Opinion ID: 3010008
Heading Depth: 3
Heading Rank: 3

Heading: New Jersey and the Federal Law Alternative

Text: This is not the first case in which a court applying New Jersey law has had to adjudicate a contract dispute with some federal connection. In Edward J. Dobson, Jr., Inc. v. Rutgers, 384 A.2d 1121 (N.J. Super. Ct. Law Div. 1978), aff'd sub nom. Broadway Maintenance Corp. v. Rutgers, 434 A.2d 1125 (N.J. Super. Ct. App. Div. 1981), aff'd, 447 A.2d 906 (N.J. 1982), plaintiffcontractors sought to avoid the impact of a no-damage for delay clause by asserting their claim for delay as an equitable adjustment. The court traced the history of the equitable adjustment provisions in federal construction contracts and federal regulations. But the court refused to import this wholly federal concept into the New Jersey law of public construction contracts. Finding that the term equitable adjustment had become a term of art in federal contracts, the court held: The policy factors that have lead [sic] to the development of this concept in federal contracts, such as a need to expand or abandon a particular arms program with consequent economic impact on contractors and subcontractors, do not warrant state courts adopting it wholesale by judicial fiat when traditional remedies for breach of contract are available. Id. at 1153 n.10. This holding was affirmed by both the intermediate appellate court and Supreme Court of New Jersey and strongly suggests that New Jersey courts would not import the federal concept of constructive termination for convenience into its public construction contracts jurisprudence. As the majority correctly points out, because there is no reported New Jersey precedent interpreting a termination for convenience clause, it is the function of this court to predict how the New Jersey Supreme Court would rule if confronted with this issue. In my view, there is no reason to believe that that court, if called upon to resolve the question, would jettison a century of settled contract law supporting liberal contract remedies and narrowly construing similar exculpatory provisions in order to adopt a harsh -- and harshly criticized, see infra -- federal interpretation of the clause at issue here. In this case, the retroactive application of this dramatic change in the law imposed by the majority to the factual scenario described above not only exacerbates the harshness of the result but also increases my confidence that the New Jersey Supreme Court would never have adopted this interpretation. D. The Termination of Convenience Provision and Its Harsh Construction by the Majority The termination for convenience clause has, as the majority explains, a long lineage, dating from the Civil War era. During that era federal government contracting was attended by much impropriety and scandal. See generally CARL SANDBURG, ABRAHAM LINCOLN, THE WAR YEARS (1948). The modern (post-1970) incarnation of the clause is ensconced in the Code of Federal Regulations: If the contractor can establish, or if it is otherwise determined that the contractor was not in default or that the failure to perform is excusable; i.e., arose out of causes beyond the control and without the fault or negligence of the contractor, the [prescribed default clauses] provide that a termination for default will be considered to have been a termination for the convenience of the Government . . . . Federal Acquisition Regulations (FAR's), 48 C.F.R. § 49.401(b) (1993). The FAR's apply to direct United States government procurement (including HUD procurement). They do not apply to grants of federal funds to local public housing authorities. The district court acknowledged this undisputed point. (Dist. Ct. Op. at 18 n.7) Moreover, regulations that govern grants to local housing agencies contain their own specific scheme and procedures for federally funded contracts made by state and local housing authorities that are separate and distinct from the FAR's. These CIAP requirements mandate a variety of terms and provisions that must be set forth in such contracts, including a termination for convenience clause. See 24 C.F.R. § 85.36(i)(2). In contrast to the FAR's, however, the Administrative Requirements for CIAP Grants do not include any counterpart to the automatic conversion language of 48 C.F.R. § 49.401(b), or the other specific termination provisions found in HUD's own FAR's. This is consistent with the mandate of the CIAP enabling statute, which is designed to allow the housing authority grantees maximum discretion and individualized judgment. 42 U.S.C.S. § 14371(e)E, (e)(4)(D) (1994). The absence of an express conversion clause in the Administrative Requirements for Grants is significant because, under the venerable maxim of statutory construction, expressio unius est exclusio alterius, the inclusion of one is the exclusion of another. As I see it, the exclusion of an automatic conversion provision in the Requirements for Public Housing Authority Contracts (when specifically included in HUD's own FAR's) expresses an intent to exclude such a provision, unless local PHA administrators choose to include it. Cf. Marshall v. Western Union Tel. Co., 621 F.2d 1246, 1251 (3d Cir. 1980) (refusing to apply a Department of Labor standard in one subsection of a regulation where it had been excluded when it was included elsewhere); SUTHERLAND STATUTORY CONSTRUCTION § 31.06 (4th ed.). Moreover, without the conversion clause, HACC's initial failure to allege that it was terminating the contract with Linan-Faye for convenience prevents HACC from subsequently embracing that argument. Before contracts with the federal government included automatic conversion clauses, courts did not permit government agencies to use the termination for convenience clauses to escape from a breach. In Klein v. United States, 285 F.2d 778 (Ct. Cl. 1961), for example, the Court of Claims rejected the government's argument that, because it had a contractual right to terminate for convenience, its illegal breach of contract should be disregarded. Id. at 784. Accord Goldwasser v. United States, 325 F.2d 722, 725 (Ct. Cl. 1963); Dynalectron Corp. v. United States, 518 F.2d 594, 604 (Ct. Cl. 1975); Torncello v. United States, 681 F.2d 756, 771-72 (Ct. Cl. 1982); Rogerson Aircraft Corp. v. Fairchild Indus.Inc., 632 F. Supp. 1494, 1499 (C.D. Cal. 1986) (changed circumstances required). The problems confronted by government contracting officers operating under the Klein rule resulted in the adoption of the automatic conversion clause by regulation, 48 C.F.R. § 49.401(b). The clause now appears in most direct federal government procurement contracts. However, as the Rogerson court noted in footnote 5 of its opinion, where the automatic conversion clause is not made part of the contract, either expressly or by regulation, the Klein rule remains fully applicable and bars the implication of such clause. Rogerson, 632 F. Supp. at 1500 n.5. Although the contract in Rogerson appears more specific than the instant contract in its requirement that the agency elect its basis for termination (i.e., default or convenience), the Rogerson decision remains important and persuasive. Without a conversion clause, HACC cannot invoke the termination for convenience provision to cure its improper default termination. And a wrongful termination for default constitutes a breach of the contract entitling the wrongly terminated subcontractor to state law damages for the breach, including lost profits. Id. at 1500-01; Clay Bernard Sys. Int'l, Ltd. v. United States, 22 Cl. Ct. 804, 810-11 (1991) (holding that absent a conversion clause a wrongful termination for default is a breach, entitling contractor to recovery under federal procurement law). But even if HACC had initially invoked its termination for convenience clause, thus avoiding the issue of the absence of a conversion clause, HACC could not avoid liability in this case. The majority acknowledges that the case law construing the termination for convenience clause has retrenched from its high water mark. While the majority's discussion does not clearly depict the current state of the law, the leading cases appear to hold that government agencies can only invoke the clause where there has been some change in the circumstances of the parties. See Torncello, 681 F.2d at 772. The majority holds that a deterioration in business relations, demonstrated in not insignificant part by a dispute over specifications, constitutes such a change in circumstances. In my view, such a rule would largely eviscerate the limitation. As lawyers who have dealt with construction disputes know, these contracts almost always generate some dispute over specifications, and any construction dispute rancorous enough to spawn litigation will almost certainly have led to the requisite deterioration in business relations. The facts of this case illustrate how circular a deterioration-of-business-relations test can be, for HACC did not even attempt to invoke the clause until litigation began. The majority constructs a regime under which a dispute arising out of a garden variety contract between a builder and a local housing authority, which is not a federal government contract but only a local agency contract to which certain federal regulations apply, has been severed from its common law roots. The majority's application of selected federal cases renders these local agency contracts virtually illusory by giving an arguably defaulting local agency the right to avoid its own breach, and sharply limit its liability simply by incanting the termination for convenience clause two years after the fact. In my view, it is inconceivable that the New Jersey Supreme Court, which has so consistently supported liberal awards of contract damages, would countenance that result, especially in the fact scenario at bar. This conclusion is strongly buttressed by the scathing criticism that has been levied at Torncello and the cognate jurisprudence. See, e.g., Stephen N. Young, Note, Limiting the Government's Ability To Terminate for Convenience Following Tornecello, 52 GEO. WASH. L. REV. 892 (1984) (suggesting that the Torncello decision provides a reason to eliminate the government's ability to terminate for convenience entirely). Because I do not believe that the New Jersey Supreme Court would adopt the federal interpretation but would instead continue to give exculpatory clauses such as the termination for convenience clause only narrow -- if any -- effect, I dissent.22