The federal government has the right to unilaterally terminate contracts when it is in the government’s interest to do so. In the event of a termination for convenience, the contractor may typically submit its termination settlement proposal within a year of the termination. Since the contractor submits the settlement proposal primarily for negotiation purposes, it is not considered a claim under the Contract Disputes Act (CDA) when it is first submitted to the contracting officer (CO). Stated another way, the termination settlement proposal is considered an instrument of negotiation rather than a non-routine request for payment or a request for the CO’s final decision. For this reason, the costs of preparing a termination settlement proposal are also generally considered allowable. However, if the termination settlement proposal otherwise meets the requirements of a claim, it can be converted into a CDA claim if the parties’ negotiations reach an “impasse” and the contractor demands that the CO issue a final decision. In this context, an impasse means a deadlock or a point where a resolution through continued negotiations is unlikely when viewed from the perspective of an objective, third-party observer. Notably, whether the parties’ negotiations have reached an impasse is a question of fact, to be determined on a case-by-case basis.
In Armed Services Board of Contract Appeals (ASBCA) No. 63637, an opinion issued on October 16, 2023, the Board found that the contractor’s termination settlement proposal had converted into a CDA claim as the parties’ negotiations had reached an impasse. The Navy awarded the underlying contract for the evaluation, repair, and modification of turbine aircraft engines. The contract was later unilaterally terminated for the government’s convenience. A little less than a year after the termination, the contractor submitted its termination settlement proposals. In November 2021, after about six months of negotiations, the contractor asserted that the parties were at an impasse. At this time, the contractor provided a CDA claim certification and requested a final decision from the CO with respect to the termination settlement proposals. After continued communications with the government, the contractor ultimately filed a petition with the ASBCA on June 9, 2023, seeking an order that would direct the CO to issue a final decision. The Board noted that 29 months had elapsed since the contractor submitted its settlement proposal. Furthermore, the contractor had indicated to the government that it was inclined to begin the dispute process in November 2021 when it certified the settlement proposals and requested the CO’s final decision. The Board concluded that under these circumstances, the government’s slow processing of the contractor’s settlement proposals rose to the level of an impasse and exercised jurisdiction.
Similarly, in ASBCA No. 51086, an opinion issued on July 23, 1998, the government’s motion to dismiss was denied when the Board found that the contractor’s termination settlement proposal had properly converted into a claim due to an impasse in the parties’ negotiations. In August 1994, the Air Force issued a contract for the removal of residual diesel fuel from tanks at missile launch sites around Malmstrom Air Force Base in Montana. The Air Force eventually terminated the contract for convenience in May 1996. Less than a year later, in April 1997, the contractor submitted its termination settlement proposal. In May 1997, the contractor notified the CO that it considered the matter in dispute and provided a CDA certification. The parties continued to communicate over the next several months, with the contractor promptly responding to the government’s inquiries about the settlement proposal. The contractor also made several attempts during August to October 1997 to meet with the CO but was repeatedly refused a meeting. In one of its responses to a government inquiry on September 3, 1997, the contractor requested a meeting with the CO and asked for a final decision. On October 23, 1997, the contractor filed its appeal with the ASBCA. The Air Force moved for dismissal, taking the position that the contractor’s settlement proposal had not yet ripened into a CDA claim. However, under the circumstances, the Board denied the government’s motion. It concluded that the parties were at an impasse since September 3, 1997, when the contractor requested a final decision from the CO.
Once the government terminates a contract for convenience, the contractor typically has up to a year to submit its termination settlement proposal. Since the settlement proposal is an instrument of negotiation, it is not considered a CDA claim when the contractor first submits it to the CO. However, if the negotiations between the parties reach an impasse, the termination settlement proposal can convert into a CDA claim, provided the contractor requests a final decision. The contractor’s demand for a final decision at this stage evidences its desire to conclude negotiations and start the dispute process. Ultimately, the determination of whether the parties’ negotiations have reached an impasse is an inherently factual question. Dispute adjudicative forums are likely to find an impasse when the parties’ negotiations are deadlocked and at a point where a third-party observer would reasonably conclude that continued negotiations are unlikely to result in a resolution. Contractors should also remember that for successful conversion into a claim, the termination settlement proposal should meet all the other requirements of a CDA claim, such as the requirement that a claim over $100,000 be duly certified. For converting such claims, if they did not initially supply a certification with the termination settlement proposal, contractors should provide a certification with their request for the CO’s final decision.
This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.
