Contract for default (Termination for Default)

"Contract for default" is not the formal term used in government procurement rules. The established term is termination for default. It means the government uses its contractual right to end all or part of a contract because the contractor has actually failed, or is expected to fail, to perform its obligations. The U.S. Federal Acquisition Regulation describes the concept in exactly these terms.

In Canadian federal contracting, Canada may terminate a contract when the contractor is in default of an obligation, subject to any notice or cure period set out in the contract. The right sits in the termination and default clauses of the contract itself, so the precise conditions depend on the contract conditions that apply to your work. Related expressions include default by the contractor, default clause and cure period, which is the time allowed to correct a failure before termination takes effect.

How termination for default works in federal contract conditions

Government of Canada contract conditions provide that if a contractor is in default of its obligations, the Contracting Authority may terminate the contract or part of it by written notice. Federal services contract conditions allow the termination to take effect immediately or after a specified cure period. A cure period may be stated in the notice itself.

Termination can cover the whole contract or only a portion of it. That matters for suppliers with multi-part work, because a default on one deliverable can put that part of the contract at risk without ending the rest.

Grounds for default recognized by PSPC

The archived PSPC Supply Manual states that Canada may terminate all or part of a contract for default if the contractor:

• fails to make progress;
• fails to perform a contract provision; or
• fails to deliver goods or perform services within the specified time.

The same manual says the decision to terminate for default should be made only after other possible solutions have been explored, and that advice from Legal Services should be obtained early. Termination is treated as a considered step, not a first response to a problem.

Other PSPC instruments name further grounds. Terms for the professional audit-support services supply arrangement allow termination for default if the contractor fails to perform a contract term or becomes bankrupt or insolvent. The temporary-help supply arrangement allows Canada to terminate for default when required corrective measures are not met. PSPC's Ineligibility and Suspension Policy clauses state that Canada may terminate a contract for default if, after award, it determines that the offeror provided a false or misleading certification or declaration.

Financial consequences for the contractor

Default termination carries cost exposure. Under the federal professional services long-form contract, the contractor has no claim for further payment after termination for default, except as provided in the contract, and is liable for Canada's losses and damages. The contract expressly includes the increased costs Canada incurs in procuring the work from another source. The short-form professional services contract also provides for termination for default and contractor liability for losses.

The audit-support supply arrangement terms add that the contractor must repay certain amounts and cover resulting losses and increased procurement costs.

What it means for a supplier bidding on Canadian public contracts

Read the termination and default clauses before you bid, and note whether the contract states a cure period. Once awarded, meet every delivery and performance requirement, and track progress against the schedule, since failure to make progress is itself a ground for default. If you receive a notice of default, respond promptly and correct the specified failure within the cure period.

Make sure every certification and declaration in your bid is accurate. A false or misleading one can lead to termination for default after award. Price your bids with the cost exposure in mind: a default can leave you without further payment and liable for the added cost of getting the work done elsewhere.