UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

95-5136

KRYGOSKI CONSTRUCTION COMPANY, INC.,

Plaintiff-Appellee,

v.

THE UNITED STATES,

Defendant-Appellant.

H. Robert Showers, Gammon & Grange, P.C., of McLean, Virginia,
argued for plaintiff-appellee. With him on the brief was Peter F.
Rathbun.

Sheryl L. Floyd, Senior Trial Counsel, Commercial Litigation Branch,
Civil Division, Department of Justice, of Washington, D.C., argued
for defendant-appellant. With her on the brief were Frank W. Hunger,
Assistant Attorney General, and David M. Cohen, Director. Of counsel
was Arvis Freimuts, Assistant District Counsel, U.S. Army Corps of
Engineers, of Detroit, Michigan.

Appealed from: United States Court of Federal Claims

Judge Yock

UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

95-5136

KRYGOSKI CONSTRUCTION COMPANY, INC.,

Plaintiff-Appellee,

v.

THE UNITED STATES,

Defendant-Appellant.

__________________________

DECIDED: August 1, 1996

___________________________

Before RICH, RADER, and BRYSON, Circuit Judges.

RADER, Circuit Judge.

The United States Court of Federal Claims determined that the United States Army Corps of Engineers (Corps) had no justification for
terminating a demolition contract with Krygoski Construction
Company, Inc. (Krygoski) for the Government's convenience. Krygoski
Constr. Co. v. United States, No. 214-89C (Fed. Cl. Mar. 2, 1993).
To remedy the breach, the trial court awarded Krygoski $1,456,851.10
in damages plus interest pending payment. Krygoski Constr. Co. v.
United States, No. 214-89C (Fed. Cl. May 19, 1995). Because the
trial court incorrectly relied on Torncello v. United States, 681
F.2d 756 (Ct. Cl. 1982), this court reverses and remands.

BACKGROUND

In 1985, the Corps undertook demolition of an abandoned U.S. Air
Force airfield and missile site near Raco, Michigan. During surveys
of the site, the Corps found asbestos contamination. Based on
blueprints and its survey, the Corps estimated that two buildings at
the site contained asbestos contamination in 1600 linear feet of
pipe insulation and 650 square feet of tank and duct insulation. The
survey also revealed that extensive vandalism may have spread
asbestos debris on the floors of the buildings.

On August 12, 1985, the Corps issued an invitation for bids on the
demolition project. The solicitation noted that bids should range
between $500,000 and $1,000,000. Eight bidders bid on the contract.
Krygoski won the contract with the low bid of $414,696. On or about
September 30, 1985, Krygoski and the United States through the
Detroit District of the Army Corps of Engineers entered into
Contract No. DACA35-85-C-0001. This contract required removal and
disposal of the asbestos during restoration of the site. Seven line
items in the contract specifically addressed asbestos abatement:

1. Asbestos Pipe Insulation Unit Unit Price

Removal and Disposal

a. First 1600 Linear feet 1600 L.F. $10.98

b. Over 1600 Linear feet 700 L.F. $10.75

2. Asbestos Tank and Duct Insulation

Removal and Disposal

a. First 650 Square feet 650 S.F. $ 8.90

b. Over 650 Square feet 100 S.F. $ 8.78

3. Demolition, Removal and Disposal 1 Job $260,940.00

4. Underground Tank Excavation and Backfill

a. First 6700 Cubic Yards 6700 C.Y. $ 3.00

b. Over 6700 Cubic Yards 3300 C.Y. $ 2.00

5. Fill

a. First 12,000 Cubic Yards 12,000 C.Y. $ 2.50

b. Over 12,000 Cubic Yards 5,000 C.Y. $ 2.00

6. Missile Silo Fill 28 EA. $1,000.00

7. Topsoil, Seeding and Mulching 39,000 S.Y. $ .70

The contract contained a Variations in Estimated Quantities (VEQ)
Clause for items 1, 2, 4, and 5 above:

Variation from the estimated quantity in the actual work performed
under any second or subsequent sub-item . . . will not be the basis
for an adjustment in contract unit price.

This VEQ Clause anticipated variations in asbestos quantities for
these four items at the Raco site. The VEQ Clause, however, did not
contemplate quantity variations for asbestos removal in other areas.

Krygoski conducted a predemolition survey. Just ten days after
Krygoski acknowledged receipt of the notice to proceed with the
contract, Mr. Phillips, Krygoski's counsel, informed the Corps of
asbestos in the vinyl flooring and roof insulation of the Raco
buildings. Krygoski proposed to remove the tile for a unit price of
$8.78 per square foot -- the cost of removing additional duct
insulation under item 2 of the VEQ Clause. The Corps requested
Thermo Analytical, Inc. to take samples at potential new locations
of asbestos contamination. The tests showed asbestos in the tile and
the flashing at the Composite building, but not in the roof
insulation.

From examining the drawings, the Corps' Area Office estimated
asbestos removal needs at 36,340 square feet. At Krygoski's removal
price of $8.78 per square foot, this amount of removal yielded an
additional cost of about $320,000 for the floor tile. The Corps did
not, however, actually test each tile. The Corps derived its
estimate from the drawings.

The contracting officer, Lieutenant Colonel Phillip Johnson (LTC
Johnson), considered a price increase of this dimension a cardinal
change in the contract. LTC Johnson reached this conclusion because
this increase exceeds 33% of the total contract cost. For a change
of this magnitude, the Corps followed a general policy of
terminating the contract for the convenience of the Government and
reprocuring the work competitively under the Competition in
Contracting Act. LTC Johnson also considered that Krygoski had not
started work on the contract. In fact, Krygoski had done little
beyond transporting four pieces of equipment to the Raco site. In
light of these circumstances, the Corps terminated the contract for
the convenience of the Government on September 5, 1986.

Following the termination, the Corps resolicited bids for the Raco
site demolition. The Corps revised its specifications to reflect the
additional asbestos removal work as well as other changes. The Corps
received eight offers on this new solicitation, DACA35-87-B-001.
Krygoski was the sixth lowest bidder at $1,200,000. Anderson
Excavating & Wrecking Co. (Anderson) won the bidding at $443,200.
Due to modifications to the contract, the Corps eventually paid
Anderson a total of $542,861.60 to complete the contract.

Krygoski sued in the Court of Federal Claims alleging that the Corps
breached its original contract. Relying on Torncello, 681 F.2d at
772 (reading the termination for convenience clause to require some
change in the circumstances of the bargain or in the expectations of
the parties), the trial court found the Government improperly
terminated Krygoski's contract. In the alternative, the trial court
found the Government abused its discretion in terminating the
contract under the Kalvar standard. Kalvar Corp. v. United States,
543 F.2d 1298, 1301-02 (Ct. Cl. 1976), cert. denied, 434 U.S. 830
(1977). Accordingly, the trial court awarded Krygoski $1,456,851.20
in damages plus interest. This amount included anticipatory lost
profits. The Government appeals.

DISCUSSION

This court reviews Court of Federal Claims decisions for errors of
law and clearly erroneous findings of fact. Cooper v. United States,
827 F.2d 762, 763 (Fed. Cir. 1987) (citing Milmark Servs., Inc. v.
United States, 731 F.2d 855, 857 (Fed. Cir. 1984)).

The trial court thoroughly analyzed the factual circumstances and
legal principles of this case. Its careful work properly framed the
issues for this appeal. As the trial court perceived, the case law
governing the decision to terminate a contract for convenience has
not always set a clear, unambiguous standard. See Torncello, 681
F.2d at 764-72 (recounting history of terminations for convenience).
An examination of termination for convenience law from several
decades ago discloses mixed signals about limiting terminations
under the bad faith/abuse of discretion standard in Kalvar, 543 F.2d
at 1301-06, or the change of circumstances test in Torncello, 681
F.2d at 772. A full review of more recent case law, coupled with
recent enactments, however, discloses a clear signal for
implementation of termination for convenience clauses.

I.

At the outset, this court traces some of the history leading up to
articulation of two tests for convenience terminations. The
Government always possessed the power to terminate its contracts;
such action, however, constituted a contract breach. John Cibinic,
Jr. & Ralph C. Nash, Jr., Administration of Government Contracts
1073 (3d ed. 1995) [hereinafter Cibinic & Nash]. Terminations for
the Government's convenience developed as a tool to avoid enormous
procurements upon completion of a war effort. Because public policy
counselled against proceeding with wartime contracts after an end to
hostilities, the Government, under certain circumstances, began to
terminate contracts and settle with the contractor for partial
performance. In 1863, the Army, for example, promulgated Rule 1179
in the Army Regulations concerning contracting for subsistence
stores. Rule 1179 expressly "provide[d] for [subsistence contract]
termination at such time as the Commissary-General may direct."
United States v. Speed, 75 U.S. (8 Wall.) 77, 78 (1868). The Supreme
Court has acknowledged the Government's authority to settle breach
claims after a convenience termination. Cf. United States v. Corliss
Steam Engine Co., 91 U.S. 321, 323 (1875) (finding the Navy
Department had authority to suspend work under a contract and enter
into a breach settlement for partial performance); see also Cibinic
& Nash, at 1073-74.

After World War I, the Government terminated contracts in large
numbers. New statutory authority provided for settlement of the
claims from those terminations. See Dent Act, 40 Stat. 1272 (1919).
When World War II started, the Contract Settlement Act of 1944, 58
Stat. 649, provided further statutory and regulatory provisions for
contract termination. See Cibinic & Nash, at 1074.

In 1964, the first edition of the Federal Procurement Regulation
(FPR) included optional termination for convenience clauses. FPR
1-8.700-2. By 1967, the FPR required termination for convenience
clauses in most procurement contracts. 32 Fed. Reg. 9683 (1967).
Thus, termination for convenience -- initially developed for war
contracts -- evolved into a principle for Government contracts of
far-ranging varieties, both civilian and military. See 48 C.F.R. §
49.502 (1995). The exigencies of war no longer limited the
Government's ability to terminate a contract for convenience.
Although wartime situations no longer limit use of the practice, the
Government's authority to invoke a termination for convenience has,
nonetheless, retained limits. A contracting officer may not
terminate for convenience in bad faith, for example, simply to
acquire a better bargain from another source. Torncello, 681 F.2d at
772. When tainted by bad faith or an abuse of contracting
discretion, a termination for convenience causes a contract breach.
See Allied Material & Equip. Co. v. United States, 215 Ct. Cl. 902,
905-06 (1977); National Factors, Inc. v. United States, 492 F.2d
1383, 1385 (Ct. Cl. 1974); Keco Indus., Inc. v. United States, 492
F.2d 1200, 1203-04 (Ct. Cl. 1974); John Reiner & Co. v. United
States, 325 F.2d 438, 442 (Ct. Cl. 1963), cert. denied, 377 U.S. 931
(1964).

The contractor's burden to prove the Government acted in bad faith,
however, is very weighty. Kalvar, 543 F.2d at 1301 ("Any analysis of
a question of Governmental bad faith must begin with the presumption
that public officials act 'conscientiously in the discharge of their
duties.'" (quoting Librach v. United States, 147 Ct. Cl. 605, 612
(1959))). Due to this heavy burden of proof, contractors have rarely
succeeded in demonstrating the Government's bad faith. See Cibinic &
Nash, at 1078; Kalvar, 543 F.2d at 1301; Librach, 147 Ct. Cl. at
612.

II.

In 1982, this court's predecessor articulated in dicta another test
for the sufficiency of convenience terminations. Torncello, 681 F.2d
at 758. In Torncello, the Navy awarded a requirements contract, but
then purchased some work covered by the contract from a competing
bidder at a lower price. Id. In an earlier case, Colonial Metals Co.
v. United States, 494 F.2d 1355 (Ct. Cl. 1974), the Court of Claims
had allowed a termination for convenience under these circumstances.
In Colonial Metals, the Navy terminated a contract for copper ingot
solely to obtain a better price. In fact, the Navy knew of the
better price at the time of contract award. The Court of Claims
permitted this termination because "such a motive [contracting for a
lower price elsewhere] is not improper." 494 F.2d at 1359.

Torncello offered the opportunity to revisit and overrule the
Colonial Metals case. Indeed Colonial Metals was inconsistent with
the Kalvar bad faith limit on terminations for convenience. Even
factoring in Kalvar's presumption of good faith actions by public
officials, 543 F.2d at 1301, the Navy in Colonial Metals contracted
in bad faith. At the time of award, the Navy knew of the better
price it later terminated the contract to obtain. In Torncello, the
Navy -- knowing it could acquire the same services at a lower price
from another contractor -- again contracted with Torncello and
Soledad Enterprises in an exclusive requirements contract. The Navy
then began satisfying its requirements from that cheaper source.
Torncello claimed the Navy breached the requirements contract. The
Armed Services Board of Contract Appeals found the contract
constructively terminated for the Government's convenience,
disallowing Torncello contract breach damages. This court's
predecessor overruled Colonial Metals because the Navy used the
termination for convenience clause to escape a promise it never had
an intention to keep. Torncello, 681 F.2d at 772. Indeed, then Chief
Judge Friedman concurred with that narrow understanding of the
court's action:

As I understand the court's opinion, the court holds only that when
the government enters into a requirements contract, knowing that it
can obtain an item the contract covers for less than the contract
price and intending to do so, there cannot be a constructive
termination for convenience of the government when the government
follows that course. On that basis, I join in the opinion.

Id. at 773;[1] see also Salsbury Indus. v. United States, 905 F.2d
1518, 1521 (Fed. Cir. 1990), cert. denied, 498 U.S. 1024 (1991)
(construing the Torncello holding).

Despite the adequate justification to overrule Colonial Metals under
the existing Kalvar test, a plurality of judges in Torncello
proceeded to articulate in dicta a broader test for gauging the
sufficiency of a convenience termination. The plurality stated that
the Navy could not invoke a convenience termination unless some
change in circumstances between the time of award of the contract
and the time of termination justified the action. Torncello, 681
F.2d at 772. As in this case, trial courts and boards have
occasionally vacillated between applying the long-standing Kalvar
test or the Torncello test.[2

III.

Recent enactments, however, have underscored rules of Government
contracting which render the plurality's dicta in ]Torncello
inapplicable to the present regime of contract administration.
Recent statutes fully address the concerns of the Torncello
plurality regarding the Government's shopping for lower prices after
contract award. The Competition in Contracting Act (CICA), Pub. L.
No. 98-369, 98 Stat. 1175 (codified as amended in scattered sections
of 10, 31 and 41 U.S.C.), compels the promulgation of regulations
and procedures to ensure full and open competition. See 41 U.S.C. §§
401, 405(a) and 416 (1994).

In 1984, CICA articulated significant factors addressing a
contracting officer's decision to terminate a contract for the
Government's convenience. CICA requires executive agencies, when
procuring property or services, to "obtain full and open competition
through use of competitive procedures." 41 U.S.C. § 253(a)(1)(A)
(1994). Thus, CICA ensures that contracting officers receive bids at
competitively low prices. For each solicitation, a contracting
officer must maintain full and open competition in the procurement
process, unless one of the limited exceptions applies. See 10 U.S.C.
§ 2304 (1994). CICA mandates impartial, fair, and equitable
treatment for each contractor. See 10 U.S.C. §§ 2304 and 2305
(1994).

This competitive fairness requirement, with its bid protest
remedies, restrains a contracting officer's contract administration.
If, for instance, a contracting officer discovers that the bid
specifications inadequately describe the contract work, regulations
promulgated under CICA may compel a new bid. See 10 U.S.C. § 2305;
48 C.F.R. § 1.602-2. Thus, to accommodate CICA's fairness
requirements, the contracting officer may need to terminate a
contract for the Government's convenience to further full and open
competition. 48 C.F.R. §§ 1.602-2(b); see 41 U.S.C. § 414 (1994).
Thus, to further its full competition objective, CICA permits a
lenient convenience termination standard.

Not every necessary alteration of the contract scope, however,
requires a new bid procedure. See 41 U.S.C. §§ 423(e)(1), 423(e)(2)
(1994) (providing procedures for certifications before a contract
modification or extension). Only "modifications outside the scope of
the original competed contract fall under the statutory competition
requirement." AT&T; Communications, Inc. v. Wiltel, Inc., 1 F.3d
1201, 1205 (Fed. Cir. 1993). CICA does not fully define a "standard
for determining when modification of an existing contract requires
new competition or falls within the scope of the original
competitive procurement." Id. This court, nonetheless, has stated
that a "cardinal change" is a drastic modification beyond the scope
of the contract:

Under established case law, a cardinal change is a breach. It occurs
when the government effects an alteration in the work so drastic
that it effectively requires the contractor to perform duties
materially different from those originally bargained for. By
definition, then a cardinal change is so profound that it is not
redressable under the contract, and thus renders the government in
breach.

Id. (citing Allied Materials & Equip. Co. v. United States, 569 F.2d
562, 563-64 (Ct. Cl. 1978)); see also Air-A-Plane Corp. v. United
States, 408 F.2d 1030, 1032-33 (Ct. Cl. 1969). In Wiltel, the
question was not whether the Government modifications breached a
contract, but was "whether Government modifications changed the
contract enough to circumvent the statutory requirement of
competition." 1 F.3d at 1205. In other words, the court inquired
whether the modification was within the scope of the competition for
the original contract. Id.

IV.

In the wake of CICA, with its protections for competition, this
court has revisited the dicta in the Torncello plurality opinion.
Salsbury, 905 F.2d at 1518. In Salsbury, a district court determined
that the Postal Service had wrongfully eliminated a bidder from the
procurement process which granted Salsbury Industries the contract.
Under the court order, the Postal Service suspended work on
Salsbury's contract and subsequently terminated the contract for
convenience. Recognizing the role of convenience terminations in the
CICA regime, this court stated that "[i]t is not the province of the
courts to decide de novo whether termination was the best course.
'In the absence of bad faith or clear abuse of discretion the
contracting officer's election to terminate is conclusive.'" Id. at
1521. (quoting John Reiner, 325 F.2d at 442). With this guidance,
this court applied the standards of Keco to test the arbitrariness
of the termination decision.[3

This court also directly addressed the applicability of the
]Torncello plurality opinion:

[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.

Id. Thus, this court rejected the reasoning of the Torncello
plurality.

Again, more recently, this court has confronted an invitation to
apply the reasoning and test of the Torncello plurality. Caldwell &
Santmyer, Inc. v. Glickman, 55 F.3d 1578 (Fed. Cir. 1995). In
Caldwell, the Department of Agriculture's Animal and Plant Health
Inspection Service (APHIS) solicited bids for the construction of
its Plant Germplasm Quarantine Laboratory in Beltsville, Maryland.
The solicitation's specifications included an ambiguous term.
Caldwell, 55 F.3d at 1580. The lowest bidder withdrew its bid when
it discovered the ambiguity about some costs APHIS expected the
contractor to bear. Caldwell received a routine preaward letter. Id.
At that point, APHIS discovered that Caldwell had also interpreted
the ambiguous specification differently from the Government. Because
the ambiguity impeded full and open competition, APHIS terminated
Caldwell's contract for the Government's convenience. Id. Without
corrective action, performance of the contract would prejudice the
other bidders. This court recited again the passage from Salsbury
that interpreted Torncello in consonance with the opinions of then
Chief Judge Friedman and Judges Davis and Nichols. Moreover, this
court underscored that assessment: "Salsbury teaches that bad faith
. . . is a prerequisite for a Torncello claim." Id. at 1582.

In sum, on two recent occasions after enactment of CICA, this court
has expressly repeated the narrow applicability of Torncello. Id. at
1582; Salsbury, 905 F.2d at 1521. Indeed this court's recent
pronouncements are fully consistent with the policy goals of CICA
and other Government procurement statutes. Under these policies,
contracting officers have no incentive to terminate a contract for
convenience except to maintain full and open competition under CICA.
With an adequate contractor in place, the contracting officer has no
interest to reprocure. Moreover, where an officer must choose
between modifying or terminating a contract, ease of administration
usually imparts a bias in favor of modification. Thus Salsbury and
Caldwell suggest that this court will avoid a finding of abused
discretion when the facts support a reasonable inference that the
contracting officer terminated for convenience in furtherance of
statutory requirements for full and open competition. V.

Turning now to this case, the termination for convenience clause of
the contract provided:

The Government may terminate performance of work under this contract
in whole or, from time to time, in part if the Contracting Officer
determines that a termination is in the Government's interest.

See 48 C.F.R. § 52.249-2 (1995). This contract language governs the
legal relations of the parties. Under the discretion conferred by
this contract language, Contracting Officer LTC Johnson decided to
terminate the contract with Krygoski because removing the
asbestos-containing vinyl tile would constitute a cardinal change
from the originally competed contract. The contracting officer felt
that a change increasing the total contract price between 25% and
33% warranted resolicitation. The trial court stated that LTC
Johnson cited "no authority for his definition of cardinal change."
Because the Government ultimately removed only 9,000 square feet of
tile, not 36,000 square feet, the trial court concluded that the
Corps arbitrarily and capriciously miscalculated the scope of
asbestos abatement. To the contrary, the contracting officer had a
reasonable basis for terminating the contract for the Government's
convenience. Asbestos removal was originally estimated to cost about
$40,000 out of an estimated $415,000 demolition contract. Thus
asbestos removal accounted for about 10% of the total cost of the
contract. At that point, the contracting officer's experts increased
the cost of asbestos removal by about $320,000. After this change,
the total asbestos removal cost was about $360,000 on a contract
near $775,000 -- just under 50% of the total contract. Asbestos
removal, originally about 10%, became about 50% of the contract
work.

Under these circumstances, the contracting officer had ample
justification for conducting a reprocurement competitively under
CICA. With this change in the scope of contract work, different
bidders, like asbestos removal firms, may have entered the
competition on the contract. See 48 C.F.R. §§ 14.203-1, 14.203-2
(1995) (enumerating the methods of soliciting bids where invitations
for bids or presolicitation notices are mailed to prospective
bidders or are displayed in public places, like trade journals).

In determining whether a modification falls within CICA's
competition requirement, this court in Wiltel examined whether the
contract as modified materially departs from the scope of the
original procurement. Wiltel, 1 F.3d at 1205. In this case, the
contracting officer, LTC Johnson, determined that the removal of the
asbestos-contaminated floor tile amounted to a cardinal change, a
modification outside the scope of the original competed contract.
The contract has no provision to increase the cost of the contract
under the VEQ Clause for removal of asbestos-contaminated floor
tile. In fact, if the removal of floor tile was within the scope of
the contract, Krygoski may have the obligation to remove the tile
without increasing the contract price. The contracting officer,
recognizing the equities of this situation, terminated the contract
for convenience to comply with CICA.

The trial court erred by invoking and relying upon the Torncello
plurality test. The trial court improperly found no change of
circumstances sufficient to justify terminating the contract for the
Government's convenience. Although arguably the Government's
circumstances had sufficiently changed to meet even the Torncello
plurality standard, this court declines to reach this issue because
Torncello applies only when the Government enters a contract with no
intention of fulfilling its promises. Salsbury, 905 F.2d at 1521.

LTC Johnson's decision to terminate is analogous to that made in
Caldwell. LTC Johnson terminated the contract to preserve full and
open competition. He decided to avoid any prospect of prejudice to
other bidders. Unlike the Torncello situation, this record shows no
evidence that the Corps intended from the outset to void its
promises. Thus, Torncello does not apply. Accordingly, this court
finds that LTC Johnson did not abuse his discretion, act arbitrarily
or capriciously or in bad faith in terminating the contract for the
Government's convenience.

This court reverses and remands for termination for convenience
damages which are to include costs of performance prior to
termination, profits on that performance and termination costs. No
anticipatory profits are to be awarded. Reversed and remanded to
calculate these costs.

COSTS

Each party shall bear its own costs.

REVERSED AND REMANDED