(Editor’s Note.  Sometimes we are asked whether a firm is entitled to stop work under certain circumstances. Though the Changes clause generally precludes such extreme action, the following provides a good example of when it is justified.)

Under its postal service contract, KI was obligated to deliver mail to 250 residential mailboxes in Yellville, Ark. Under the changes clause of the contract USPS was permitted to make “minor service changes” – defined as increases not exceeding $2,500. USPS made a unilateral addition of 52 mailboxes and said KI’s pay would be increased by $1,088 where KI said it was not enough and USPS eventually agreed to increase it by an additional $1,603 bringing the total value of the change to $2,691. Whereas USPS considered the changes to be “insignificant minor service changes” that could be made unilaterally KI disagreed and refused to provide the additional changes.  USPS eventually procured the services elsewhere and deducted the costs from payments otherwise due to KI after which KI ceased all performance and USPS terminated the contract for default.

KI filed suit challenging the default termination and seeking breach damages including payments for the remainder of the contract and litigation costs while USPS contended that under the Changes clause KI was required to perform in response to any and all service changes ordered by the CO.  The Court sided with KI stating though a government contractor’s duty to proceed is broad, it is not absolute. An exception to the duty exists for “cardinal changes” – situations in which “the government has attempted to effect a change which fundamentally alters the parties’ contractual undertaking.” The court stated nothing prevented USPS from ordering KI to deliver mail to the 52 boxes temporarily and then negotiating and agreeing upon a permanent change to secure the work but the CO was not entitled to order KI to perform more than $2,500 in additional work on a permanent basis without first securing the contractor’s consent.  Unilaterally increasing the contract work by more than $2,500 represented a material breach of the contract that justified KI’s refusal to perform both the original and additional work (Keeter Trading Co. Inc. v US, Fed. Cl. No 05-243).

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