Torncello v. United States
231 Ct. Cl. 20 · United States Court of Claims · 1982
Facts
Soledad Enterprises, Inc. (Soledad) bid for and was awarded a grounds maintenance and refuse removal contract with the Navy for six housing projects in San Diego, California, in June 1973. The contract, which ran for one year and was extended, included item 8 for plant disease, insect, and rodent control, for which Soledad bid $500 per call. The Navy, however, only needed gopher control, which was much cheaper, and consequently never called Soledad for item 8 work. Soledad offered to do gopher control for $35 per call, but the Navy still did not use Soledad, instead diverting the work to the Department of Navy Public Works, a competing bidder with a lower price. Soledad rescinded its $35 offer in April 1975, noting the diversion of work, and subsequently went bankrupt. It was stipulated that Soledad never received item 8 work, while the Navy had such work and gave it to Public Works.
Procedural history
Soledad initially lost its claim before the contracting officer and subsequently lost its appeal to the Armed Services Board of Contract Appeals (ASBCA). The ASBCA accepted that the government might have breached but deemed it unimportant due to the availability of constructive termination for convenience. The case then came before this court on motions for summary judgment, and the court referred it to the trial division for further proceedings on damages.
Issue
The central legal question is whether the government can use the standard "termination for convenience of the government" clause to justify diverting work from a requirements contract to another bidder for reasons known before the contract was awarded. Specifically, the court considered if the clause applies when the government seeks to avoid its contractual obligations to obtain a cheaper price that was known at the time of contract formation.
Holding
The court held that the termination for convenience clause does not apply in this situation, finding the government in breach of contract. The Navy's diversion of business was not excused by constructive termination for convenience.
Rule
A contract is void for lack of consideration if one party reserves an unlimited right to escape its promises, rendering its obligations illusory. The government's standard "termination for convenience" clause is intended to allocate the risk of changed conditions, such as wartime exigencies or unforeseen circumstances making performance impossible or unnecessary, not to allow the government to avoid obligations for reasons known at the time of contract award. If the clause were construed to permit termination for exculpatory reasons known beforehand, it would vitiate the consideration for a requirements contract, as the government's promise to fulfill its requirements would be illusory. The court found that arguments for sufficient limitations on the government's power to terminate (notice, payment for services rendered, good faith, or abuse of discretion) do not provide adequate consideration to uphold the contract in such an exculpatory scenario.
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