed-fee contract for twelve months, with two optional twelve-month extensions. The fixed fee will be at least 8% of the total estimated costs. The EPA will expedite the approval of Maxima's invoices for guaranteed minimum items and limit production requirements for a thirty-day extension to 10% above prior levels. Handwritten notations by the contracting officer, James Kranda, indicate agreement with these terms.

On September 21, 1982, a modification to the contract was made, reallocating $40,000 in funds and extending the performance period by one month. Maxima billed the EPA $272,210.90 for October 1982, calculated by deducting previous billings from the contract minimum. The EPA finance office processed this voucher without the contracting officer's approval, and payment was made around December 20, 1982.

In October 1983, the EPA's General Counsel discovered the payment had been made. Subsequently, in a November 16, 1983 letter, the new contracting officer informed Maxima that the EPA’s non-fulfillment of minimum order quantities constituted a constructive termination of the contract, effective October 31, 1982, and requested a termination settlement proposal by January 31, 1984. Maxima did not submit this proposal. 

On May 31, 1984, a final decision was issued demanding repayment from Maxima of $233,974.05, after accounting for other costs. Maxima appealed this decision and counterclaimed for services rendered in October 1982, including interest. EPA has moved to dismiss the counterclaim as premature, asserting that Maxima did not seek a final decision from the contracting officer. The motion includes an appendix listing 39 undisputed material facts.

Appellant claims that instead of terminating the contract for convenience, the contracting officer agreed to pay guaranteed minimums in exchange for an additional month of free services and a favorable follow-on cost reimbursement contract, asserting that the Government received additional consideration and cannot later dispute the agreement based on alleged mistakes in law or authority. In response, the Government refutes 18 of the appellant's "Material Facts," particularly those related to consideration for the alleged new agreement. The Government argues that Mr. Kranda's marginal notations on a September 27, 1982, letter were not confirmations of agreement but were added later and not discussed with relevant employees. Regarding the claim that Maxima's October services were provided without additional consideration, affidavits indicate that the EPA expected to bill for these services at contract unit prices, contradicting the appellant's assertions. The Government disputes the notion that the contracting officer agreed to pay guaranteed minimums in return for October services or any negotiation of a cost reimbursement contract, maintaining that they believed the EPA was always obligated to pay the guaranteed minimums regardless of work quantity. The Government's position hinges on two main arguments: (1) the contracting officer lacked express authority to pay the guaranteed minimums as it conflicted with the contract's payment provisions and termination clause, and (2) the contracting officer cannot enter into agreements that violate federal procurement regulations. The Government highlights that the appellant has not adequately addressed the issues of contracting officer authority and has presented only limited references to relevant case law, while the Government cites cases related to contract interpretation and limits on authority. The discourse reveals that material facts regarding the alleged consideration for the agreement are disputed.

The Board is tasked with determining the applicability of the termination clause in the contract, specifically if it can be asserted retroactively when guaranteed minimum quantities were not ordered. The parties seek an interpretation of the guaranteed minimum and payment provisions. Due to the lack of specific issues raised in the pleadings, the Board conducted its own research, concluding that interpretative analyses of guaranteed minimum contracts lack considerable value, particularly in binding the Government to order or pay for minimum quantities.

The legal precedent set by *College Point Boat Corp. v. United States* establishes that the Government has a right to terminate contracts for convenience, which extends to retroactive assertions. Justice Brandeis noted that a party can defend against breach of contract claims by showing legal excuse for nonperformance, even if that excuse was unknown at the time. This concept was further reinforced in *John Reiner Co. v. United States*, where it was ruled that the Government could limit liability related to termination provisions even if those provisions were not explicitly invoked.

The doctrine of constructive partial termination for convenience has been applied in various cases, effectively limiting the recovery to compensation specified in the termination clause when the Government did not order the necessary quantities. In the present case, the appellant claims that the contracting officer, despite considering contract termination, opted for a new agreement with consideration, which would preclude constructive termination or late termination assertions by the Government after contract completion. Notably, the appellant's correspondence from September 27, 1982, agreed to extend the contract under specific conditions without additional consideration, which included the payment for guaranteed minimum quantities and a limitation on required services during the extension.

The extension of the contract was agreed to without additional consideration, meaning the appellant expected to be compensated for services rendered during the 30-day extension from pre-existing contract funds. Both parties were unaware that the Government was only liable for termination costs due to the failure to order minimum quantities. The extension merely prolonged the existing contract's performance period without altering its terms, which remained consistent with the previous 12 months. Services during this period would be ordered and paid for upon acceptance, but there was no new agreement formed.

The first condition of the extension involved negotiating a sole source cost-plus-fixed-fee (CPFF) contract with Maxima, reflecting the EPA's intention to continue services based on a proposal submitted by Maxima on September 13, 1982. This condition aimed to prevent service interruptions and did not pertain to the existing contract, indicating no consideration for a new agreement.

The second condition, which involved paying an invoice for guaranteed minimum items, stemmed from a mutual misunderstanding that the Government would be liable for such payments. However, judicial precedents clarify that no such liability exists. The contracting officer lacked the authority to bind the Government to these payments, and the appellant could not rely on the officer's unauthorized promise, as it did not constitute valid consideration.

The third condition limited production requirements during the extension to no more than 10 percent over August 1982’s production levels. A notation by James Kranda indicated that the production requirements for October were already fulfilled at the time of this notation.

The Government's position is supported by evidence indicating that the notes on the letter were written after the extended contract's completion. The limitations on production requirements during the 30-day extension were designed to protect the appellant, not to benefit the Government, demonstrating that there was no consideration for a new agreement. Consequently, the contracting officer lacked the authority to authorize payment for unordered production requirements, rendering the payment of the invoice unauthorized and mistaken, necessitating a refund based on the precedent set in DiSilvestro v. United States.

The original contract was effectively constructively terminated for the Government's convenience on October 31, 1982. The appellant's counterclaim for compensation related to October 1982 services falls under the Government's established computation based on August 1982 requirements. The contract stipulates that any termination claims must be submitted within one year post-termination, and there is no benefit in remanding the dispute for negotiation.

The appeal has been denied. Maxima did not submit its termination settlement proposal, while the Government calculated the amount owed to be $32,236.85 for October requirements, $4,338.40 for equipment costs, and $6,000 for termination expenses, reducing the overpayment to $229,635.65. Maxima is ordered to repay this amount plus interest from May 31, 1984, as per the final decision. The contract outlines guaranteed minimums and maximums for various production requirements and specifies obligations for maintaining workstations both on-site and off-site, with detailed descriptions of services required.

The guaranteed minimum payment was determined based on the minimum service requirements at a 168-hour turnaround rate. The contract obligated Maxima to deliver not only the minimum but also up to the maximum specified pages and hours, including a 48-hour turnaround upon request. Although the agency guaranteed this minimum payment, the Board cautioned that existing case law could void any minimum quantity guarantees by the government due to termination rights. In September 1982, during contract renewal negotiations, Maxima expressed concerns about operating losses and cash flow issues due to lower-than-expected service volumes in the previous year, highlighting the absence of provisions for progress payments against the guaranteed minimum. The agency's neglect of Maxima's complaints resulted in accumulated unpaid minimums until October 1982, when Maxima invoiced a total of $267,872.50 for the annual minimum and October services. The dissenting opinion inaccurately characterized this as payment for one month’s services and suggested the government could modify contracts post-performance without constraints. The majority opinion emphasized the importance of upholding legal principles in government contracts, arguing against the notion that the government can unilaterally alter agreements after full performance. The contract's Article XI requires the contractor to submit invoices for completed work, with payments to be made at fixed rates outlined in the contract.

The board's majority opinion suggests that payment was aligned with contract terms, but it did not explicitly state this. The majority's comparison of the indefinite quantities contract in this case to a previous case, North Chicago Disposal Co., is criticized as unfounded; unlike North Chicago, which fulfilled its obligations without a minimum quantity requirement, the current case lacks a similar context. A pertinent case is Charles Bainbridge, where the government failed to order the minimum services specified in an indefinite quantities contract, leading to a claim by the contractor. The board ruled that the contractor could only recover damages due to a termination for convenience clause, which aligns with legal precedent allowing government breaches to be retroactively treated as terminations. There is no evidence of bad faith by the government in this instance.

The majority confuses consideration with damages; an indefinite quantities contract requires a promise for a guaranteed minimum order to be enforceable. The promise constitutes the necessary consideration, and if breached, damages are awarded to compensate for the loss. The minimum quantity provision serves dual purposes: it establishes contract consideration and provides a basis for measuring damages in case of a breach. The contractor, Maxima, cannot benefit more from damages than from performing the contract. Maxima is entitled to termination for convenience costs or damages for breach of contract and may seek an equitable price adjustment if it can prove underpricing based on expected order volumes. Additionally, the case law implies that any minimum quantity guarantees by the government may be void due to termination rights. Agencies are encouraged to inform contractors that failure to meet minimum orders will result in payment under termination clauses to prevent misunderstandings.