Jonathan Cain | It's not over until the government says so

Infotech & the law | Legal insights for today's market

Jonathan Cain

The termination of a contract to supply computer hardware and software for convenience does not terminate the contractor's duty to supply the warranty repair and software support that were required under the terminated contract. A federal appeals court delivered this opinion recently in the case of International Data Products Corp. v. United States.

The court reached this decision despite the government having terminated the contract completely and the contract lacking any wording that expressly required survival of the warranty and support obligations after termination.

The Air Force entered into a fixed-price contract for computer systems, warranty services, and software products and upgrades through which IDP was obligated to provide three to five years of warranty service and two years of software upgrades.

After purchasing about $35 million in products and services, the government sent the contractor a notice of termination for convenience stating that the contract was completely terminated. The contractor was directed to stop all work, terminate subcontracts and place no further orders for hardware and software.

After the termination, the government insisted that IDP continue to supply warranty services and software upgrades to systems that had been delivered under the contract. When the company refused, the government threatened debarment, so the contractor continued warranty and software maintenance and submitted a claim for the costs of doing so.

The U.S. Court of Federal Claims ruled that IDP was not required to provide the warranty and software upgrade services. However, the court also held that the company was not entitled to being paid for the services because no contract for the services existed once the original contract was terminated.

On appeal to the federal circuit, the court upheld the denial of IDP's claim for the costs of warranty service, but for a different reason. This time, the court said, the government's right to obtain warranty and software support services remained in effect, even after the complete termination of the contract, on the grounds that the government had already paid for warranty work and software updates when it originally bought the systems.

The court said the warranty and software maintenance obligations had been paid for and attached to the delivered systems. The obligation to deliver those services and updates did not end with the termination of every other aspect of the contract, despite the instruction to terminate all services and supplier subcontracts.

The holding illustrates one more disparity between commercial and government contract law. In commercial contract law, if a clause of a contract is intended to survive the termination of the balance of a contract, the contract will say so.

The Federal Acquisition Regulation contains no such clause. The only place that the FAR mentions continuing warranty obligations after termination is as a suggested condition to be attached to a termination settlement agreement. In this case, there was no such agreement, so there was no contract clause that continued the warranty obligation beyond the complete termination of the contract.

This decision leaves unanswered the question of what other duties may continue to be imposed on a contractor that is terminated by the government under the same theory that the federal court employed in this case. License rights to data or software and nondisclosure obligations are two aspects that come to mind. The lesson for the present is that warranted items have to be priced to cover the duty to fulfill the entire warranty term, regardless of whether the balance of the contract is terminated.

Jonathan Cain is a member of the law firm Mintz Levin in Washington. The opinions expressed in this article are his. He can be reached by e-mail at jtcain@mintz.com.

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