Claim that agency terminated a contract in bad faith is denied. The claimant alleged that the agency acted in bad faith when it discontinued funding for a contract and then terminated the contract for convenience. The board, however, found that the agency had ample reasons to discontinue funding. The costs on the contract were out of control. The contractor appeared to be invoicing the agency for work in excess of funding limits. The scope of the contract had changed since it was executed, and it was not clear what kind of deliverable the contractor had to provide. Once funding was discontinued, the contracting officer had the discretion to terminate the contract for convenience. There was no evidence of bad faith.
The Department of Homeland Security’s Chemical and Biological Defense Division (CBD) had a contract with NVS Technologies, Inc. for the development of a system to detect biological threats. Over several years, CBD kept increasing the funding and the cost value for the contract.  Indeed, after four years, the contract value had almost doubled. At the same time the value was going up, NVS’s obligations under the contract kept changing. Modifications to the contract eliminated tasks after they had been paid for, extended performance milestones, and even eliminated the requirement that NVS deliver a working device.
An acting director of CBD determined that the contract was out of hand. The spend rate was out of control. He believed NVS was invoicing the agency for amounts in excess of allocated funds. Also, the scope of the contract had changed. The acting director thought the objectives of the contract were inconsistent with CBD’s mission. Additionally, the acting director was not happy with NVS’s alleged intellectual property rights in the system. What’s more, he believed that agency staff was not giving him accurate information on the contract. As a result of this, the acting decided to discontinue funding for the contract.
Under the contract’s limitation of funding (LOF) clause, once funding was discontinued, NVS had the right to request a termination for convenience. It did not do so. If the contractor did not request a termination, then the LOF clause allowed the contracting officer to terminate for convenience or to allow the contract to expire. The contacting officer in this case elected to terminate.
NVS filed several claims with DHS for termination costs and for over $280 million in lost profits, stemming from an alleged bad faith termination. (The maximum value of the underlying contract was on about $30 million.) DHS denied the claims, and NVS appealed to the CBCA. The parties resolved the claim termination costs in binding arbitration before a board judge. The claim for bad faith termination went to trial.
NVS alleged that the CBD had breached the contract’s duty of good faith and fair dealing by terminating funding. Specifically, NVS asserted that the acting director’s funding decision had been motivated by an intent to injure NVS.
The board found that NVS had not presented any evidence to overcome the presumption that the acting director and contracting officer had acted reasonably in discontinuing the funding. The acting director was reasonably concerned about rate of spending and the irregular administration of the contract. He had legitimate concerns about the progress of performance and the fact that the contractor was not obligated to provide a working prototype. The acting director did not breach the implied duty of good faith and fair dealing by ending funding for the program.
NVS also argued that the decision to terminate the contract for convenience after discontinuance of funding also breach the implied covenant. The board rejected this argument too. As noted, under the LOF clause, if funding was discontinued, then the contracting officer could either terminate for convenience or let the contract expire. The contracting officer chose to terminate. The decision to terminate, the board reasoned, did not amount to bad faith. In fact, the board noted the termination benefitted NVS. If the contracting officer had decided to let the contract expire, then NVS would not have been entitled to termination costs. By electing to terminate, the contracting officer allowed NVS to actually receive more money.
NVS further alleged that Office of Inspector General report had found that the CBD acting director had acted in bad faith. But the board found that this reading of the report was erroneous. While portions of the report purported to negate the acting director’s reasons for discontinuing the funding, the board did not find the report credible as it was filled with factual and legal inaccuracies.
NVS is represented by Cheryl Cathey, its Chief Operating Officer. The government is represented by Marion Cordova of the Department of Homeland Security.
