Public-Private Partnerships and Termination for Convenience Clauses: Time for a Mandate

For better or worse, and for richer or poorer, the line between government and private provision of goods and services is disappearing. It was never a bright line; governments have always turned to private purveyors of goods and services to acquire many of the tools required for the provision of public services.1 The sanitation workers picking up garbage may have been employed directly by a city, but they picked up the trash in trucks built by private companies. Beneath those trucks are public roads, which have almost always been built entirely by private construction companies, not government employees.2 Increasingly, however, governments at all levels are contracting out responsibility for the services themselves.3 Private enterprises now build and staff the garbage trucks.4 They build and operate roadways; they staff manual and electronic toll collection systems;5 and they plow and maintain road surfaces. Private enterprises also own and run "public" schools6 and prisons.7 On occasion, the government retains its role as financier, collecting taxes or fees with which to defray the costs of hiring the private purveyors of goods or services.8 Often, however, the government's role is limited to picking the private enterprise which will provide a good or service and negotiating the fees that the enterprise can charge for its services; the enterprise then collects the appropriate fee directly from residents and other users.9 In theory, the incentive provided by the profit motive and the absence of legal restrictions, such as civil service protections, allow private entrepreneurs to provide better quality services at lower cost than their public counterparts.10But what if things go wrong? At times, the public authorities or their constituents are dissatisfied with the performance of the private enterprise and wish to switch to another private purveyor, to return to public provision, or to eliminate the service entirely. Unless the private enterprise's lack of performance rises to the level of a breach of its contractual obligations, a government must buy its way out of the contract. And under standard contract law, such buyouts do not come cheaply. Private parties insist on receiving payments comparable to the compensation due following the government's breach of its obligation to continue the contract. Expectation damages are the norm; this measure of damages requires that the nonbreaching party be placed in the position that it would have been in had the contract been completed in accordance with its terms.11 In the normal course of events, the nonbreaching party is entitled to the discounted present value of its projected future profits. The extensive term of many of these privatization arrangements not only causes the amount of damages to balloon but also ensures that the calculation of the amount owed will be contentious and expensive to calculate.12There is an alternative. It is to follow the pattern set by federal procurement law and mandate the inclusion of termination for convenience clauses in all privatization contracts. Including such clauses would diminish a government's damage obligation in the event it desires to cancel a contract. Instead of paying expectation damages, the government would pay something closer to out-of- pocket reliance damages.13 Specifically, under a termination for convenience clause, the government need only pay "the price on work completed, actual costs incurred plus a reasonable allowance for profit on partially completed work, and nothing whatsoever on work not yet begun (thus, no lost profits on such work)."14As other commentators have noted, one-sided termination privileges are not an unalloyed blessing.15 This Article, however, argues that in the context of privatization agreements, the costs of including a termination for convenience clause are far outweighed by the benefits. Indeed, in this Article I urge that such clauses be both mandatory and nonwaivable.Part I describes the history and current use of termination for convenience clauses. …