Board “Evicts” Government Termination: Contractor Awarded Expected Lost Profits for Improper Lease Termination

In Flatland Realty, LLC, ASBCA No. 63409, the Armed Services Board of Contract Appeals (Board) granted an appeal seeking damages, plus interest, from an improper termination for default.  In an uncommon result, the Board awarded lost profit expectancy damages because the government had improperly terminated the contract, which did not incorporate a termination for convenience clause.

The underlying contract was a 15-year lease by the government to the contractor for the operation of a concession.  The lease included a five-year Use and Development Plan (UDP). When the parties failed to reach agreement on a new UDP after the UDP’s fifth year, the government terminated Flatland for default.

On appeal, Flatland challenged the propriety of the termination for default.  Flatland claimed that no lease provision required the submission of a new UDP, nor did any portion of the lease indicate that the UDP expired after five years.  The Board agreed, finding that the government’s decision to terminate for default was unjustified.  Moreover, there was no termination for convenience clause in this lease agreement (ostensibly because leases to contractors are not FAR-covered “acquisitions” using appropriated funds, despite being covered by the CDA as a “disposal” of government personal property).  Since the traditional termination clauses were absent, the government lacked the typical contract protection that would have converted an improper default termination into a termination for convenience.  As such, the Board held that the government’s improper termination for default constituted a breach of the contract.  Because the government breached, the Board awarded Flatland lost profit expectancy damages.

Both the contract and holding are atypical, but worth noting.  Under the G.L. Christian doctrine, mandatory FAR clauses that are not included in a contract can be read into the contract by operation of law.  Here, because the lease was not FAR covered, the termination for convenience clause was not required and the Board did not read one in.  Thus, the government’s improper default termination was a breach of the agreement and the contractor could recover lost profits—which generally are not recoverable under a FAR-based termination for convenience.

This decision highlights the importance of understanding the particular contractual vehicle being employed by the government, which can impact the range of recoverable damages in the event of a government breach.