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When reliance is detrimental: economic, moral, and policy arguments for expectation damages in contracts terminated for the convenience of the government.
I. INTRODUCTION II. HISTORICAL DEVELOPMENT OF THE MODERN TERMINATION FOR CONVENIENCE REGIME A. Termination for Convenience as a Means to Limit Post-Wartime Waste B. The Christian Era III. ECONOMIC EFFICIENCY ARGUMENTS FAVOR MOVING AWAY FROM CHRISTIAN A. Going-In Positions B. Price Analysis of Government Contracts C. Efficiency Analysis 1. Unnecessary Insurance Expenses 2. Government as Best Predictor of Default 3. Government as Best Preventer of Default 4. Summary of Efficiency Analysis IV. MORAL ANALYSIS OF THE TERMINATION FOR CONVENIENCE REGIME A. Theories of Contract 1. Contract as Promise 2. The Utilitarian View B. Is Termination for Convenience the Moral Equivalent of Breach? C. The Government as Teacher and Exemplar D. Summary: Synthesizing the Moral and Economic Calculi V. POLICY ARGUMENTS FAVOR A RETREAT FROM CHRISTIAN AND PRESUMPTIVE RELIANCE DAMAGES A. Sovereign Immunity B. Government as Sovereign vs. Government as Contracting Party VI. CONCLUSION
The law does not allow one party to be bound while the other party remains free to negotiate. (1)
--Professor Joe Tucker
No backsies. (2)
--Frances the Badger
Some, like Professor Tucker, make the point elegantly; others, like Frances, are more direct. Each articulates what we all--lawyer and layperson alike--understand implicitly: in every contract, the allocation of risk occurs exclusively and finally during the bargaining process. Though the scope and tenor of the risk allocation process may vary dramatically from contract to contract, (3) one thing is true of all bilateral negotiations: when they have ended for one party, they have ended for both. (4)
Seen in this light, all questions of individual contract interpretation are variations on one theme: How were risks allocated when risk allocation was complete? While virtually every contract dispute involves at least one party's wishing, in light of later discovered facts, that he had allocated risks differently, neither the common law nor the Uniform Commercial Code allows one party unilaterally to reallocate risk once negotiations are over and performance has begun. (5)
This rule is so foundational to American contract law that it comes as a shock to many students in an introductory Federal Procurement Law course to learn that the United States, when entering into contracts, does not follow it as regards the most basic of all risk allocations: the risk that at some point a party will wish it were not contractually bound at all. Instead, court-made law and federal regulations together guarantee that the federal government may, for almost any reason whatsoever, unilaterally terminate all or any part of virtually any contract into which it has entered, after the negotiations are complete and without affording the same prerogative to its contractors. Though the government may recover its reprocurement costs should the contractor cease to work without good cause, (6) a contractor's remedy when the government terminates contracts for reasons other than contractor default is generally limited to his costs thus far incurred, plus a reasonable profit on the work he has already performed. (7) "Anticipatory profits ... shall not be allowed." (8) The occasional criticism notwithstanding, this liberal "Termination for Convenience" (hereinafter T4C) privilege has become one of the most settled doctrines of federal procurement law, (9) employed often in situations far beyond the classic excess war materiel scenarios out of which the doctrine first grew and to which its proponents originally looked for its justification. (10)
This article contends that the government's almost unfettered right to terminate a contract for its convenience is normatively unsound. While the nature of government contracting is sufficiently unique to justify a limited government T4C prerogative, multiple arguments support significant delimitations not currently in place. Part II of this article traces the development of the law of government contract terminations, reviewing relevant court decisions, statutes, and regulatory controls. Part III analyzes the economic efficiency of the current T4C regime, demonstrating how that regime drives unnecessarily high government procurement costs. Part IV evaluates the moral implications of the government's reserving to itself the right to terminate contracts without affording the same right to its contractors, concluding that morality would be better served by a default rule awarding contractors expectation damages. Part V examines policy arguments for and against the current T4C regime, arguing that neither the doctrine of sovereign immunity nor the proposition that one government should not be permitted to bind a subsequent government justifies the status quo. Part VI offers some concluding thoughts and proposes a more limited T4C regime that would safeguard national (11) interests while increasing the economic efficiency and moral soundness of the federal government's procurement system.
A. Termination for Convenience as a Means to Limit Post-Wartime Waste
In the years following the American Civil War, the federal government found itself under contract for goods and services it no longer needed. The then-Secretary of the Navy accordingly terminated a contract with the Corliss Steam Engine Company before Corliss had fully performed or been fully paid. (12) Corliss's representative proposed settlement terms, to which the Secretary agreed. (13) Hindsight was apparently twenty-twenty, though, and Corliss brought suit, alleging the Secretary did not have the authority to settle the contract. (14) At the end of a remarkably brief opinion, and without rendering any specific holdings regarding when or how the government could terminate its contracts (or what damages the law required), the Supreme Court concluded:
But aside from [the] general authority [he had as] Secretary of the Navy, under the orders of the President, [the Secretary] was, during the rebellion, specially authorized and required by acts of Congress, either in direct terms or by specific appropriations for that purpose, to construct, arm, equip, and employ such vessels of war as might be needed for the efficient prosecution of the war. In the discharge of this duty, he made the original contracts with the claimant. The completion of the machinery contracted for having become unnecessary from the termination of the war, the secretary, in the exercise of his judgment, under the advice of a board of naval officers, suspended the work. Under these circumstances, we are of opinion that he was authorized to agree with the claimant upon the compensation for the partial performance, and that the settlement thus made is binding upon the government. (15)
The Court did not state what "the[] circumstances" on which it based its opinion were. If subsequent congressional action is a fair guide, though, support for the government's T4C prerogative, at least in the nineteenth century, was grounded on the understanding that major shifts in national policy--such as the cessation of wide-scale military operations--would sometimes render particular contracts unnecessary and wasteful to complete. (16)
The Court would revisit this issue when another government contractor was told his services were no longer needed after the First World War had ended. In 1917, Congress gave the President statutory authority "to modify, suspend, cancel, or requisition any existing or future contract for the building, production, or purchase of ships or material." (17) Per the statutory language, should "the United States" exercise this Presidential prerogative, "it" was to "make just compensation therefor as determined by the President." (18) While the statute did not specify what constituted "just compensation," the Supreme Court, in Russell Motor Car Co. v. United States, found that, "In fixing just compensation [a] court must consider the value of the contract at the time of its cancellation, not what it would have produced by way of profits for the Car Company if it had been fully performed." (19) In justifying its holding, the Court said that Russell's contention that it was owed anticipatory profits on the cancelled portion of its contract with the United States "confuses the measure of damages for breach of contract with the rule of just compensation for the lawful taking of property by the power of eminent domain." (20) The Court, in what would prove to be a recurring theme, stated:
The contract, we must assume, was entered into with the prospect of its cancellation in view, since the statute was binding and must be read into the contract. The possible loss of profits, therefore, must be regarded as within the contemplation of the parties. The lower court was right in refusing to allow anticipated profits and, there being nothing in the findings to justify the contrary, we must accept the amount fixed on the basis of just compensation as adequate. (21)
Eight years later, the Court would deny anticipatory profits to a manufacturer whose contracts with another private party, some of which were made prior to the passage of the Act of June 15, 1917, had been requisitioned by the government and, subsequent to the Armistice, cancelled. In De Laval Steam Turbine Co. v. United States, (22) the Court affirmed the Court of Claims's judgment denying De Laval anticipatory profits of over $300,000, holding that the $8500 awarded beyond actual costs incurred adequately reflected the value De Laval would have received by assigning its rights under the contract to another private party, "considering all the circumstances--uncertainties of the war and the rest." (23)
While the Act of June 15, 1917, may have been unprecedented in its reach, it was not the first time the government had taken steps to ensure it would not be bound to fully perform contracts made unnecessary by dramatically changed circumstances. In 1863, the Army was required by regulation to include a termination provision in contracts for subsistence stores. (24) While some government agencies followed suit in promulgating regulations requiring T4C clauses in certain contracts, through the end of the Second World War most terminations of government contracts occurred under statutory authority, including the Dent Act of 1919 and the Contract Settlement Act of 1944. (25) It was not until the second half of the twentieth century that the focus in the law of T4C shifted from statutory authority to regulatory requirements.
The 1950 edition of the Armed Services Procurement Regulation contained mandatory Termination for Convenience clauses to be used in the majority of DoD contracts over $1,000. In 1964 the first edition of the Federal Procurement Regulations (FPR) contained optional termination for convenience clauses to be used "whenever an agency considered it necessary or desirable...." In June 1967, the FPR was revised to make the Termination for Convenience clauses mandatory, with limited exceptions, in fixed-price supply contracts over $2500 and fixed-price construction contracts over $100,000. [Federal Acquisition Regulation] 49.502 continues to require broad use of Termination for Convenience clauses, with the result that the broad rights developed for war contracts have come to be applied to all types of contracts, civilian as well as military, in times of both peace and war. (26)
B. The Christian Era
One thing remained constant throughout the slow but steady increase in the government's willingness to assert its T4C prerogative over the century following the Civil War: government contractors were always on notice of their being liable to be terminated for the convenience of the government. Statutes or, in certain cases, express contractual provisions, made it clear to all government contractors that the government could terminate certain (by 1950, most) of its contracts at will, with only reliance damages available to the contractor as a remedy. Absent such provisions in law or individual contracts, government contracts were understood to be governed by the same default rules as private contracts, with the government liable for anticipatory profits if it failed to perform any of its contractual obligations. (27)
All this changed dramatically in 1963, when the United States Court of Claims ruled, in G.L. Christian & Assoc. v. United States, (28) that, despite the absence of a T4C clause in a government contract, courts "are not, and should not be, slow to find the standard termination article incorporated, as a matter of law, into [the] contract if [applicable federal procurement] Regulations can fairly be read as permitting that interpretation." (29)
Christian arose when the Department of the Army deactivated Fort Polk, Louisiana, in 1958. (30) Pursuant to the Capehart Act of 1955, the Army Corps of Engineers had, in August 1957, contracted with the plaintiff to build approximately 2000 on-post houses over a period of eighteen months, for a total contract price of almost $33,000,000. (31) The Corps terminated the contract in January 1958. (32) At this point, the work was barely more than two percent complete and was "substantially behind schedule." (33) Many claims resulting from the termination were settled administratively, but Christian sued for over $5,000,000 in anticipated profits. (34)
This case, like many others sounding in contract, could have been avoided had the contract been better drafted. Section 8.703 of the Armed Services Procurement Regulations clearly required that contracts of this type and size include a clause giving the government the right to terminate the contract "whenever the Contracting Officer shall determine that such termination is in the best interest of the Government," with the contractor being awarded costs not to include anticipated profits. (35) The contract omitted such language, leaving the government to argue the required clause should be read in by force of law. (36) The Court of Claims accepted the government's argument, citing three bases for its opinion. First, "[a]s the Armed Services Procurement Regulations were issued under statutory authority, those regulations, including Section 8.703, had the force and effect of law." (37) As such, "there was a legal requirement that the plaintiff's contract contain the standard termination clause and the contract must be read as if it did." (38) Second, the "limitation [on profit to work already performed and the prohibition on anticipatory profits] is a deeply ingrained strand of public procurement policy." (39) Noting that "[l]iterally thousands of defense contracts and subcontracts have been settled" by termination for the convenience of the government, (40) the court found that
[r]egularly since World War I, it has been a major government principle, in times of stress or increased military procurement, to provide for the cancellation of defense contracts when they are no longer needed, as well as for the reimbursement of costs actually incurred before cancellation, plus a reasonable profit on that work--but not to allow anticipated profits. (41)
"History," the court stated,
shows ... that the Defense Department and the Congress would be loath to sanction a large contract which did not provide for power to terminate and at the same time proscribe anticipated profits if termination did occur. Particularly in the field of military housing, tied as it is to changes and uncertainties in installations, would it be necessary to take account of a possible termination in advance of completion, and to guard against a common law measure of recovery which had been disallowed for so many years in military procurement. (42)
The court used this history to introduce the third reason for its holding. "The experienced contractor ... could not have been wholly unaware that there might be a termination for the convenience of the Government, which the defendant would not deem a breach." (43) Besides historical precedent, the fact that the contract, despite omitting the standard termination clause, contained, along with "accompanying agreements," "at least four references" to a "'termination of the Housing Contract for the convenience of the Government' and to the Government's assumption of certain obligations in that event" made the court "think it probable ... that [plaintiff's assignees] knew of that general policy." (44)
Christian accomplished two distinct but related things. First, it established the precedent that "a contract will be read to include a required clause even though it is not physically incorporated into the document," (45) when the clause "is of such importance as to reflect a deeply ingrained strand of, or a legislative intent for, public procurement policy, or a major government principle." (46) Second, it was effectively the last step in a policy revolution. Where once the common law of damages was displaced sparingly when applied to government contracts, with large defense contracts comprising the bulk of those benefiting from statutory protection or containing express T4C provisions, in Christian, the court added its voice to the increasingly prevalent notion that the government must generally have "the right to terminate a contract without cause at any time after award." (47)
Seen one way, Christian was but an incremental change. It did not purport to enlarge the universe of circumstances in which the government should ensure its T4C prerogative, but rather only to recognize that in the appropriate circumstances this prerogative is secure independent of contract drafters' actions or even intent; as such, Christian probably did not directly and immediately result in significantly more terminations of government contracts for convenience. Seen from a different perspective, though, Christian was a watershed moment in the development of government procurement law. Christian removed the possibility that contractors could negotiate expectation damages as a term of a contract, even when government officials see good reason to accept these terms. (48)
Neither Christian nor the liberal T4C regime it has come to symbolize has been without its critics. (49) However, since forty-five years have passed without meaningful change to either the governing regulatory provisions (50) or case law interpreting the government's right to terminate for convenience, (51) it appears that Congress and federal regulators agree with at least one commentator who is satisfied that, even if "one might question the logic of the Christian decision, the result certainly appears fair. Manifestly, the court should not have permitted the contractor to recover a multimillion dollar windfall after completing only two percent of the contract." (52)
I contend that Christian was a case of hard facts making bad law. It is not, I believe, so "manifest" that Christian reached the right result, at least not insofar as Christian's holding has been applied to less egregious fact patterns that have arisen since Christian. While it is true that the government should take steps to avoid paying millions of dollars in "unearned" profits after cancelling a large contract shortly after its inception, it does not necessarily follow that if the government does not take those steps, it should benefit all the same. Instead, all three branches of government should recognize the significant benefits to be gained by liberalizing the contract negotiations process to allow negotiating damage remedies. Among these benefits, the most tangible are economic.
Though courts have sometimes employed economic terminology in finding that the government should not be held liable for anticipatory profits on contracts it terminates--both Russell and Christian make clear that government contractors are expected to factor the likelihood of contract termination into their bids (53)--no court has explicitly dealt with the issue of whether broad government termination rights are, on the whole, economically efficient. This part of the article presents economic arguments advocating a limited T4C regime, more in keeping with its original limited scope of application.
A. Going-In Positions
Though Part IV of this article will explain why economic concerns alone are insufficient grounds from which to draw normative conclusions, I begin my analysis here with the proposition that, all else being equal, a more economically sound government procurement regime is to be preferred over one that is less so. (54) From this it follows that a shift to a more economically sound damages regime in government contracts is, if possible, desirable. (55) Generally speaking, this economic soundness is best measured by "Kaldor-Hicks efficiency," which describes any transaction in which, measured from the ex ante perspective, no party thereto is made worse off, at least one party is made better off, and any third party losers are fully compensated for losses they incur as a result of the parties' transaction. (56) Finally, I posit that the government should not pay more than is necessary for the goods or services it procures. (57)
B. Price Analysis of Government Contracts
While price is a starting point for economic analysis, and while unexpectedly high costs may generally indicate that closer analysis is necessary, price alone cannot determine efficiency. Just as wealth is created when a child who values candy at $1.00 pays $.75 to a storekeeper who values the candy at $.50, (58) so wealth is created when an airline buys a fleet of modern passenger jets from a manufacturer for a price less than the absolute maximum it is willing to pay, but more than the absolute minimum the manufacturer would have been willing to accept. Each contract is Kaldor-Hicks efficient. The question the economist asks about any given contract, then, is not whether the goods to be exchanged are cheap or expensive in the abstract, but instead whether the exchange increases social wealth to the maximum extent possible. Put differently, the question is whether one party could be made better off without another party's being made worse off. In government contracts, the answer is yes.
That government contracts, on average, cost more than similar private contracts is probably beyond fair dispute. But this is true not, as the cynic would posit, simply because of the potential for (or actual) corruption or ineptitude within the ranks of public employees engaged in the government procurement process. (59) Rather, even in the absolute absence of any mismanagement, and even assuming the government's ability to reduce its transactions costs to the level of those of the private sector, (60) the government's broad right to terminate its contracts for its convenience guarantees the government will pay more for the goods and services it procures, all else being equal. This is a simple function of the increased risk a government contractor assumes. Reduced risk is, itself, a valuable element of consideration. (61) The price the contractor assigns to the risk allocated to him will determine the ultimate efficiency of the contract--if the government could achieve the same value at a lower price without putting the contractor in a worse position, the allocation of risk to the contractor is inefficient. A close examination of the risk allocation under the modern T4C regime demonstrates that this is exactly the case.
Suppose a contractor provides goods or services in identical form both to a major retailer and to the United States. Suppose further that the retailer's financial situation is sufficiently strong to make the likelihood of its defaulting on the contract close to zero. The contractor's profits are legally guaranteed the moment he secures the retailer's acceptance of the contract. (62) His profits are only potential, however, when he contracts with the government; he does not realize them during the executory stage of the contract. (63) Because he must presumably earn a certain minimum profit regardless of the entity or entities with whom he contracts, he must increase the price he offers the government proportionate to the likelihood of government default.
To put numbers to this claim, consider a truck manufacturer who is asked to make four custom vehicles for a commercial entity and four identical vehicles for the federal government. (64) Assume that each truck costs $18,000 to manufacture, and that the manufacturer needs to receive at least $80,000 in exchange for every four trucks he sells in order for his business to stay afloat. (65) If the contractor knows, to a statistically acceptable likelihood, that the government will ultimately purchase only 75% of vehicles of this sort for which it contracts, he must charge the government at least $20,666.67 per truck, even though he would agree to sell the four trucks to the commercial entity for $20,000 apiece. This is because he must insure against the likelihood of losing $2000 profit on one out of the four trucks he makes for the government. (66)
C. Efficiency Analysis
The layperson's concern with this pricing disparity is that the government has paid "too much" for what it received. That is, a taxpayer may take umbrage at the fact that the government received vehicles identical to those procured by a commercial entity, but paid more for each one. In economic terms, though, this is not really true-the government and commercial entity did not receive the same things at all. Unlike the commercial buyer, the government did not just contract for four trucks--it also bought the right to pay for only three (or two, or no) trucks without paying a penalty, i.e., without increasing the unit cost of the truck(s) it ultimately purchased. So long as that prerogative was worth the additional price, the contract was efficient: it allocated resources to those that valued them more highly, and any improvement to one party's position (e.g., the manufacturer's securing the right to expectation damages in the event of termination) could come only at the expense of the other party (e.g., the government's losing the bargainedfor security of being able to pay only reliance damages should the need to terminate arise).
If, however, the right to pay for fewer than all of the trucks were not worth what the government paid for it, the contract would be economically inefficient. At least three inter-related economic realities demonstrate that this is precisely the case in our hypothetical contract: the government is the best insurer against default, the government has the most information regarding the likelihood of default, and the government is in the best position to prevent default. (67)
1. Unnecessary Insurance Expenses
In light of the government's enforceable T4C right, our hypothetical contract does not guarantee (absolutely) the manufacturer any profits at all. We observed above that in order to guarantee (statistically) his required total profit of $8000, the manufacturer must price trucks he sells to the government at no less than his unit cost ($18,000) plus required unit profit ($2000) plus one-third of that required unit profit ($666.67). (68) That is, he must do his best to insure his expected profit based on "probabilistic averages." (69) However, while there is no rational reason for him to price his bid lower than $20,666.67 per truck, or $82,666.67 for the contract, (70) there is good reason for him to price his bid higher than this amount, as I shall explain below. Extrapolated over the universe of government contractors, this means that while a few contractors may (perhaps foolishly) price their bids below those indicated by probabilistic averages, the lion's share will price theirs at or above these averages. (71) This is proved by mathematics and the phenomenon of risk aversion.
Consider the five possible results for our truck manufacturer: the government may ultimately purchase all four of the trucks for which it contracted, or it may purchase three, two, one, or none. (72) The likelihood of the first is 81/256, while the likelihoods of the others are 108/256, 54/256, 12/256, and 1/256, respectively. (73) The first possibility--an 81/256 chance of earning $2666. (67) more than is necessary for solvency--is obviously worth something to the manufacturer, as he does not even have this chance when contracting with the commercial entity. Reduced to dollars, this chance is worth $843.75. (74) By the same token, the chances of lost profits may be said to be worth -$843.75. (75) However, it is reasonable to expect that the manufacturer will assign different subjective values to the chance of excess profit and an equal chance of losing the same profit, since the consequences of the latter (loss of his business, per the presuppositions of our hypothetical) are, to him, greater than any marginal benefit gained from more profit than he needs to remain solvent. (76)
A first step, then, in eliminating inefficiency in government contracts is to induce government contractors to risk-neutrality. This is done most commonly through insurance. (77) If a contractor can predict with relative certainty the likelihood of a negative event's occurrence--that is, if he can accurately value the cost of risk (here, the failure of the government to purchase all four trucks) (78)--and if this risk can be shared by enough similarly situated parties, the subjective value the contractor assigns to the risk will equal its objective value. (79) In our example, then, the truck manufacturer would have no incentive to price his trucks above $20,666.67. (80) The contract will only be Kaldor-Hicks efficient, however, if the chosen means of insurance is the cheapest, assuming equal effectiveness of each means considered. Otherwise, the party purchasing the insurance could be made better off (by buying cheaper, but equally effective insurance), while the other would be no worse off (he would still get his bargained-for performance). There are three possible sources for insurance in any bilateral contract: each of the contracting parties and the private insurance market. The cheapest will be the one with the lowest combination of measurement costs (the costs of evaluating risk) and transactions costs (the costs incurred in assigning the risk via the chosen mechanism). (81) In most government contracts, this will be the government.
The government's measurement costs are cheaper because it is in possession not only of all information freely available to non-government entities (including government contractors and private insurance companies) but also information not freely available to these entities. The cost of a contractor's acquiring this second category of information, even if very small, will be returned to the government in the form of a higher contract price. For the government to pay any measurement costs is therefore inefficient. (82)
Transactions costs should also be cheaper when risk of expectation loss is borne by the government. That the savings from not having to draft an insurance contract exceed the cost differential between an in-house adjudication and payment function and a private one is far from certain; the fact that the government outsources so many functions to the private sector is a concession to the fact that the private sector realizes savings through process efficiencies. However, in the particular case of claims adjudication, the government already demonstrates competence to perform the process in-house. Rather than purchasing commercial insurance for tort liability, the government self-insures. (83) Having seen fit to retain this large adjudication process in-house, it seems, a fortiori, that the government should be able to adjudicate contract claims more cheaply and efficiently than a private insurer.
However, even if a private insurer were able to charge the government less in premiums than the government would otherwise pay to settle claims for expectation damages,--if, that is, a private insurer were somehow better able to distribute risk than even the government, for example, by broadening the universe of risk to include other governments' contracts--as between the government as insurer and government contractor as insurer, the government should always be able to protect against loss more cheaply. The government is but one customer for an insurance company, and one the size of which makes the work of an actuary much easier. (84) Were every government contractor to have to purchase private insurance, the insurance company or companies providing this insurance would have to calculate risk and issue policies frequently, which would in turn increase overall transactions costs, perhaps significantly.
In sum, when risk is distributed over the universe of government contracts, rather than calculated on a contract-by-contract basis (whether through private insurance or through increased contract pricing), the total cost of that risk is lower. But there is yet another reason the government can more cheaply bear the risk. This is because the government is better able to predict the likelihood of a termination's occurring at all.
2. Government as Best Predictor of Default
As explained earlier, the government should always be the possessor of greater information relative to the likelihood of default. Were this information put to proper use, the government could better calculate the actual likelihood of default. The greater the confidence in the calculated likelihood, the more risk could be borne. (85) This is because the risk of miscalculation is, itself, a risk that must be insured against one way or another. As before, the options are self-insurance, increased contract price, and private insurance. (And, for the same reasons as before, self-insurance should be the cheapest of the three options.) In the case of property insurance, for example, if a building owner needed not only to protect against a one percent chance of $10,000 damage, but also the fifty percent chance that the one percent were really two percent, he would not only likely be willing to pay more than $100 for insurance--the risk of $10,000 loss is (to each individual at risk) more costly than a certain $100 expense (86)--but he would be willing to pay more than $150, the total actuarial value of his risk.
Each individual contractor is like the insured in the above scenario, not knowing the likelihood of default to a certainty. And while termination of government contracts is almost surely not as susceptible to statistical predictions as is the occurrence of natural disasters, any ability on the government's part to predict termination more accurately--which ability is guaranteed, at least marginally, by the government's possessing superior information--reduces the cost of risk. (87)
3. Government as Best Preventer of Default
Even if the government were not better able to predict the likelihood of default, the government is the only contracting party able to affect the likelihood of default. A reliance damages regime under incentivizes performance, with the result being that government contracting officers are able, with relative economic impunity, to enter unwise contracts or unwisely to terminate contracts. (88) In economic terms, reliance damages incentivize inefficient breach. (89) While I do not suggest that imprudent government contract actions occur as a matter of course, human nature being what it is, results will generally follow incentives. (90) A default expectation damages regime, with the ability to negotiate reliance damages when the government gains a discrete advantage therefrom, provides the proper incentive to ensure efficiency in government contracting.
4. Summary of Efficiency Analysis
"[A]n important function of contracts is to assign risks to superior risk bearers." (91) In the case of government contracts, the government is ordinarily the superior risk bearer. This superiority may be very small, and it may be unquantifiable, but the government should seldom, if ever, be an inferior risk bearer relative to its contractors. But defaulting to reliance damages skews this risk allocation. That serious academic attempts to move the law toward a reliance damages regime (92) have never gained traction in the commercial realm is good evidence that the common law of damages works, i.e., that it is efficient. The idea that the government should not be made to pay enormous damages, while true in some cases, is an insufficient reason to depart wholesale from the common law. A more nuanced approach is necessary.
Thus far, I have argued that a general rule of common law damages in government contracts, with allowances made for the government actually to negotiate a T4C right in appropriate contracts, would be more economically efficient than the status quo. That is, a default rule providing expectation damages for early termination would create more wealth for society as a whole than the current liberal T4C regime. To the extent, then, that greater social wealth is good, a change in the current damages rules would be normatively preferable to the status quo. However, wealth creation, while generally a good thing, (93) is not the chief end of man, (94) nor should it always be the main concern of government. (95)
Recent scholarly work in the field of law and economics has acknowledged this limit on the normative value of economic efficiency analysis. (96) One concern with laws designed exclusively to maximize efficiency is that they operate well from a macro standpoint, but can have harsh effects at the individual level. Some believe the solution is to view "efficiency and distribution [as] equally essential elements of justice, which is seen as a goal of a different order than either of its constitutive elements." (97) These observers note that while Kaldor-Hicks efficiency may be achieved whether all members of society eat once a day, or half eat twice each day while the other half starve, virtually no one, layman or economist, would say a legal regime producing this distributive pattern was ideal. (98)
This discussion, while important, is yet unsatisfactory in addressing a more basic question. Even assuming government contract law achieved an "ideal" result vis-a-vis efficiency and "distributive justice," what are the moral implications of the government's reserving to itself the right, unilaterally and without any meaningful constraint, to renounce its contractual obligations in a way its citizens cannot? (99) I believe the weight of the moral arguments favor a more limited, negotiated T4C prerogative, better holding the government to its word and more fairly allocating risk between the two parties in government contracts.
A. Theories of Contract
Abraham Lincoln is said to have had the following exchange with his generals. Lincoln: "If you call a tail a leg, how many legs does a dog have?" Reply: "Five." Lincoln: "No, four. Just because you call a tail a leg does not make it so." In a sense, the question of appropriate damage remedies in contract law--private or government--is of the same sort as Lincoln's. If the term "contract" has some irreducible minimum meaning, and if that meaning implicates a promisee's present interest in future performance of a promise, then the only sensible damages regime is one that presumes expectation damages unless the parties freely negotiate otherwise. Further, if a law must be sensible to be just and moral, then any law not providing for expectation damages at least to this extent would be unjust and immoral.
Of course, the implication of Lincoln's gentle (yet profound) reproof of his generals' response is nowise universally accepted. (100) Nor do I presume or even hope to be able to settle here the matter of intrinsic meaning of the notion of contract. Still, it is helpful at this point to review the arguments set forward in prevalent deontological theories of contract. Comparing these to utilitarian theories, I believe that, while it is not provable absent resort to (inevitably controversial) natural law arguments that contractual obligations are morally weighty based on their nature as promises, it can be shown that breach of contract not compensated by expectation damages may be immoral, while breach of contract compensated by expectation damages will never be more so. (101) Measured by the sum of its case-by-case effects, then, a default rule of expectation damages in government contract law is at least morally neutral relative to, and possibly morally preferable to, the current regime.
1. Contract as Promise
In his classic book Contract as Promise, Professor Charles Fried sets forth a comprehensive theory of contract law based on the postulate that what he termed "the promise principle" is "the moral basis of contract law." (102) He draws support from Hume, citing the latter's belief that "respect for ... contract [is one of the three] self-evident foundations of law and justice." (103) Fried's theory is decidedly deontological:
The obligation to keep a promise is grounded not in arguments of utility but in respect for individual autonomy and trust.... An individual is bound to keep his promises because he has intentionally invoked a convention whose function it is to give grounds--moral grounds--for another to expect the promised performance.... [T]here must exist a ground for mutual confidence deeper than and independent of the social utility it permits. (104)
Others have offered alternative deontological theories of contract, finding value in their relational nature (105) or the fairness that adherence to one's promise promotes. (106) But all have in common one fundamental and glaringly obvious (and relevant) theme: no one seriously questions the intrinsic rightness of adhering to one's contractual obligations. (107) Having made a promise, a contracting party "must display fidelity to [his] words." (108) As such, the moral question regarding damage remedies is, Which remedy best promotes contract performance? Here, Fried's work is again helpful.
Fried's argument in support of expectation damages is two-fold. First, he contends, if a contract is a promise, then the non-breaching party has lost not what he invested, but what he stood to receive. (109) In this sense, a contractual promise is like the tail of President Lincoln's dog: it may be called something other than what it is, but that does not make it so. A contract breach is thus not remedied when the non-breaching party is given only reliance damages. Second, Fried argues that stronger remedies will better incentivize performance by making breach more painful. (110) In this he finds fellowship with Steven Shavell and other law and economics scholars who argue that expectation damages are the only damages consistently able (at least potentially--transactions costs almost always fall unjustly on the non-breaching party) to compensate the innocent party for what he has lost. (111)
2. The Utilitarian View
In contradistinction to Fried and other deontological contract theorists stand those who see the moral value of contract law as consequential. (112) To these utilitarians, contract law is good not to the extent it corresponds to some metaphysical reality ("keeping one's word is good"), but rather in the way it achieves desirable ends. The best legal rule is that which achieves the greatest good for the greatest number of people. Utilitarian contract theorists differ over how "good" is to be measured: some believe using contract law to redistribute wealth to a particular class or group is a morally worthwhile aim, (113) while others see the good of contract law more universally, in terms of general wealth maximization (114) or overall equity. (115) Obviously, these two subgroups of utilitarian contract theorists will disagree on the morality of many doctrines of government procurement law, perhaps chief among them the laws giving preference to higher bidders who are members of a certain legally favored class. Both groups should, though, be able to agree on the moral benefit (or at least not perceive any moral detriment) of switching from a T4C/reliance damages regime to a default rule of expectation damages, with exception by explicit negotiation only. The economic analysis in Part III, above, explains why this is so: maximizing efficiency will, in turn, maximize utility.
The redistributionists, on the other hand, should prefer (or at least not object to) expectation damages as the default rule on the basis that if more wealth is available generally, more will fall to members of favored classes, even if only marginally. This is because (1) a switch to expectation damages has no causal relationship to the awarding of government contracts to one bidder or another and will thus cost members of favored classes no contracts; and (2) on average, each government contractor in the favored class will receive no less in toto from the government, inasmuch as the lower prices she receives for each contract will be offset by the expectation damages she will be awarded when any contract is cancelled.
Those utilitarians who do not see any individual's wealth increase as more desirable than another's (or who believe it wrong to ensure one person, or a group, receives legal favor) will likewise be satisfied by a default rule of expectation damages. As I have argued above, this switch would make more wealth available, and available to all contractors on an equal basis.
B. Is Termination for Convenience the Moral Equivalent of Breach?
Of course, at the literal and legal levels, the government's terminating a contract is not a breach at all. Rather, in terminating a contract the government simply avails itself of a right specifically provided for by the terms of the contract. Seen this way, the government's terminating a contract for its convenience is no more or less morally significant than the government's declining to exercise a contract option: the fact that a contractor wished to be able to receive increased consideration in exchange for performance he had hoped would be required of him is immaterial unless he benefits from a binding pledge on the government's part to require and to pay for such performance. (116) If contractual obligations have moral weight because they are promises, that moral weight is limited commensurate to the scope of the promises.
The Christian court fundamentally changed this dynamic. It is true, today, that a termination of a government contract is not a breach of a promise in the strictest sense. By virtue of the Christian doctrine, all government contract promises are constructively caveated to the point that, technically, they cannot be broken. But that is not to say a termination for convenience bears no moral likeness to a breach of promise. In fact, it is because of Christian, specifically its reach, that terminations are, sometimes, morally suspect.
When contracting against the backdrop of an absolute (legal) fight to exculpate oneself independent of any intention to secure or preserve that right, the morality of breaking the promise must be evaluated independent of that exculpation fight. An analogy is helpful here. Suppose a bright, morally aware fifteen-year-old makes a contract to purchase a book, payment to be made and property to be delivered one week hence. Suppose she is unaware that the law will not enforce this contract due to her infancy. (117) The day after she makes the contract, she regrets her decision. The day after that, she discovers her exculpation fight and informs the seller that she is cancelling the contract. The law is paternalistic in this area, perhaps justifiably so, because children--if not all, then enough to justify the rule--lack the mental capacity to be trusted to contract. But this does not mean every child lacks the moral capacity to be bound to her word. Rather, this is an area where the law chooses not to reach as far as morality. The child's sin is against God and her fellow man; she has not transgressed human law. (118)
On the other hand, what if the child had explicitly negotiated with the seller for a right to rescind the contract prior to delivery? Independent of her knowing of the law's unwillingness to enforce her contract, her election to rescind cannot fairly be said to be immoral. In the first example, she broke a promise. In the second, she never made one. (119)
Likewise, consider the adult business executive who negotiates a labor contract in light of bankruptcy laws that allow him, given the fight circumstances, to scrap the agreement. If he subsequently acts in perfect accord with the law and violates the agreement, can he be said not to have violated his moral obligation? (120) Perhaps in the situation where to do otherwise would do greater harm to the promisee (the labor union and its members), but only on the theory that the promise implicitly did not reach that far (as the promisee would not have demanded performance in such a situation (121)), not on the theory that an unwaivable legal exculpation fight vitiates all moral accountability.
Though the analogy is not perfect in every case, the moral analysis is much the same with government contracts in light of Christian. Pre-Christian, the government's fight to terminate was a part of some (most, if the governing regulations were followed) contracts. The government thus contracted like the child in our second example who explicitly negotiated a rescission right. In Christian, the parties' negotiation (constructive though it was--contract law operates on the legal fiction that the language contained in the four corners of a document, even though boilerplate, reflects the intent of the parties (122)) was thwarted by the court, and the government's promise was broken. In contracts drafted after Christian, the government stands incapable of effectively promising.
Because of the shadow Christian casts, conventional moral analysis of the government's promise making is, in many instances, a non-sequitur. When government actors, as in Christian, forget to include, or choose in violation of governing regulations not to include, a T4C clause in the contract, their subsequent T4C is just like the examples above of the child or CEO taking advantage of favorable legal treatment to break a promise with legal impunity. But even when the T4C fight, guaranteed by Christian, is made explicit in the contract, the government's hands are not completely clean in its T4Cs. Negotiations against the backdrop of an unwaivable fight are not of the same moral character as true arms-length transactions--if the government will maintain its prerogative in any event, can it really be said to have negotiated for it in the first place? This fait accompli bargaining scenario taints, even if only marginally, the morality of the government's electing not to do what it contracted to do. Though perhaps not as morally problematic as breaking a promise without the benefit of any recognized fight to do so--whether court-made or contractually negotiated--government T4Cs cannot, in light of Christian, be said to be the moral equivalent of the mere exercise of a contract right.
C. The Government as Teacher and Exemplar
It bears brief mention that the government owes its citizens a duty of moral behavior that is beyond reproach. The law is a tutor, (123) demonstrating minimum standards below which we should not go, but compliance with the law's minimum requirements is not the aspirational standard for either citizen or government actor. There are multiple methods by which the government can procure goods and services: civil servants may be hired, and servicemembers may even be conscripted. Termination of efforts begun by these individuals would raise no moral concerns, as directing them to commence a project, ultimately abandoned, implicates no promise. By instead electing to enter into a contract, the government voluntarily takes on itself not only the legal, but also the moral, burdens that accompany the institution of contract. Paying damages that correctly reflect what has occurred--the breaking of a promise--would establish the government as a moral leader in its contracts, rather than merely an entity that complies with its legal obligations.
D. Summary: Synthesizing the Moral and Economic Calculi
Morality is a type of meta-economics. (124) It is no coincidence that there is a significant overlap in the times that fulfilling a contract is economically efficient and morally right; likewise, efficient breach is not necessarily an immoral action in every case. (125) Moral rightness is, itself, a commodity quantifiable in dollars. Its value may be extremely high, or it may be infinite. (It is not hard to think of otherwise economically advantageous contracts that should be, and are, rejected for no reason but the immorality of performance.) But whatever the amount is, it will be accounted for--we can't avoid so doing. (126) The trick is not to undervalue morality as a commodity. The current T4C regime, unfortunately, does exactly that. Its moral cost may be, in the view of some, slight. It is not, however, zero. And even if it were the case that adequate economic efficiency could somehow counterbalance this cost, this article has demonstrated that the current T4C regime is not efficient. Together, morality and economics demonstrate the flawed nature of the regime.
Public policy should, and often does, flow from sound moral and economic analysis. While these bases need not be explicitly set forth in the law, lawmakers ignore them at our peril. This is the case in current T4C law. The black letter law of T4C makes virtually no reference to the economic wisdom or moral soundness of the regime. Likewise, arguments offered in favor of the current regime are often grounded primarily, if not exclusively, on political notions. Accordingly, Part V of this article briefly evaluates the most common policy arguments set forth in support of the current T4C regime, on their own merits and independent of the foregoing economic and moral analysis.
Despite frequent court dicta that appear to indicate that the government is bound by the same rules that bind the private parties with which it contracts, (127) as explained in Part II, above, the law has always accepted that the government may need to terminate some of its contracts during their performance period. At issue has been the remedy available to the contractor. (128) Though the common law prescribed anticipatory profits as the remedy for termination not based on the other party's having breached the material terms of the contract, the law has moved steadily over the years toward recognizing reliance damages as a contractor's exclusive remedy when the government terminates his contract. Courts and commentators have justified this rule on the basis that the government must be free to change its course in response to changed circumstances, and often invoke the doctrine of sovereign immunity in support of their arguments. To require expectation damages--the remedial equivalent of full performance, per Holmes's famous dictum (129)--is seen as a limitation on the government's ability to function as sovereign. (130) Thus, while the Tucker Act grants jurisdiction to the Court of Claims over "any claim against the United States founded ... upon any express or implied contract," (1 sovereign immunity ensures that the Act's (131) jurisdictional grant is construed strictly, (132) and courts have never seriously questioned the government's prerogative to limit its damages to those provided by the FAR. (133)
These two primary policy arguments against expectation damages are unpersuasive and should be rejected. First, invoking sovereign immunity so as to protect the government from liability for anticipatory profits is, while legal, inappropriate. Second, the United States government binds successor governments all the time, in ways more powerful than contract.
A. Sovereign Immunity
The belief that government is inherently immune from suits sounding in contract precedes this nation's founding. Sir William Blackstone, whose Commentaries have been called "the bible of [early] American lawyers," (134) wrote of suits against the crown for breach of contract, "[T]he end of such action is not to compel the prince to observe the contract, but to persuade him." (135) Years later, Alexander Hamilton was equally forceful:
It is inherent in the nature of sovereignty not to be amenable to the suit of an individual without its consent.... The contracts between a nation and individuals are only binding on the conscience of the sovereign, and have no pretensions to a compulsive force. They confer no right of action independent of the sovereign will. (136)
That this doctrine still holds is beyond dispute. (137) Neither is it disputable that there could come a time when the government would legitimately need to withdraw its consent to be sued, whether generally or in the case of a particular contract. Though the current T4C regime makes this highly unlikely, it is at least conceivable that a situation could arise wherein the government of the United States could be liable for damages it simply was unwilling to pay. However, the historical trend toward waivers of sovereign immunity seems incongruous with the corresponding expansion of the government's reservation of the fight to terminate contracts for convenience. The purpose of sovereign immunity is to allow the government freedom of action without financial consequence. Tort is a classic example. The law does not allow military members to prevail in suits against the federal government for damages they suffer in the course of their military duties, (138) on the theory that military commanders must not have their tactical or strategic decision making constrained by concerns of civil liability. But when the government action at issue is financial dealing, the government's protection from adverse financial consequences should come from the deal itself, rather than post hoc. I have explained earlier why the government's termination for convenience prerogative costs more than it is worth. The same arguments apply, and the same result obtains, when the government generally resorts to sovereign immunity as a defense to contract actions.
B. Government as Sovereign vs. Government as Contracting Party
The more substantive policy argument against binding the government to expectation damages is that to so bind it would effectively allow one government to bind the next. That is, one government could establish a contract so large and politically inexpedient to breach that subsequent governments would feel compelled to complete the contract, even if they believed it not in the national interest to do so. (139) In effect, the argument goes, one government could, in its contracting role, bind a successor government's ability to exercise its role as sovereign lawmaker. (140)
The simple rejoinder to this concern is that a contract--no matter how large--by one government no more binds successor governments than does any other sovereign act. Tax policy, military engagements, social programs, and interest rates on loans and bonds are all established by the government with the implicit understanding that to change them down the road will have a cost. Though the cost to change these may be "only" political, while the cost to terminate contracts is financial (and sometimes political as well), can the latter really be said to exceed the former? The government has the legal authority to abolish Medicare and Social Security tomorrow without paying a penny. On the other hand, were the government to cancel a major weapons system development, it would, under an expectation damages regime, pay potentially millions or even billions of dollars. Is there any real doubt that, even in the face of liability for expectation damages, the weapons system procurement is more likely to be terminated than the benefits program?
The distinction between government-as-contractor and government-as-sovereign is ephemeral and cannot fairly be established by courts analyzing contracts post hoc. (141) The better rule is that when the sovereign government enters the commercial marketplace, it voluntarily submits itself to the same rules as other corporate or individual contracting entities. Just as these private parties may negotiate for termination rights on whatever terms they see fit, (142) so may the government. Only in this manner can the two roles be reconciled.
The government does not stand on a special pedestal when it enters the marketplace. It stands on the level of the citizens with whom it contracts.... (143)
In a liberal democracy, government exists for the benefit of its people, not itself. (144) The current T4C regime turns this on its head. The government of the United States pays more for the goods and services it needs, and it reserves to itself the right to violate its pledge in a technically legal, but morally suspect, way. The only benefit obtained in return is the assurance that the government will never pay, in any individual contract, for goods or services it ultimately does not need or receive. As the ultimate measure of value in these transactions is benefit to the people as a whole, I submit the cost is not worth the benefit.
The solution, however, is not a wholesale retreat to common law rules. There will be specific actions the government wishes to take without committing itself to pay potentially significant expectation damages should it subsequently need to change course. Though it is tempting to attempt to define these circumstances by category--commentators have proposed, for instance "limit[ing] terminations for convenience to contracts for weapons systems, wartime requirements, or other uniquely governmental needs" (145)--such categorical distinctions are likely unworkable. After all, Christian itself dealt with a need that can fairly be called "governmental" (the housing to be constructed was all on post) from one perspective, but "commercial" from another (the houses being built were presumably no different than others off post).
Instead, the optimum T4C regime would establish dollar limits as the criterion for reliance versus expectation damages. There would be a certain dollar amount for each type of contract (construction, routine services, weapons system production, etc.) below which the presumption would be against a government T4C prerogative, i.e., in which common law damages would be due upon the government's ending the contract for reasons other than the contractor's breach. The higher these dollar limits were, the more efficient the system would be. Because of this, contracting officers should have some discretion to negotiate away even the legally presumed T4C prerogative for contracts above the respective dollar limits. (Conversely, if there were a good reason to secure a T4C right in particular contracts below the threshold--as explained in Part III, the government will always be more likely to know when this is the case than a contractor--the government should retain that right, as well.) To safeguard against significant cost to the taxpayers based on gross human misjudgment, there could be a system of increasing authority to negotiate away a T4C prerogative at higher levels of supervision. That is, even if a unit-level contracting officer did not have the authority to risk expectation damages for contracts over, say, $5,000,000, his functional supervisor at a higher headquarters level could authorize this risk for all contracts up to, say, $15,000,000, and so forth.
Christian should be overruled and the FAR should be rewritten to establish the (high) dollar thresholds, below which government contracts will be presumed not to include a government T4C right. Additionally, the FAR should include provisions authorizing contracting officers to waive those limits when they deem it in the government's interest to do so. (146)
This new regime of substantially limited government T4C rights would be economically efficient, costing the government less without compromising the quality or availability of necessary goods or services. It would be morally right, ensuring that the government does not break its promises. And it would be politically sound, properly balancing the government's need for flexibility with its citizens' right to have their government deal forthrightly and fairly. Economics, morality, and political theory all answer this risk allocation question the same way: expectation damages in contracts terminated for the convenience of the government.
(1) Author's recollection of my 1L Contracts professor's attempt to help his students distill and synthesize the law of offer and acceptance.
(2) RUSSELL C. HOBAN, A BARGAIN FOR FRANCES 30 (1970). In this children's book, the protagonist and her friend learn a hard lesson about the consequences of entering into a contract rashly.
(3) Perhaps the greatest variance among contracts is how explicitly contract terms are established. Risk allocation may be express, through the adoption of specific contractual terms, or implied, by passive acceptance of the default rules imposed by the law of the jurisdiction in which the contract is made. Ian Ayres and Robert Gerner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 87-88 (1989).
(4) Of course, the bargaining process may be re-opened at any point. This is not an exception to the rule, but an expression thereof, inasmuch as one party may only renegotiate with the other if the other is willing to renegotiate with the one.
(5) RESTATEMENT (SECOND) OF CONTRACTS [section] 89 cmt. b, illus. 5 (1981); U.C.C. [section] 2-209 (1998) (requiring an "agreement" for modification of a contract).
(6) GENERAL SERVS. ADMIN. ET AL., FEDERAL ACQUISITION REG. 49.402-2(e) (Jul. 2007) [hereinafter FAR].
(7) FAR 49.201(a) governs fixed-price contracts, stating that, "[a] settlement should compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract, including a reasonable allowance for profit." FAR 52.249-6(h), which governs cost-reimbursement contracts, is analogous, providing for costs expended in contract performance plus settlement negotiations; the contractor receives a percentage of any award or fixed fee equal to the percentage of work completed at the time of contract termination.
(8) FAR 49.202(a).
(9) See infra notes 50-52 and accompanying text.
(10) See infra note 16 and accompanying text.
(11) My arguments in this article presuppose that the only legitimate government interests are those of its citizens. It is thus neither here nor there whether a contract is cheaper or otherwise more advantageous "to the government," common industry parlance notwithstanding. Rather, the question, as I see it, is whether the law of government contracts generally, and each government contract in particular, improve, even if only marginally, the well being of Americans. See, e.g., STATEMENT OF THE BERKSHIRE COUNTY, MASSACHUSETTS, REPRESENTATIVES (Nov. 17, 1778) reprinted in THE FOUNDERS' CONSTITUTION (Philip B. Kurland & Ralph Lerner eds., 1987) ("In a word nothing is more certain than that Government in the general nature of it is a Trust in behalf of the people.").
(12) United States v. Corliss Steam-Engine Co., 91 U.S. 321,321 (1876).
(13) Id.
(14) Id.
(15) Id. at 324.
(16) This is the view held by the leading commentators in the field of government contract law. "The concept of termination for convenience of the government was developed principally as a means to end the massive procurement efforts that accompanied major wars." JOHN CIBINIC, JR ET AL., ADMINISTRATION OF GOVERNMENT CONTRACTS 1049 (4th ed. 2006).
(17) Appropriations, Urgent Deficiencies, Pub. L. No. 65-23, ch. 29, 40 Stat. 182 (1917) (hereinafter "Act of June 15, 1917," the term the Court used). The Act "ma[de] appropriations to supply urgent deficiencies in appropriations for the Military and Naval Establishments on account of war expenses for the fiscal year ending June thirtieth, nineteen hundred and seventeen, and for other purposes." Id.
(18) Id. It is not clear from the language of the statute why it was "the President" who was to establish just compensation, but it was "the United States" who, Congress anticipated, would actually exercise the power by modifying or terminating a contract. The Supreme Court appears to have resolved this question in Russell Motor Car Co. v. United States, 261 U.S. 514 (1923), by explicitly endorsing the President's authority to delegate authority, even if only by implication, to executive agents. "Executive power, in the main, must of necessity be exercised by the President through the various departments. These departments constitute his peculiar and intimate agencies and in devolving authority upon them meticulous precision of language is neither expected nor required." Russell, 261 U.S. at 523. Though a full analysis of the question is beyond the scope of this article, I am not as confident as was the Court that Congress's intent was simply to authorize any agent of the Chief Executive to fix compensation in the case of contracts terminated for the convenience of the government. One meaningful safeguard against the government's too casually cancelling contracts would be to require high-level approval, in certain circumstances up to and including the President's, for a damages award. Though this extreme would undoubtedly be cumbersome and inefficient, the alternative extreme, set forth in the current Federal Acquisitions Regulations, is to allow any warranted contracting officer to decide both whether to terminate and how much to pay. FAR 49.115. It is at least possible that Congress wanted to prevent widespread termination that could result from excessive decentralization of control.
(19) Russell, 261 U.S. at 523.
(20) Id.
(21) Id. at 524. The Court takes for granted that the right to pay less than expectation damages necessarily follows the right to terminate. This is not true. Contract law may and often does "separat[e] ... the sensibility of the self-help remedy of cancelling a contractual relationship and the distinct issue of whether [author: or how much] to compensate the cancelled party.... [R]emedial unbundling occurs all the time...." Charles Tiefer, Forfeiture by Cancellation or Termination, 54 MERCER L. REV. 1031, 1057 (2003).
(22) De Laval Steam Turbine Co. v. United States, 284 U.S. 61 (1931).
(23) Id. at 72 (quoting Brooks-Scanlon Corp. v. United States, 265 U.S. 106).
(24) United States v. Speed, 75 U.S. 77, 82-83 (1969). The Court noted that Rule 1179 of the Army Regulations of 1863
ha[d] reference to contracts for the regular and continuous supply of subsistence stores, and not to contracts for services or labor; and it is required because the post or force to be supplied may be suddenly removed or greatly diminished. It has no application to a contract for a certain amount of supplies, neither more nor less, or to do a specific job of work requiring skilled labor.
(25) CIBINIC ET AL., supra note 16, at 1050.
(26) Id.
(27) Nolan Bros., Inc. v. United States, 186 Ct. Cl. 602, 609 (1969).
(28) G.L. Christian & Assoc. v. United States, 160 Ct. Cl. 1 (1963).
(29) Id. at 15. Christian did not completely vitiate the right of contractors to receive expectation damages.
[I]f the Government terminates a contract without justification, such termination is a breach of the contract and the Government becomes liable for all the damages resulting from the wrongful act. The damages will include not only the injured party's expenditures and losses in partially performing the contract, but also, if properly proved, the profits that such party would have realized if he had been permitted to complete the contract. The objective is to put the injured party in as good a position pecuniarily as he would have been in if the contract had been completely performed.
Id. at 11 (citations omitted).
(30) Id. at 4.
(31) Id. at 4, 10.
(32) In one of history's ironies, Fort Polk reopened in 1961. Fort Polk History: Welcome to Fort Polk, http://www.jrtc-polk.army.mil/JRTC-Polk_NEW/sites/about/history.asp (last visited Feb 1, 2008). As of early 2008, it was home to over 8300 soldiers and their more than 15,700 family members. Joint Readiness Training Center and Fort Polk Public Affairs Office Fact Sheet (1st Qtr 08), http://www.jrtc- polk.army.mil/JRTCpolk_NEW/sites/about/FactSheet.pdf. A government contractor is now engaged in an eleven-year project to build or renovate 3821 homes. Fort Polk Family Housing, http://www.polkpicerne.com/index.php?pid=105 (last visited Feb. 1, 2008).
(33) Christian, 160 Ct. Cl. at 10.
(34) Id.
(35) Id. at 11-12 (quoting 32 C.F.R. [section] 8.703 (1954)).
(36) Id. at 11.
(37) Id.
(38) Id.
(39) Id.
(40) Id. at 16.
(41) Id. at 15.
(42) Id. at 16.
(43) Id.
(44) Id. at 16-17.
(45) Lockheed Martin Librascope Corp., ASBCA No. 50508, 199-1 B.C.A. [paragraph] 30,635.
(46) Id. at 32. See also General Eng'g & Mach. Works v. O'Keefe, 991 F.2d 775, 780 (C.A.F.C. 1993) ("[T]he Christian Doctrine has also been employed to incorporate less fundamental or significant mandatory procurement contract clauses if not written to benefit or protect the party seeking incorporation.").
(47) Graeme S. Henderson, Termination for Convenience and the Termination Costs Clause, 53 A.F.L. REV. 103, 104 (2002). See also Stephen N. Young, Note, Limiting the Government's Ability to Terminate for its Convenience following Torncello, 52 GEO. WASH. L. REV. 892, 892-93 (1984).
The termination-for-convenience-of-the-government clause appears in virtually all government contracts.... In addition to invoking the clause directly to terminate a contract, the government has greatly expanded its ability to invoke the clause constructively, after the breach has occurred. The constructive use of the clause has become so broad that the government is able to exculpate itself from its own prior material breaches on the contract, thereby avoiding payment of anticipated profits--a result that is unique in the field of contracts.
(48) The Christian court apparently accepted the notion that a government agent might omit a T4C clause, but may have assumed that such omission could only be ill-motivated. On rehearing, the court stated that "[i]t was important [at the time earlier government procurement regulations were promulgated], and it is important now, that procurement policies set by higher authority not be avoided or evaded (deliberately or negligently) by lesser officials, or by a concert of contractor and contracting officer." Christian, 160 Ct. Cl. at 66-67. I propose that government agents might, for the reasons articulated in this article, think it wise and beneficial to all parties to a contract to negotiate away the government's T4C rights.
(49) See, e.g., Marc A. Pederson, Rethinking the Termination for Convenience Clause in Federal Contracts, 31 Pub. Cont. L.J. 83 (2001); see also Joel P. Shedd, The Christian Doctrine, Force and Effect of Law, and Effect of Illegality on Government Contracts, 9 PUB. CONT. L.J. 1, 21 (1977).
When a procurement regulation states that a particular clause shall be inserted in a particular type of contract, can it be said that the real purpose and intent of the drafters of the regulation is that the specified clause shall be a part of the contract regardless of whether it is inserted therein?
(50) See, e.g., FAR 49.502.
(51) The closest courts have come to overhauling Christian was Torncello v. United States, 231 Ct. Cl. 20 (1982). There, the court wrestled with the tension between government as sovereign and government as contracting entity. Id. at 30. Observing that any contracting party, even the government, "may not reserve to itself a method of unlimited exculpation without rendering its promises illusory and the contract void," id. at 26, the Torncello court ultimately refused to sanction the Navy's "termination" of one part of a broad indefinite-quantity, indefinite-delivery pest control contract, when the Navy knew at the time it signed the contract that it planned only to place certain (inexpensive) pest control orders with Torncello while using other contractors for services for which Torncello charged more than his competition. Id. at 53. Absent "changes [in] circumstances" after contract formation, the unfettered right to terminate for convenience would vitiate the consideration requirement. Id. This "changed circumstances" doctrine did not bring about the sea change some hoped it would, though. In Krygoski Constr. Co. v. United States, the Federal Circuit "revisited the dicta in the Torncello plurality opinion," stating that it had "rejected the reasoning of the Torncello plurality." Krygoski Constr. Co. v. United States, 94 F.3d 1537, 1544 (Fed. Cir. 1996). Quoting its previous decision in Salsbury Industries v. United States, 905 F.2d 1518, 1521 (Fed. Cir. 1990), the Krygoski court held that Torncello "stands for the unremarkable proposition that when the government contracts with a party knowing full well that it will not honor the contract, it cannot avoid a breach claim by adverting to the convenience termination clause." Krygoski, 94 F.3d at 1543-44.
(52) Stanton G. Kunzi, Losing Sight of Christian Values: The Evolution and (Disturbing) Implications of the Christian Doctrine, 1992 ARMY LAW. 11.
(53) See also United States v. Speed, 75 U.S. 77, 83 (1869) ("While the commissary might have insisted on a [termination or partial termination for convenience clause], for which he might in that event have been charged a higher price, he did not do so, and cannot have the benefit of it as though he had.").
(54) That is, I agree with the tenet of economic analysis of law that holds that "contract law ought to promote 'efficiency,'" Lewis A. Kornhauser, An Introduction to the Economic Analysis of Contract Remedies, 57 U. COLO. L. REV. 683, 686 (1986), without joining those who see this promotion as necessitating that the law "reject the view of contract as promise." Id. See also STEVEN SHAVELL, ECONOMIC ANALYSIS OF LAW 62 (2004) ("It will generally be assumed that the goal of tribunals is to maximize social welfare.").
(55) Cf. David W. Barnes, The Meaning of Value in Contract Damages and Contract Theory, 46 AM. U.L. REV. 1, 36-37 (1996) (proposing Restatement language giving a non-breaching party "surplus," rather than value-based damages, in an attempt to better incentivize contract performance and increase social wealth).
(56) RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 13 (7th ed. 2007). These third-party impacts are called "externalities." STEVEN SHAVELL, ECONOMIC ANALYSIS OF LAW 13 (2004). An efficient bargain is achieved when no party can be made better off by changing the terms of the bargain without another party's being made worse off. Kornhauser, supra note 54, at 689. As will be demonstrated, infra, at Part III.C., government contracts under Christian's T4C regime are inefficient in that one party can be made better off (the government, through cheaper procurement of goods) without another's being made worse off (in that contractors would achieve, even absent Christian, the same total profits).
(57) It is, of course, in defining "necessary" that this relatively non-controversial statement generates debate. The remainder of this part attempts to prove that Christian's liberal T4C regime results in the government's paying more than it could for most goods and services, without gaining additional benefit commensurate to that added cost. In a sense, this proposition--that the government should not pay more for its contracts than necessary--is an application of the Kaldor-Hicks efficiency model, inasmuch as when the government pays more than is required, taxpayers are not fully compensated for the costs, i.e., there are uncompensated externalities attendant to the procurement process.
(58) Before the transaction, total social wealth was $1.25: the child had money worth $.75 to him, and the shopkeeper had candy worth $.50 to him. After the transaction, the storekeeper had the child's money (still worth $.75) but the candy's value to its owner had increased to $1.00. Aggregate wealth after the transaction was thus $1.75. See Robert L. Birmingham, Damage Measures and Economic Rationality: The Geometry of Contract Law, 1969 DUKE L.J. 49, 53 (1969) (explaining how the exchange of goods between two parties can increase the welfare of each individual). Kaldor-Hicks efficiency analysis gives lie to the fallacy that "if two people engage in a transaction and one of them is seen to gain thereby, it must follow that the other has lost." D. PAARLBERG, GREAT MYTHS OF ECONOMICS 27 (1968). Critical to economic analysis of the law is the understanding that social wealth is not a zero-sum game.
(59) One thinks of the infamous "$400 hammer" the Pentagon was criticized for buying in the mid-1980s. See James Barton, High Cost of Military Parts, N.Y. TIMES, Sept. 1, 1983, at D1.
(60) Besides being an almost impossible goal, such reduction would be undesirable. Because public contracts lack the check on corruption inherent in private contracts, particularly those made by individuals or closely-held companies--a personal financial stake in the efficiency and profitability of the deal--rational (that is, economically prudent) decision making must be otherwise guaranteed, or at least effectively incentivized. Though the potential for adverse personnel actions and civil or criminal penalties such as those provided for in, for example, 18 U.S.C. [section] 371 (2000) (criminalizing conspiracy to defraud the United States) increases individual accountability somewhat, it is the open competition regime established by the Competition in Contracting Act of 1984, Pub. L. No. 98-369, [section] 2701, 98 Stat. 1175 and implemented by the Federal Acquisition Regulation that best constrains the likelihood of corrupt (and thus economically inefficient) government contract practices. While some may consider the strictures required to effect this regime unjustifiably cumbersome and costly, any replacement regime that similarly protected against corruption would necessarily cost more than that which occurs naturally in the private sector.
(61) See Charles J. Goetz and Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 COLUM. L. REV. 554, 562 (1977) ("[A] promisee has a recognizable utility in certain in terrorem provisions and this utility is frequently reflected in willingness to pay a price for such clauses."); see also Pederson, supra note 49, at 94-95 (citing several 1920s cases in which courts explicitly acknowledged that the government pays a premium for the right to terminate a contract without being in breach).
[W]hat many view as a power of the Government to terminate its contracts for convenience is, in essence, a right that it must pay for whenever a Termination for Convenience clause is included in a government contract, or when the clause is subject to being read in to the contract by courts under the Christian Doctrine. Once one has recognized that the Government's universal inclusion of the Termination for Convenience clause represents a cost, the question that must next be considered is whether that cost is justified by adequate benefits.
Id. at 95. Pederson concludes that these costs are not so justified, but are rather "perhaps a wasteful luxury." Id. at 100. This article attempts to demonstrate that there is no "perhaps" about it--the universal application of Termination for Convenience powers is, to a mathematical certainty, not worth the money the government spends for them.
(62) U.C.C. [section] 2-708 (1998); RESTATEMENT (SECOND) OF CONTRACTS [section] 347 (1981).
(63) FAR 49.202(a) (stating that in contracts terminated for the convenience of the government, "anticipatory profits.., shall not be allowed").
(64) It does not matter, for purposes of this argument, whether the vehicles are custom made or commonly commercially available. I choose custom vehicles to avoid the situation of a contractor who, when faced with his promisor's default, will, by virtue of easy mitigation of damages by sale in the (unchanged) spot market, recover 100% of his anticipated profits elsewhere.
(65) For our purposes, then, the manufacturer's "profit" on each group of trucks needs to total $8000. That is, if he is the sole owner of his business, he will receive $8000 for his efforts--both entrepreneurial and labor--and if, instead, his business is publicly held, shareholders will share $8000 amongst themselves. This is how the FAR determines profit, as the difference between allowable costs and the contract price. FAR 15.404-4. In true economic terms, though, "profit" is simply another cost in a contract--the cost of a sole proprietor's time and entrepreneurial risk or the cost of the benefit of the capital investment provided by shareholders. POSNER, supra note 56, at 122. Though the latter understanding could form the basis for an argument that expectation damages (anticipatory profits) are no different than any other cost and should no more be awarded in the event of breach than should specific performance be granted, the law has never taken this approach, but has instead treated profits as different in kind than costs associated with, e.g., labor, material, overhead, fees, and other business costs, etc. For the remainder of this article, I refer to "profits" in this conventionally accepted sense.
(66) This price depends on the manufacturer's being guaranteed, whether by contract term or operation of law, compensation for actual costs he incurs in performance (leaving aside, for the present purposes, opportunity cost), should the government elect not to purchase one or more trucks. Should he not be guaranteed to recover his out-of-pocket expenses, his price will be higher still, as he must now insure not only his profits from the contract, but also against the possibility that his investment in performance will be made worthless by the government's subsequent choice not to perform. Cf STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW, 297-99 (2004) (explaining the unworkable nature of contracts not enforced by adequate legal remedies).
(67) By the term "default," I mean simply the termination of a contract for a reason other than in response to the other party's unjustified failure to perform. That is, for purposes of this argument, government default includes anything that would constitute common law breach, even if the government's actual T4C prerogative (however derived) negates liability.
(68) The notion of "unit profit" in our example depends on the manufacturer's actually being able to sell his four trucks in the commercial sector, rather than only to the government. Though I assumed this in our example, this is, of course, by no means guaranteed in the real world. Were the government the only prospective buyer, the government's bargaining power would be much stronger--this is just another way of saying the seller would value the government's actually offered business more than the unguaranteed prospect of commercial business--and the manufacturer's price would come down. He would still, under our assumptions, lose his business; his goal in selling to the government would simply be to mitigate or delay his losses. Under this circumstance, no conclusions could be drawn regarding the efficiency of Christian's T4C regime. Still, to the extent that there exist contractors who actually do have to decide whether to deal with the government or the private sector (and these contractors do exist--builders, for instance, often work for both private and public clients), the analysis in this part holds.
(69) Kornhauser, supra note 54, at 088 n.21.
(70) Of course, there could be reasons extrinsic to a contract that would prompt a contractor to accept a loss on the contract, future business being perhaps the most plausible. For purposes of this analysis, I presume there are none. Even if there were, however, these could in turn be priced (potential future profits discounted by the likelihood of realizing those profits) and factored into the contract price; such price adjustment would not affect the efficiency issue at hand, i.e., whether the additional money spent by the government based on Christian's T4C regime ultimately returns an equivalent value.
(71) While people are generally risk averse, risk propensity is 'determined in part by individuals' subjective predilections. Stephanos Bibas, Plea Bargaining Outside the Shadow of Trial, 117 HARV. L. REV. 2463, 2507-09 (2004). As such, there will always be those who ignore statistical probability, hoping they will be among the few who "beat the odds." While the existence of these individuals accounts for the continued existence of roulette tables, the fact that an event's statistical probability will, given sufficient repetition of the event, become a historical fact with implications for those who gamble, means that competition in the free market will weed all but a very few odds-defying contractors from the ranks of the solvent.
(72) In this sense, contracting with the government is like electing to throw a forward pass in a football game: "three things can happen, and two of them are bad." Tom Sorenson, It's Time to Give 110 Percent, Take One Cliche at a Time, CHARLOTTE (N.C.) OBSERVER, Aug. 27, 2000, at 2H.
(73) The likelihood of an event's occurring four times in a row, when the event is each time 3/4 likely to occur is [(3/4).sup.4]; the respective likelihoods of the event's occurring three of four, two of four, one of four, and zero of four times are [(3/4).sup.3](1/4), [(3/4).sup.2][(1/4).sup.2], (3/4)[(1/4).sup.3], and [(1/4).sup.4].
(74) 81/256 multiplied by $2666.67 is $845.75, rounded to the nearest cent.
(75) (54/256)($2666.67) + (12/256)($2666.67 * 2) + (1/256)($2666.67 * 3) = (81/256)($2666.67).
(76) See POSNER, supra note 56, at 105-06 (explaining why a risk averse person will weigh more heavily "a one percent probability of a fire that will cause $10,000 damage [than] a certain loss of ... $100, even though the two are "actuarial[ly] equivalent"); see also id. at 12 ("Risk aversion is a corollary of the principle of diminishing marginal utility of money, which just means that the more money you have, the less additional happiness you would get from another dollar.").
(77) There are, of course, methods to reduce inefficiency (even to zero) in certain contracts independent of any T4C rules. Risk neutral contractors will make their offers at, rather than above, the price dictated by probabilistic averages. Sometimes the effects of risk aversion can be completely eliminated through incorporation. POSNER, supra note 56, at 11. However, Christian remains an independent cause of inefficiency in at least some contracts, and short of undoing the liberal T4C regime it has spawned, eliminating inefficiency in the government procurement system as a whole will remain impossible.
(78) I have thus far assumed arguendo that this likelihood could accurately be predicted. This is, in fact, quite unlikely, as the variables that affect government contract performance are manifold and intrinsically unpredictable. Actuarial tables are largely backward-looking, predicting future events like death or fire based on past frequencies that are unlikely to change dramatically. The human and political dimensions to government contracts would likely confound even the most astute actuary. Cf. Gillian Hadfield, Of Sovereignty and Contract: Damages for Breach of Contract by Government, 8 S. CAL. INTERDIS. L.J. 467 (1999) (asserting that the need for government to change direction justifies denying government contractors expectation damages). In Part III.C.2, infra, I will argue that economic analysis of the unpredictability and unquantifiable nature of these variables points toward expectation damages as the proper means of minimizing the unnecessary costs associated with risk of the government's need to terminate contract performance.
(79) POSNER, supra note 56, at 106. That is, the risk of the government's default will not "cost" the contractor more than the value of the potential benefit of the government's overperforming relative to its historical trend by ultimately buying all four trucks.
(80) If he priced his trucks any higher, he would lose the contract to a lower-bidding competitor.
(81) POSNER, supra note 56, at 107.
(82) Should the government elect market insurance, there would likewise be a cost in transferring the information to the insurer. While it could conceivably cost the government more to transfer the information amongst its agencies (i.e. from the generating office to the government contracting officer) than to the insurer, it seems reasonable to assume that on the whole it will be cheaper to move the information within the government than to an outside entity.
(83) 28 U.S.C. [section] 2672 (2000) (authorizing federal agencies to settle tort claims and establishing procedures for so doing). As part of the mechanism by which the federal government pays claims and judgments, 31 U.S.C. [section] 1304 (2000) establishes a judgment fund "to pay final judgments, awards, compromise settlements, and interest and costs specified in the judgments or otherwise authorized by law."
(84) This is because the more instances of a given probabilistic event's occurring, the more likely that the event will occur at or very near the number of times it is statistically predicted to occur. For instance, the risk that a coin will land "heads" significantly more or less than fifty percent of the time is much higher when the coin is tossed only twice than when it is tossed fifty times, even though the likelihood of any given toss's coming up heads remains fifty percent. ROBERT V. HOGG & ELLIOT A. TANIS, PROBABILITY AND STATISTICAL INFERENCE 3 (2d ed. 1983).
(85) Robert A. Hillman, Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law, 1987 DUKE L.J. 1, 30 ("The superior risk bearer is the party who is better able to insure against the risk and who has greater information, knowledge, and experience in the particular area.").
(86) See supra note 76.
(87) If, for instance, a contractor knew with fifty percent confidence that there was a ten percent chance of termination resulting in $1000 in unrealized profits, and also knew with one hundred percent confidence that there was no more than a twenty percent chance of termination on a given contract--such confidence is obviously fantastic, but the numbers serve the purposes of this example--he must include in his contract price up to $200 in cost of risk. (All else being equal, the contractor who wins the bidding competition will likely price that risk closer to $150.) If the government, on the other hand, could accurately predict with one hundred percent confidence that the risk of termination was only eighteen percent, with the same fifty percent confidence in a ten percent prediction, the numbers drop to $180 and $140.
(88) By "unwise," I do not mean arbitrary or manifestly foolish. Rather, I mean economically inefficient. Just as a "no questions asked" return policy on consumer goods gives a shopper the freedom to purchase what he might, in the absence of the ability to rescind the deal, do without (though the higher price he will pay for this return policy might correspondingly disincentivize the purchase), so the ability to terminate a contract without paying expectation damages allows a contracting officer to enter into contracts without properly valuing the goods or services to be obtained thereby. If one enters into a contract knowing he can escape his obligations by paying only reliance damages, he is less likely to secure the best value among all available offers for his contracted price, as he can simply re-contract with another party who subsequently offers him a better deal. If this occurs early in the performance phase and reliance damages are low, those damages constitute the inefficiency, since no value was obtained for them. If, on the other hand, the better deal is offered so late in performance that the new price plus reliance damages exceeds the value to the buyer of the goods or services, the inefficiency is the difference between the first and second (lost) contract prices.
(89) W. David Slawson, The Role of Reliance in Contract Damages, 76 CORNELL L. REV. 197, 226 (1990). Inefficient breach is any breach in which social wealth is not increased to the level it would have been had the contract been performed. Cf. POSNER, supra note 56, at 120-21.
(90) F.H. Buckley offers a sociological example. Marriage, he contends, is weakened--"it is less than a contract"--by what is effectively a non-waivable termination for convenience right. F.H. BUCKLEY, JUST EXCHANGE: A THEORY OF CONTRACT, 42 (2005).
Since the passage of no-fault laws, people have been less willing to get married and, once married, to have children. These trends might be reversed were the marriage contract more strongly enforced. Giving the parties the right upon marriage to waive no-fault divorce rights would make the exit option costlier for parties who exercised that option.... As fault becomes costlier, there will be less of it.... An expansion of free bargaining rights, in which no-fault divorce waivers are made enforceable and marriage vows are made more credible, would therefore protect marriage.
Id. The same argument can be made of government contracts made post-Christian and governed by modern FAR termination rules.
(91) POSNER, supra note 56, at 120.
(92) See, e.g., L.L. Fuller & Sonny Purdue, The Reliance Interest in Contract Damages, 46 YALE L.J. 52 (1936-37).
[J]ustice in the area of material goods involves increasing opportunity for creative participation in the productive sector by expanding the possibilities for employment, wealth creation, and property ownership. These are important not simply because they provide more space for people to acquire material goods but also because the very acts associated with the emergence, growth, and maintenance of these phenomena allow people to cultivate virtues such as prudence, courage, and industriousness.
(94) Matthew 16:26 ("For what will it profit a man if he gains the whole world and forfeits his life?"). See also Luke 12:15 ("[F]or one's life does not consist in the abundance of his possessions.").
(95) See, e.g., Abraham Lincoln, Proclamation of Thanksgiving, Address (Oct. 3, 1863) (noting the recent "[n]eedful diversions of wealth from the fields of peaceful industry to the national defense...."). Contra RICHARD A. POSNER, THE ECONOMICS OF JUSTICE 115 (981) ("[T]he criterion for judging whether acts and institutions are just or good is whether they maximize the wealth of society." (emphasis added)).
(96) Francesco Parisi, Positive, Normative, and Functional Schools in Law and Economics, in THE ELGAR COMPANION TO LAW AND ECONOMICS 58, 60-70 (Jurgen Backhaus ed. 2005).
The early years of law and economics were characterized by the uneasiness of some traditional legal scholars in the acceptance of the notion of wealth maximization as an ancillary paradigm of justice.... [T]wo objections continue to affect the lines of the debate. The first relates to the need for specifying an initial set of entitlements or rights, as a necessary prerequisite for operationalizing wealth maximization. The second springs from the theoretical difficulty of defining the proper role of efficiency as an ingredient of justice, vis-a-vis other social goals.
Id. at 61. In contrast to Judge Posner's "well-known defence of wealth maximization as a guide for judicial action," Guido Calabresi "claims that an increase in wealth cannot constitute social improvement unless it furthers some other goal, such as utility or equality." Id.
(97) Id. at 70.
(98) Id. at 68-69.
(99) Government termination for convenience clauses, coupled with the constructive T4C doctrine (by which the government may, post hoc, justify a termination on any grounds it could have asserted even if it did not, at the time of termination, actually assert these or any other legitimate grounds), make it "almost impossible for a contractor to successfully challenge a convenience termination." David W. Launetti, The Confluence of Convenience Terminations and Guaranteed Minimums in Government Contracts: What is the Proper Remedy when the Government Fails to Order the Minimum Quantity Specified in an Indefinite-Delivery, Indefinite-Quantity Contract?, 13 FED. CIR. B.J. 1, 7, 11 (2003). Virtually the only avenue left open to the contractor is to argue the termination was in bad faith. Yet even here, the contractor is extremely unlikely to prevail, as the government benefits from a presumption of good faith much stronger than the common law presumption applied to government contractors. Frederick W. Claybrook, Jr., Good Faith in the Termination and Formation of Government Contracts, 56 MD. L. REV. 555, 569 (1997); see also REPORT OF THE ACQUISITION ADVISORY PANEL TO THE OFFICE OF FEDERAL PROCUREMENT POLICY AND THE UNITED STATES CONGRESS 7 (Final Panel Working Draft, Dec. 2006) (recommending that "contractors, as well as the government, enjoy the same legal presumptions, regarding good faith and regularity...."), available at http://acquisition.gov/comp/aap/documents/Introduction%20and%20 Executive%20Summary.pdf (last viewed Jan. 25, 2008).
(100) Cf. Anthony D'Amato, Counterintuitive Consequences of "Plain Meaning," 33 ARIZ. L. REV. 529 (1991). D'Amato is of the "pragmatic indeterminacy" school, which is associated with legal realism and critical legal studies and which has been criticized as being nothing more than nihilism. Id. at 530. He contends that, "[a]t bottom, a word does not 'have' a meaning. A word is only a puff of vibrating air, or ink marks on the paper." Id. at 534. The upshot of this is a deconstruction of all legal rules. See Anthony D'Amato, The Case of the Under-aged President, 84 NW. U.L. REV. 250 (1989) (arguing that the Constitution's 35-year age minimum on Presidents is only contextual, not absolute).
(101) The critical limitation to this proposition is that the contract or the law must adequately address the terms under which non-performance is excusable. See STEVEN SHAVELL, DISCUSSION PAPER NO. 531: IS BREACH OF CONTRACT IMMORAL? (2005), available at http://www.law.harvard.edu/programs/olin_center/papers/pdf /Shavell_531.pdf (last viewed Jan. 25, 2008). Only this limitation prevents the arguably immoral result of the government's spending taxpayers' dollars to compensate a contractor for work he has not performed on a contract terminated because taxpayers no longer need the goods or services promised. If, however, the law imposes those damages that correctly incentivize performance (by neither undercompensating nor overcompensating the non-breaching party, i.e. by providing expectation damages in those circumstances 1) in which the parties explicitly agreed on that remedy; and 2) in which, had the parties, during negotiations, anticipated the particular circumstances in question, they would have agreed on that remedy, unjustified breach (i.e. nonperformance excused neither explicitly nor implicitly) will not occur. This prevents the immoral result of squandered tax dollars. See id. at 2, 14.
(103) Id.
(104) Id. at 16-17. Though Fried's work is couched in secular terms, his conclusions are consistent with the Biblical view of promises as being made at the discretion of the promisor, but once made, being morally and legally binding. Numbers 30:2 ("If a man vows a vow to the Lord, or swears an oath to bind himself by a pledge, he shall not break his word. He shall do according to all that proceeds out of his mouth."); Ecclesiastes 5:4-5 ("When you vow a vow to God, do not delay paying it, for he has no pleasure in fools. Pay what you vow. It is better that you should not vow than that you should vow and not pay."); Deuteronomy 7:12 (recognizing that a treaty between Israel and her enemies would prohibit Israel from obeying God's command to destroy them). God, whose behavior is the standard of morality that His children are to follow, Leviticus 11:45, I Peter 1:15-16, is a covenant maker and keeper. See, e.g., Jeremiah 31:33.
(105) Daniel Markovitz, Contract and Collaboration, 113 YALE L.J. 1417 (2004).
(106) JOHN RAWLS, A THEORY OF JUSTICE, 344-48 (1971). "The rule of promising [which Rawls defines simply as the rule that one must do what he has promised to do, id. at 344-46] does not give rise to a moral obligation by itself: To account for fiduciary obligations we must take the principle of fairness as a promise." Id. at 348.
(107) There are certain contexts that complicate this general rule. For instance, moral philosophers debate whether the breaking of a promise to do something immoral is, itself immoral, such that the violation is but the lesser of two evils, or whether, instead, the violation is itself an affirmative good because the promise was of no moral weight. Compare Judges 11:29-40 (the story of Jepthah's fulfilling his rash vow) with THE WESTMINSTER CONFESSION OF FAITH XXII.IV ("[An oath] cannot oblige to sin....").
(108) Daniel Markovitz, Making and Keeping Contracts 92 VA. L. REV. 1325, 1329 n.6 (2006).
(109) FRIED, supra note 102, at 18-21. "The connection between contract and the expectation damages is so palpable that there is reason to doubt that its legal recognition is a relatively recent invention." Id. at 21. "Promise and restitution are distinct principles. Neither derives from the other, and so the attempt to dig beneath promise in order to ground contract in restitution (or reliance, for that matter) is misconceived." Id. at 26.
(110) Id. at 20.
(111) SHAVELL, supra note 101, at 15-16. But see Gil Lahav, A Principle of Justified Promise-Breaking and its Application to Contract Law 57 N.Y.U. ANN. SURV. AM. L. 163, 177-78 (2000) (arguing that, on Fried's autonomy theory, specific performance or punitive damages are preferable to expectation damages, as these remedies better incentivize performance).
(112) There is a third, smaller group of contract theorists: the post-modernists. I include critical contract theorists in this group, as critical legal studies, like postmodernism generally, question the very question of normativity, focusing instead on law as result. See Clare Dalton, An Essay in the Deconstruction of Contract Doctrine, 94 YALE L.J. 997, 1113 (1985) ("The stories told by contract doctrine are human stories of power and knowledge.") There is less post-modern contract theory literature than deontological or utilitarian (particularly given the extensive law and economics scholarship, most of which fits into the latter category), but see Peter Goodrich, Sleeping With the Enemy: An Essay on the Politics of Critical Legal Studies in America, 68 N.Y.U.L. REV. 389, 416-19 (1993). Because of this, and because by their very nature post-modern theories of law are something of "non-theories," see BUCKLEY, supra note 90, at 22 ("To persuade, a theory of contracts must do three things: it must recognize that promising is an institution; it must account for the promisor's fidelity duties; and it must explain the basic rules of contract law."), I do not address them in detail here. This omission should not, however, compromise the moral analysis in this section, inasmuch as all but the most thoroughgoing post-modernist theories of contract (or anything), which reject normative conclusions entirely, rest their normative conclusions on utilitarian bases.
(113) This view has gained traction in positive law, as federal law and regulations sometimes require the government to accept potentially higher costs for goods and services when the goods and services can be provided by, e.g., women who own small businesses. 15 U.S.C. [section] 644(g) (2000); FAR 19.201.
(114) BUCKLEY, supra note 90, at 22 ("It has generally been recognized that law-and-economics provides a compelling account of contract law; what is less recognized is that only it does so, and that rival theories of contract law must be rejected.").
(115) See, e.g., Robert Cooter and Melvin Aron Eisenberg, Damages for Breach of Contract, 73 CAL. L. REV. 1432, 1461 (1985) ("The damage rules that courts apply to fill in contracts should be both fair and efficient.").
(116) Cf. FRIED, supra note 102, at 23 (explaining how express contractual limitations on consequential damages are generally upheld).
(117) RESTATEMENT (SECOND) OF CONTRACTS [section] 14 (1981).
(118) It is possible, and I believe correct, that the government acts morally in refusing to enforce some moral obligations of some individuals. This is because government's jurisdiction is naturally limited. For the government to go beyond its province would, itself, be an immoral act. See Craig A. Stem, Things Not Nice: An Essay on Civil Government, 8 REGENT U.L. REV. 1 (1997).
(119) See McNealy v. Caterpillar, Inc., 139 F.3d 1113, 1119 (7th Cir. 1998) ("[T]he sine qua non of contract law [is] that parties are not bound by obligations unless they agreed to the obligations.").
(120) See George Will, Op-Ed., An Airline that Isn't Bankrupt, WASH. POST, Jan. 25, 2007, at A25.
(121) SHAVELL, SUpra note 101, at 13.
(122) Standardized contract language is ubiquitous, and, with the exception of those few contracts found to be unconscionable, standardized contracts not in violation of a governing law or regulation are routinely enforced. RICK BIGWOOD, EXPLOITATIVE CONTRACTS 275 (2003). "[S]tandardized contracts are mostly to be endured as beneficial in complex (hence impersonal) free market economies. Accepted as a necessary feature of the modern commercial age, standardized contracts are largely tolerated for their utility, convenience, and efficiency in business." Id. at 274.
(123) Robert P. George, What's Sex Got to do with it? Marriage, Morality, and Rationality, 48 AM. J. JURIS. 63, 84 (2004); Stephen J. Morse, Excusing and the New Excuse Defenses, 23 CRIME & JUST. 329, 334 (1998) ("The law is a teacher that sets moral and social standards for conduct."); Jeffrey L. Harrison, Order, Efficiency, and the State: A Commentary, 82 CORNELL L. REV. 980, 991 (1997) ("[T]he law is a teacher about right and wrong.... ").
(124) See John D. Mueller, How Does Fiscal Policy Affect the American Worker? 20 NOTRE DAME J.L. ETHICS & PUB. POL'Y 563,565 (2006).
(125) Lahav, supra note 111, at 176. Lahav's "Principle of Justified Promise Keeping" is his attempt to "ground the concept of efficient breach within a larger moral theory by showing how the practice of efficient breach could be made compatible with utilitarian and even deontological ethics." Id. at 165.
(126) But see Robert L. Birmingham, Breach of Contract, Damage Measures, and Economic Efficiency, 24 RUTGERS L. REV. 273, 278 (1969-70) (taking exception to Adam Smith's belief in the affirmative morality of laissez faire in stating that "economists, aspiring to standards of objectivity set in the natural sciences, have been able to condemn violation of the conditions of competitive equilibrium as inefficient with only minimal appeal to moral precepts").
(127) See, e.g., United States v. Blair, 321 U.S. 730, 738 (1944) (Frankfurter, J., dissenting in part).
Those dealing with the Government must no doubt turn square comers. While agents for private principals may waive or modify provisions in contracts which circumstances have rendered harsh, provisions in government contracts cannot be so alleviated. But in order to enforce the terms of a government contract courts must first construe them. And there is neither law nor policy that requires that courts in construing the terms of a government contract should turn squarer comers than if the same terms were contained in a contract between private parties. "A Government contract should be interpreted as are contracts between individuals, with a view to ascertaining the intention of the parties and to give it effect accordingly, if that can be done consistently with the terms of the instrument."
Id. (quoting Hollerbach v. United States, 223 U.S. 165, 171-172 (1914)). See also Lynch v. United States, 292 U.S. 571,579 (1934) ("When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals."); Sinking-Fund Cases, 99 U.S. 700, 719 (1879) ("The United States are as much bound by their contracts as are individuals. If they repudiate their obligations, it is as much repudiation, with all the wrong and reproach that term implies, as it would be if the repudiator had been a State or a municipality or a citizen.").
(128) CIBINIC ET AL., supra note 16, at 1049.
(129) Oliver Wendell Holmes, The Path of the Law, 10 HARV. L. REV. 457, 462 (1897) ('The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it,--and nothing else.").
(130) G.L. Christian & Assoc. v. United States, 160 Ct. C1. 1, 30 (1983). The Court explained:
[T]he Defense Department and the Congress would be loath to sanction a large contract which did not provide for power to terminate and at the same time proscribe anticipated profits if termination did occur. Particularly in the field of military housing, tied as it is to changes and uncertainties in installations, would it be necessary to take account of a possible termination in advance of completion, and to guard against a common law measure of recovery which had been disallowed for so many years in military procurement.
Id. Gillian Hadfield argues forcefully that though the government may be bound by its contractual obligations, only the prerogative to terminate for convenience and pay mere reliance damages reconciles the "important tensions between the role of government as contractor and the role of government as legislator." Hadfield, supra note 78, at 469.
(131) 28 U.S.C. [section] 1491 (2000). The Contract Disputes Act of 1978, 41 U.S.C. [section][section] 601-03 (2000) established Boards of Contract Appeals as alternative administrative for a for contractors bringing claims against the government.
(132) Valley View Enters. v. United States, 35 Fed. CI. 378, 385 (1996). Contra Pan-Am Tobacco Corp. v. Dept. of Corr., 471 So. 2d 4, 5 (Fla. 1984) (finding legislation empowering State to enter contract constituted waiver of sovereign immunity, despite fact that State had explicitly waived sovereign immunity for actions sounding in tort with no analogous waiver for contract claims).
(133) See, e.g., Ellett Constr. Co. v. United States, 93 F.3d 1537, 1546 (Fed. Cir. 1996) (recognizing that while some common law claims exist under the federal procurement regulation system, anticipatory damages are not to be had). But see United States v. Winstar Corp., 518 U.S. 839, 910 (1996) (finding government regulatory action to constitute a breach of contract, rather than a constructive termination for convenience).
(134) DANIEL BOORSTIN, THE MYSTERIOUS SCIENCE OF THE LAW 4 (1941). "In the first century of American Independence, the Commentaries were not merely an approach to the study of the law; for most lawyers they constituted all there was of the law. The influence of Blackstone's ideas on the Framers of the Federal Constitution is well known." Id. at 3.
(136) THE FEDERALIST NO. 81 (Alexander Hamilton).
(137) ERWIN CHEMERINSKY, FEDERAL JURISDICTION 589-593 (3rd ed. 1999).
(138) Feres v. U.S., 340 U.S. 135 (1950).
(139) A similar problem arises when legislation or regulations have the ancillary effect of negating the government's contractual obligations. This was the case in U.S. v. Winstar, 518 U.S. 839 (1996) (plurality opinion), in which the government unsuccessfully defended against Winstar's contention that the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) did not justify the government's failure to uphold its duties under a pre-existing contract.
(140) See Horowitz v. United States, 267 U.S. 458, 461 (1925) ("[T]he United States when sued as a contractor cannot be held liable for an obstruction to the performance of the particular contract resulting from its public and general acts as a sovereign.").
(141) Winstar, 518 U.S. at 894 ("[W]e have already expressed our doubt that a workable line can be drawn between the Government's 'regulatory' and 'nonregulatory' capacities.").
(142) James R. Walsh and Hugh Alexander, At Your Convenience: Courts are Generally Enforcing Termination for Convenience Clauses in Private Sector Contracts That are Well Drafted and Prudently Invoked, 21 LOS ANGELES LAW. 42 (1998). But see Pan-Am Tobacco Corp. v. Dept. of Corr., 471 So. 2d 4, 5 (Fla. 1984) ("It is basic hornbook law that a contract which is not mutually enforceable is an illusory contract. Where one party retains to itself the option of fulfilling or declining to fulfill its obligations under the contract, there is no valid contract and neither side may be bound." (citations omitted)).
(143) Claybrook, supra note 99, at 581.
(144) THE DECLARATION OF INDEPENDENCE para. 2 (U.S. 1776) ("Whenever any Form of Government becomes destructive of these ends [of securing its citizens' rights], it is the Right of the People to alter or to abolish it, and to institute new Government... in such form, as to them shall seem most likely to effect their Safety and Happiness."); see also supra note 11.
(145) Joseph J. Petrillo & William E. Conner, From Torncello to Krygoski: 25 Years of the Government's Termination for Convenience Power, 7 FED. CIR. B.J. 337, 371 (1997).
(146) In discussing my proposals with government employees experienced in government contracting, the standard response I receive is an expressed concern over the amount of money the government stands to lose if I am wrong, i.e., if an expectation damages regime were not more efficient. (Perhaps not surprisingly, those private practitioners with whom I talk seem much more receptive to my ideas.) To put the total risk in perspective, consider the following. Though total annual federal contracting expenditures have risen dramatically post-9/11, and particularly since the 2003 invasion of Iraq, let us assume the $350 billion figure listed by the Office of Management and Budget's Office of Federal Procurement, http://www.whitehouse.gov/omb/procurement/ index.html (last visited Jan. 25, 2008), is accurate and is likely to remain fairly constant for the foreseeable future. Assume further that every contractor's anticipated profits were ten percent of each respective contract price. (This number is probably impossible to ascertain correctly. Some analysts place this number at seven percent, Transcript of Examining Halliburton's "Sweetheart" Deal in Iraq: Experts Say Lucrative Contracts Yield Razor-Thin Profit Margins (NPR's All Things Considered radio broadcast, Dec. 22, 2003), available at http://www.npr.org/templates/story/story.php?storyId= 1559574 (last viewed Jan. 25, 2008); the FAR caps profit margins on cost-plus-fixed-fee contracts at fifteen percent for research and development contracts, six percent for architect-engineer projects, and ten percent for all others, FAR 14.404-(c)(4).) Finally, assume the government cancelled one in every ten contracts (a figure that is probably fantastically high) in such a way as to receive nothing of value that could lessen the impact of paying expectation damages. On these figures (designed to establish an absolute worst-case scenario), the government would stand to lose a total of $3.5 billion per year in "wasted" expectation damage payments, assuming there were absolutely no efficiencies gained through reduced prices in completed contracts. This amount is less than one-fourteenth of the smallest annual increase in the size of the federal budget over the last decade, and represents approximately one-seventh of one percent of the 2005 federal budget. The Budget for Fiscal Year 2008, Historical Tables, available at www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf (last visited Jan. 25, 2008). While $3.5 billion is "real money," even in terms of government spending, it is not, relatively speaking, enough to justify dismissing arguments for attempted systemic improvements on the grounds that the results of failure would be simply too great to risk.
Major Bruce D. Page, Jr. (B.S., Davidson College (1994); J.D., Regent University School of Law (2002); LL.M., The Judge Advocate General's Legal Center and School United States Army, Charlottesville, Virginia (2007)) is Associate General Counsel Headquarters, Defense Logistics Agency, Fort Belvoir, Virginia. He is a member of the Florida Bar. This article was submitted in partial completion of the Master of Laws requirements of the 55th Judge Advocate Officer Graduate Course. The author thanks Professors Craig Stern and Scott Pryor and colleague Daniel Poling for their helpful suggestions on earlier drafts of this article. The author is also, as always, grateful to his wife, Laura, and children, Kaylie, Betsy, Christy, Jenna, Nathan, Marie, and Jack, for their love, patience, and encouragement during the writing of this article.
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|Page, Bruce D., Jr.
|Air Force Law Review
|Mar 22, 2008
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