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Interim Internal Purchasing Guidelines > 6 Contract Administration > 6.9 Contract Termination
6.9.1.a Applicability
1. These guidelines apply to contracts that contain clauses permitting
termination for the convenience of the Postal Service or for supplier
default, and to those contracts with clauses that provide for termination
on notice. It establishes uniform guidelines for the complete or partial
termination of such contracts.
2. These guidelines must be used by the contracting officer as a guide in
evaluating settlement of a subcontract terminated for the convenience
of a supplier whenever the settlement could be the basis of a claim for
reimbursement.
3. The contracting officer may follow these guidelines in determining any
equitable adjustment resulting from a modification to a fixed-price
contract under the Changes clause.
6.9.1.b Review and Approval. No contract priced at or with a potential termination
liability exceeding $1 million may be terminated for convenience or default
unless the VP, SM, has approved termination. In addition, no contract,
regardless of price, which is considered sensitive or highly visible may be
terminated for convenience or default unless the VP, SM, has approved
termination.
6.9.1.c General Principles
1. Contracts may be terminated, whether for default, convenience, or
upon notice, only when it is in the interest of the Postal Service.
2. The contracting officer may terminate a contract on notice or use a
no-cost settlement agreement instead of other forms of termination
when:
(a) The supplier will accept a no-cost settlement or the contract
allows termination on notice;
(b) Postal Service property was not furnished or will be returned; and
(c) All outstanding payments, claims, and supplier obligations are or
will be resolved.
6.9.1.d Termination Notice
1. General
(a) The contracting officer may terminate contracts only by written
notice to the supplier. (In terminating a fixed-price contract for
default for a cause other than failure to make timely delivery, the
termination notice discussed here must be preceded by the notice
or notices discussed in 6.9.3.b.5 and 6.9.3.b.6.)
(b) Notice must be by:
(1) Certified mail, return receipt requested;
(2) Telegraphic notice; or
(3) Hand delivery with written acknowledgment by the supplier.
(c) The notice must state:
(1) The type of termination and the contract clause authorizing
the termination;
(2) The date the supplier is required to stop performance;
(3) The extent of the termination and, if a partial termination,
the portion of the contract to be continued; and
(4) Any special instructions.
2. Distribution. When the termination notice is sent to the supplier, the
contracting officer must simultaneously send a copy to the information
service center and to any known assignee, guarantor, or surety of the
supplier.
3. Amendment. The contracting officer may amend a termination notice to:
(a) Correct nonsubstantive mistakes in the notice;
(b) Add supplemental data or instructions;
(c) Rescind the notice if the work terminated has been completed or
shipped before the supplier receives the notice; and
(d) Reinstate the terminated portion of a contract.
4. Reinstatement. The contracting officer may, with the consent of the
supplier, reinstate the terminated portion of a contract in whole or in
part by amending the notice of termination when:
(a) Circumstances clearly indicate a requirement for the terminated
portion; or
(b) Reinstatement is otherwise advantageous to the Postal Service.
6.9.2.a General
1. Applicability. The following guidelines apply to all fixed-price contracts.
Paragraph I of Clause 4-1 addresses termination for convenience.
When a non-fixed price contract will be used, it must contain Clause
B-12, Termination for Convenience or Default, in place of paragraph l.
2. Type of Settlement
(a) The contracting officer may settle contracts terminated for
convenience by:
(1) Negotiated agreement;
(2) Contracting officer determination;
(3) Costing out under vouchers, if the contract is a
cost-reimbursement contract; or
(4) A combination of these methods.
(b) When possible, the contracting officer should negotiate a fair and
prompt settlement with the supplier.
6.9.2.b Supplier's Duties. After receiving a termination notice and unless directed
otherwise by the contracting officer, the supplier must comply with the
contract clause and the termination notice, which generally require that the
supplier:
1. Stop work immediately on the terminated portion of the contract and
stop placing subcontracts under that portion;
2. Terminate all subcontracts related to the terminated portion of the
contract;
3. Immediately advise the contracting officer of any special circumstances
precluding stoppage of work;
4. Perform the continued portion of the contract and promptly submit any
request for an equitable adjustment of price with respect to the
continued portion, supported by evidence of any increase in the cost;
5. Take necessary action to protect and preserve property in which the
Postal Service has or may acquire an interest, and deliver the property
to the Postal Service or otherwise dispose of it as directed by the
contracting officer;
6. Promptly notify the contracting officer in writing of any legal
proceedings growing out of a subcontract or other commitment related
to the terminated portion of the contract;
7. Settle outstanding liabilities and claims arising out of subcontract
terminations, with prior approval or ratification as required by the
contracting officer;
8. Promptly submit a settlement proposal, supported by appropriate
schedules; and
9. Dispose of any termination inventory, as directed by the contracting
officer.
6.9.2.c Settlement of Subcontractor Claims
1. Subcontractor Rights. A subcontractor has no contractual rights against
the Postal Service but may have rights against the Postal Service
supplier or the immediate subcontractor with which it has contracted.
Upon termination of a Postal Service contract, or a change that
necessitates subcontract termination, the supplier and each
subcontractor are responsible for prompt settlement of the termination
claims of their immediate subcontractors.
2. Prime Supplier's Rights and Obligations
(a) The termination clauses provide that, upon termination, the
supplier must, unless directed otherwise by the contracting
officer, terminate all subcontracts to the extent that they relate to
performance of the work terminated.
(b) The reasonableness of the supplier's settlement with a
subcontractor should be measured by the aggregate amount that
would be due under an equivalent Postal Service termination
clause. The contracting officer may allow reimbursement in
excess of that amount only in unusual cases, and then only when
satisfied that the subcontract terms were negotiated in good faith
and did not unreasonably increase the subcontractor's rights.
3. Delay in Settling Subcontractor Claims. When a supplier's inability to
reach settlement with a subcontractor delays the settlement of the
Postal Service contract, the contracting officer may settle with the
supplier for all amounts except the subcontractor's settlement proposal,
and reserve Postal Service and supplier rights as to the proposal.
4. Assistance in Subcontract Settlements. In unusual cases, the
contracting officer may determine that it is in the interest of the Postal
Service to offer to assist the supplier in settling a particular subcontract.
The Postal Service, the supplier, and the subcontractor may then enter
into an agreement covering settlement of the subcontract. In these
cases, the subcontractor must be paid through the supplier as part of
the overall settlement.
5. Direct Settlement by the Postal Service. The Termination for
Convenience clause gives the Postal Service the right, but not the
obligation, to settle and pay any claims arising out of subcontract
terminations. Direct settlements with subcontractors are not
encouraged, because the Postal Service supplier is obligated to settle
and pay a subcontractor's termination claims. However, when the
contracting officer determines that it is in the interest of the Postal
Service to settle a subcontractor's claim directly, the contracting officer
may, after consultation with assigned counsel and after notifying the
supplier, direct the assignment of all supplier rights to the Postal
Service, and settle the subcontractor's claim using the procedures for
settling Postal Service contracts. An example in which the interest of
the Postal Service would be served is when a subcontractor is the sole
source of a product and it appears that a delay by the supplier in
settling the subcontractor's claim will jeopardize the subcontractor's
financial position.
6.9.3.a General
1. Paragraph m of Clause 4-1 addresses terminations for default.
Termination for default is the exercise of the Postal Service's right to
completely or partially terminate a contract by reason of the supplier's
actual or anticipated failure to perform. When the contracting officer has
the right to terminate a contract for default, the total undelivered
contract quantity, whether delinquent or not, may be terminated for
default.
2. If the supplier can establish that its failure to perform arose out of
causes beyond its control and without its fault or negligence, the
Default Termination clause provides that a termination for default will be
deemed a termination for the convenience of the Postal Service, and
the rights and obligations of the parties will be governed accordingly.
3. When a contract provides for liquidated damages, the contracting
officer must mitigate damages when grounds for termination for default
exist by having the supplier perform or terminating the contract for
default. Liquidated damages, once incurred, may be remitted in whole
or in part as may be just and equitable, upon the recommendation of
the VP, SM, and after consultation with assigned counsel.
4. When the contracting officer determines in writing that the supplies or
services are still required and that reinstatement is advantageous to the
Postal Service, the contracting officer may reinstate the terminated
portion of a contract, but only with the supplier's written consent.
5. For termination for default of orders placed under Federal Supply
Schedule (FSS) contracts, consult the General Services Administration.
6.9.3.b Fixed-Price Contracts
1. Postal Service Rights and Obligations
(a) Under the Termination for Default clause, the Postal Service has
the right, subject to the notification requirements of the clause, to
terminate all or any part of a contract without regard to
severability of contract obligations when the supplier:
(1) Fails to complete any material requirement of the contract
within the time specified in the contract (including any
extensions);
(2) Fails to make progress to a degree that it endangers
performance of the contract;
(3) Fails to perform any other contract provision; or
(4) Fails to give adequate assurances as required by 6.2.5.
(b) The Postal Service is not liable for the supplier's costs on
undelivered work and is entitled to repayment of any progress
payments for undelivered work.
(c) The contracting officer may have the supplier transfer title and
deliver the completed supplies and manufacturing materials to the
Postal Service. The completed supplies and manufacturing
materials may be acquired for use in continuing the terminated
contract work or use under another contract.
(d) Subject to the provisions of (e)(4), the Postal Service must pay
the supplier the contract price for any supplies completed and
delivered, and the amount agreed upon by the contracting officer
and the supplier for any manufacturing materials acquired by the
Postal Service.
(e) The Postal Service must be protected from failure to make
provision for the Postal Service's potential liability to laborers and
material suppliers for lien rights. The contracting officer must take
one or more of the following measures before making the
payment referred to in (d):
(1) Ascertain whether any payment bonds furnished by the
supplier are adequate to satisfy all claims, or whether it is
feasible to obtain similar bonds to cover outstanding liens.
(2) Require the supplier to furnish statements from laborers
and material suppliers disclaiming any lien rights they may
have in the supplies and materials.
(3) Obtain agreement between the Postal Service, the supplier,
and any claimants to release the Postal Service from any
potential liability to the supplier or claimants.
(4) Withhold from the amount otherwise due for the supplies or
materials an amount the contracting officer determines
necessary to protect the Postal Service's interest, in
accordance with 6.4.4.
(5) Take any other action that is appropriate in view of the
supplier's degree of solvency and other circumstances.
(f) The supplier is liable to the Postal Service for any excess costs
the Postal Service incurs in acquiring supplies and services
similar to those terminated for default, and any other damages,
whether or not repurchase is made.
2. Determination of Appropriateness. When a default termination is being
considered, the contracting officer should ensure that termination for
default, rather than convenience, is appropriate. The contracting officer
should consult with the purchase team, other purchasing personnel,
technical specialists, and assigned counsel, and consider:
(a) The provisions of the contract, and applicable laws and
regulations.
(b) The specific failure of the supplier and, unless time does not
permit, the excuses for failure.
(c) The availability of the supplies or services from other sources.
(d) The urgency of the need for the supplies or services, and whether
or not they can be obtained sooner from sources other than the
delinquent supplier.
(e) The degree to which the supplier is essential to the Postal
Service, and the effect of a termination for default on the
supplier's capability as a supplier under other contracts.
(f) The effect of a termination for default on the ability of the supplier
to liquidate progress payments.
(g) Any other pertinent facts and circumstances.
3. Surety Notification and Arrangements
(a) When a termination for default appears imminent, the contracting
officer must send a written notification of that fact (not an actual
notice of default) to any surety, at both its main and local offices.
(b) If requested by the surety, and agreed to by the supplier and any
assignees, arrangements may be made to have future checks
mailed to the supplier in care of the surety. In this case, the
supplier must forward a written request to the designated
disbursing officer, specifically directing a change in address for
mailing of checks.
4. Initiating Termination - Failure to Make Timely Delivery
(a) When a supplier fails to make timely delivery, the contracting
officer has a reasonable time after the delivery date to determine
whether the contract should be terminated for default. When the
supplier is continuing performance of the contract, a reasonable
time for the contracting officer to make a decision is 30 working
days. Delay beyond that period may result in a waiver of the right
of the Postal Service to terminate for default.
(b) When the contracting officer determines that termination for
default is proper, the contracting officer should issue a termination
notice at once, following the procedures in 6.9.3.b.7. No demand
for adequate assurances should be issued. However, the
contracting officer may allow the supplier to assert any alleged
excusable delay.
(c) If a contracting officer's delay in issuing a notice of termination for
default results in a waiver of that right, a new delivery date must
be established by bilateral or unilateral modification of the
contract. The new delivery date must be reasonable considering
all the circumstances of contract performance. When the new
date is established, the right to terminate for default is reinstated.
5. Notice of Impending Termination - Causes Other Than Failure to
Make Timely Delivery. When the contracting officer makes a preliminary
determination that termination for default is appropriate in cases other
than failure to make timely delivery, the contracting officer should, if
practicable, notify the supplier in writing of the possibility of termination.
This notice may:
(a) Call the supplier's attention to its liabilities in the event that the
contract is terminated for default;
(b) Request that the supplier show cause why the contract should not
be terminated for default;
(c) State that failure of the supplier to explain why the contract
should not be terminated may be taken as an admission that no
valid explanation exists;
(d) When appropriate, invite the supplier to discuss the matter at a
conference.
6. Demand for Adequate Assurance - Causes Other Than Failure to
Make Timely Delivery
(a) A written notice must be issued when the contracting officer
determines that the supplier is failing to make satisfactory
progress to a degree it endangers contract performance, or
determines that some other failure, under the contract or
otherwise (other than failure to make timely delivery), is cause for
concern. However, no demand is required when there is
anticipatory repudiation of the contract, that is, when the supplier
positively states, by work or action, that it will not or cannot
perform its contractual obligations (see 6.2.6).
(b) The demand must specify the failure and give the supplier 10
days (or longer, if necessary) to assure the Postal Service of
steps that will be taken to cure the failure.
(c) When the time remaining in the contract delivery schedule does
not permit a response period of 10 days or longer, a demand may
be made part of the notice described in 6.9.3.b.5.
7. Termination Notice
(a) Immediately upon determining that termination is proper under
6.9.3.b.4., or upon expiration of the 10-day or longer period
allowed by a notice under 6.9.3.b.6., the contracting officer may
issue a notice of termination for default, unless it is determined
that nonperformance will be cured.
(b) When a demand for adequate assurance has been issued, the
notice of termination must be coordinated with assigned counsel
before issuance.
(c) The notice of termination for default must meet all the general
requirements set forth in 6.9.1.d, as well as:
(1) Set forth the contract number and date;
(2) Describe the acts or omissions constituting the default;
(3) State that the supplier's right to proceed with performance
of the contract (or a specified portion of the contract) is
terminated;
(4) State that the supplies or services terminated may be
procured against the supplier's account, and that the
supplier will be held liable for any excess repurchase costs;
(5) State that the Postal Service reserves all rights and
remedies provided by law or under contract, in addition to
charging excess costs; and
(6) Inform the supplier that the termination is subject to Clause
B-9, Claims and Disputes.
(d) When the contracting officer has determined that the failure to
perform is not excusable, the termination notice must also state
that it reflects that decision, and that the supplier has the right to
appeal as specified in Clause B-9, Claims and Disputes.
(e) The contracting officer must make the same distribution of the
termination notice as was made of the contract, and any surety
must be furnished a copy and asked to advise whether it desires
to arrange for completion of the work.
(f) The contracting officer must notify the information service center
to withhold further payments under the terminated contract.
8. Procedure in Lieu of Termination. When the contracting officer
determines that the supplier's failure to perform arose from causes
beyond its control and without its fault or negligence, the contracting
officer may not terminate the contract for default. When it is in the
interest of the Postal Service, the contracting officer may, instead of
terminating the contract for default:
(a) Terminate the contract for convenience;
(b) Permit the supplier, its surety, or its guarantor to continue
performance under a revised delivery schedule;
(c) Permit the supplier to continue performance by means of a
subcontract or other arrangement with an acceptable third party, if
the rights of the Postal Service are adequately preserved; or
(d) Execute a no-cost termination settlement agreement (or terminate
on notice if allowed under the contract) if the requirement for the
supplies and services specified in the contract no longer exists
and the supplier is not liable to the Postal Service for damages,
as provided below.
9. Determination Following Termination Notice. When the contracting
officer is unable to determine, before issuing the notice of termination,
whether the supplier's failure to perform arose from causes beyond its
control and without its fault or negligence, the contracting officer must
make a written decision on that point as soon as practicable after
issuing the notice. This decision must be delivered promptly to the
supplier, with a notification of the right to appeal as specified in Clause
B-9, Claims and Disputes.
10. Contracting Officer Memorandum. When a contract is terminated for
default, or when a procedure authorized by 6.9.3.b.8. is followed, the
contracting officer must prepare a memorandum for the contract file
that fully explains the action taken.
6.9.3.c Contracts Other than Fixed-Price
1. Postal Service Rights and Obligations. The right to terminate a contract
that is not fixed-price for default is provided under Clause B-12,
Termination for Convenience or Default. In the event of termination, the
supplier must be reimbursed costs allowed under the clause (the costs
of preparing the supplier's settlement proposal are not allowable). Any
fee payable under the contract must be reduced as directed by the
clause. The clause does not give the Postal Service the right to recover
excess repurchase costs, but it does give the Postal Service continuing
rights when the supplier fails to replace or correct defective supplies.
2. Determination and Notice. The contracting officer must consider the
factors in b.2 in determining whether termination for default is
appropriate. Under Clause B-12, Termination for Convenience or
Default, the supplier must be given the notice or notices required by
6.9.3.b.5. and 6.9.3.b.6., before terminating for default.
6.9.4 Termination on Notice
6.9.4.a General. Termination on notice is the exercise of a right to terminate a
contract without further obligation. Such a right is frequently provided in
contracts requiring the performance of services or those of indefinite length. If
appropriate to the particular purchase, contracting officers, with the
assistance of assigned counsel, may draft and include contract clauses which
provide only the Postal Service or both parties the right to terminate on
notice. The clause should provide that the notice to terminate will be provided
to the other party a certain number of days before the termination will occur.
In appropriate instances (as, for example, where claims associated with
termination are unlikely), termination on notice may be an acceptable
substitute for termination for convenience. In almost all cases, however,
contracts providing for termination on notice should also include provisions
for termination for default.
6.9.4.b Written Notice. If the contract contains a termination on notice clause, the
Postal Service may terminate the contract by sending the supplier a written
notice consistent with the clause. Compliance with the clause is required; a
supplier need not honor a notice inconsistent with the contract terms.
6.9.4.c Default. If a contract containing a termination for notice clause also contains
a clause allowing for termination for default or for cause which calls for less
notice than that required by the termination on notice clause, and it is
subsequently established that the termination for default or cause was
improper, the supplier's damages entitled will be limited to the additional
amount to which the supplier would have been entitled had the termination
for default or cause been a termination on notice.
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