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Board's Interpretation of Non-Substitution Clause Was Faulty

The Court of Appeals for the Federal Circuit reversed an Armed Services Board of Contract Appeals decision holding the government breached an information technology contract's non-substitution clause because, under a proper interpretation of the contract, the government did not replace leased software after terminating the contract for convenience. The dispute arose from a blanket purchase agreement under which the government issued a delivery order to lease software. The government subsequently terminated the delivery order for convenience, which triggered the order's non-substitution clause and obligated the government not to replace the software with functionally similar products for one year after the termination. Although the government had not deployed the software, the ASBCA found the government's continued use of preexisting applications that were functionally similar to the leased software and an upgrade of two applications to enable web access constituted a replacement of the software during the non-substitution period (09-1 BCA 34,067).

No Replacement

The Federal Circuit, however, found it unreasonable to interpret the non-substitution clause as prohibiting continued use of preexisting, unmodified software. The definition of "replace" requires substitution of one thing by another and "at the very least some action by the government following the termination of the contract." The government took no action with regard to all but two of the preexisting applications and did not replace them. The Federal Circuit also concluded the upgrade to two applications was not substantial enough to be considered a replacement of the entire software suite. The upgrade occurred before the termination and, by merely changing the applications from being desktop to web-based, did not affect the software's core functionality. By simply continuing to use preexisting software, the government did not engage in the conduct the non-substitution clause was intended to prevent --cancelling the contract to substitute a functionally equivalent and more advantageous product. Moreover, the government was justified in terminating the contract for convenience for lack of an adequate hardware platform even if it had prior knowledge deployment of the leased software might not be successful. (McHugh v. DLT Solutions, Inc., CA-FC, 54 CCF 79,428)




(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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