Protecting Federal Contracts

The U.S. federal government can prematurely end a contract with (and therefore payment to) a business. The U.S. federal government (hereinafter referred to as “federal government” or “government”) is the single largest procurer of goods and services in the world. The government’s significant buying power, coupled with U.S. procurement laws, affords it the unique authority to terminate federal contracts and leave federal contractors (and their lenders) at a potential loss. 

Generally speaking, equipment financers exist in the government procurement sector in a few ways: leasing equipment directly to the government, leasing essential equipment to prime and subcontractors, or providing financing to contractors so they can perform their contractual obligations. 

The federal government’s unilateral action (or inaction) can cut the life of the contract short, reducing profits. However, there are some ways to mitigate this risk. When certain provisions are included in the contract, contractors and the agency can agree to meet certain standards in making an optional renewal decision. This column explores how certain contract terms may limit the government’s discretion when it comes to contract options and potential remedies, such as through the claims process. 

What Are Contract Options, and Who Controls Them?

Every federal agency is subject to the Federal Acquisition Regulation (FAR) along with any agency-specific rules. By default, the FAR grants the government a unilateral choice to purchase additional supplies or services or even extend the length of a contract without further competition. Options are common in federal contracts and are typically exercised. Contracting officers, government employees with authority over contracts, are required to make multiple determinations before exercising an option (e.g., reviewing the contractor’s past performance, the government’s interests and needs, etc.). Federal agencies maintain broad discretion over the decision to use an option. 

The federal government can unilaterally choose not to exercise a contract option as well. Amid shifting budgets, limitations on expenditures, and the presence of new, cheaper alternatives to existing equipment needs, a federal agency may have various reasons for not exercising an option. However, even with the seemingly unfettered discretion agencies have over options, contractors can still protect their expectations on contracts by including certain provisions in their agreements to check an agency’s contracting power. 

The “Best Efforts” Clause 

One way that contractors can restrict government discretion over options is to include a “best efforts” clause. A “best efforts” clause requires a contracting party to do only what is reasonable under the circumstances, given the party’s capabilities. For example, the government might agree to use its best efforts to obtain funds for each option renewal. 

In Marquardt Co. v. United States, the U.S. Court of Federal Claims focused on a “best efforts” clause that would have required the government to use its best efforts to obtain funding to meet its payment obligation. In that case, the court viewed the dispute over the “best efforts” clause as an actionable claim for breach of contract. In another case, Northrop Grumman Computing Systems v. United States, the Court reached a similar decision about a “best efforts” clause’s ability to restrict the federal government’s usual discretion, stating that the agency’s failure to use its best efforts to obtain funding to continue the contract could be a breach of contract. 

An “Availability of Funds” Clause 

In addition to a “best efforts” clause, an “availability of funds” clause may also provide contractors with a remedy against an agency turning down contract options. An “availability of funds” clause (also called “availability of appropriations”) shields the government from legal liability for payment on contracts until funds are made available to the contracting officer. While this may, at first blush, seem to favor the government, the U.S. Supreme Court has reasoned that a federal agency is also restricted by such a clause. In Cherokee v. Leavitt, the Supreme Court said the federal government cannot disregard contractual promises (such as an option) when adequate funds do become available. Thus, an “availability of funds” clause can limit the government’s non-renewal decision. 

Remedies

When these specific clauses are a condition of acceptance under a federal contract, the government’s refusal to exercise an option may create the opportunity for a breach of contract claim or even a breach of the government’s duty of good faith and fair dealing. However, without a specific provision in a contract to limit the government’s discretion, the government can choose not to exercise an option. Keep in mind that the “best efforts” and “availability of funds” clauses discussed here pertain to federal contracts, so the rules for contract options, and the remedies available to contractors, may differ for state and local governments or when contracting with private parties. To learn more about state and local contract options specific to your location, it would be best to contact a local government contracts attorney in your area. 

Conclusion

While the federal government generally maintains broad discretion in choosing whether to exercise an option, that discretion need not be unlimited. Ultimately, every equipment financing professional who deals in government contracting should consider the value saved by these clauses that might limit an agency’s discretion over exercising a contract option. 

Note: This article is intended for informational purposes only and is not intended to be construed or used as general legal advice nor as a solicitation of any type. Please contact the author(s) if you have questions regarding the currency of this information. Learn more about Greenberg Traurig’s Government Contracts & Projects Practice.