Termination for Default

Termination for Default is the exercise of a government's contractual right to terminate all or part of a contract because the contractor has actually failed, or is expected to fail, to perform its contractual obligations. It is a remedy for non-performance, and it sits on the contractor's record rather than being a neutral ending of the work.

The term is firmly established in U.S. federal acquisition rules, particularly FAR Part 49, Subpart 49.4, where it is used in fixed-price government contracts. It also appears directly in Canadian federal procurement documents, including a Public Services and Procurement Canada (PSPC) supply arrangement, and in NATO contracting terms through a closely related notice of default mechanism. Related terms include default clause, cure notice, show-cause notice, excusable delay and termination for convenience.

How the U.S. FAR defines termination for default

The FAR Part 49 definition describes a government right to terminate a contract completely or partially for the contractor's actual or anticipated failure to perform. Under the FAR default clause, termination may follow a failure to deliver supplies or perform services within the required time. It may also follow a failure to perform another contract provision, or a failure to make progress where that failure endangers contract performance.

The financial consequences are significant. Under a termination for default, the government is generally not liable for the contractor's costs on undelivered work and may seek repayment of applicable advance or progress payments.

The PSPC "Termination for Default" clause

PSPC's Solution-Based Supply Arrangement contains a clause expressly titled "Termination for Default." It allows Canada, by written notice, to terminate all or part of a contract in two situations:

• the contractor fails to perform a term of the contract; or
• the contractor becomes subject to specified bankruptcy, receivership, assignment or winding-up events.

Where the ground is a failure to perform, termination may take effect immediately or after a stated cure period, if the contractor does not remedy the default to the contracting authority's satisfaction. The clause appears in Canadian federal professional-services supply arrangements and the contracts that result from them. It is not limited to a particular commodity or defence program.

Notice and cure periods in NATO contracts

NATO contracting materials use a closely related mechanism. The Allied Command Transformation general terms and conditions provide for termination of all or part of a contract where a contractor fails to deliver or perform on time, fails to perform another contractual provision, or fails to make progress and does not cure the failure within the specified cure period.

For certain failures that can be cured, the terms require written notice of default and a stated cure period before termination. That period is normally ten days unless another period is identified. Suppliers pursuing NATO work should read the notice and cure provisions of each solicitation closely.

Excusable failures and conversion to termination for convenience

A termination for default is not always final. Under FAR 49.401, it may generally be converted to a termination for convenience if the contractor establishes, or the government determines, that the failure was excusable. A failure is excusable when it resulted from causes beyond the contractor's control and without its fault or negligence. That conversion matters because it changes how the ending is treated and what the contractor can recover.

What it means for a supplier bidding on Canadian public contracts

Canadian suppliers meet this clause in federal professional-services arrangements and when pursuing U.S. work. The Canadian Trade Commissioner Service explains that a termination-for-default clause may be invoked for failure to perform or for violating another contract term or condition.

The practical steps follow directly from the clause wording:

• Perform deliveries, services, progress obligations and other requirements within the specified terms.
• Respond to any written default or cure notice.
• Correct the default within the stated cure period where one is provided.
• Keep records that support any claim that a failure was excusable or outside your control.

Bid teams should also read the insolvency triggers in the PSPC clause, since termination can follow those events even when performance has been on schedule.