Contract Dispute Summary

The following learning objectives are covered in this lesson:

• Contrast the difference between termination for convenience, termination for default, and termination for cause.
• Identify the process for resolving disputes between parties of a contract.
• Given a funding shortfall, apply the rules governing the use of expired funds to resolve the problem.

1. Contract termination can occur for two main reasons: convenience or default.

Termination for Convenience: allows the Government the unilateral right to completely or partially terminate a contract if the work no longer needs to be done or there is no more funding available. If a contract is terminated for convenience, the government must reimburse the contractor for the cost of completed work, a reasonable profit for that work, and costs associated with termination settlement.

Termination for Default: allows the Government to completely or partially terminate a contract for non-commercial items because the contractor fails to deliver on time, endangers a timely delivery, or fails to comply with the terms or conditions of the contract. In this case, the government is only responsible for paying for products delivered and accepted. The government is also entitled to reimbursement for expenses incurred as a result of finding another contractor.

Termination for Cause: A type of termination for default that applies only to contracts using commercial item procurement procedures. Termination for cause allows the Government to completely or partially terminate a contract for commercial items because the contractor fails to deliver on time, endangers a timely delivery, or fails to comply with the terms or conditions of the contract.

2. There are two options for resolving contract disputes: Litigation and Alternative Dispute Resolution. Both parties of a contract can exercise these options. Disputes between the government and contractor can be very costly for both parties, especially if the dispute results in litigation. Alternative Dispute Resolution uses selected methods to resolve disputes without going to court, including the following:

• Mediation: A neutral third party listens to the issues, helps develop options, and works with the disputing parties to obtain a negotiated settlement. Mediation helps preserve relationships. The parties in the dispute maintain high level of control over the outcome.
• Fact-finding: A neutral technical expert renders an advisory decision to both parties based on the facts presented by the disputing parties.
• Mini-Trial: Senior-level management listens to both parties and renders a decision. A neutral third party can help in clarifying and identifying issues, but senior management is ultimately responsible for negotiating a settlement.
• Non-binding Arbitration: A neutral third party renders a non-binding decision based on evidence presented by disputing parties. Arbitration is closest to litigation.

The purpose of ADR is to resolve disputes in an environment that is collaborative, not competitive. Alternative Dispute Resolution (ADR) should be the first resort to solve disputes when appropriate, but there are circumstances where taking the dispute directly to court is necessary. Court is most appropriate when:

• Dispute is over issues of law
• Full public record is required
• Fraud is suspected
• Other party is likely to falsely present their case

3. Funds are considered "expired" when the obligation period for that fund has expired. For example, RDT&E funds have a two-year obligation period. After this two-year obligation period is over, RDT&E funds are available for expenditure for five more years but are considered expired. Expired funds still retain their original appropriation category, year, line item and other accounting identifiers for the expenditure time beyond the original obligation period. Expired funds can only be used for payment or adjustments to the original obligations during the expired period and cannot be re-assigned to new obligations.