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An underlying and somewhat misguided theme in a number of recent media reports includes such bush lawyering as: Terminating the Super Hornet contract would somehow be a ‘breach of contract’ etc... An underlying and somewhat misguided theme in a number of recent media reports includes such bush lawyering as:

1. Terminating the Super Hornet contract would somehow be a ‘breach of contract’; and,

2. Such an act would somehow cost enormous amounts of money in terms of penalties the Commonwealth would have to pay to the Contractor.

Clearly none of those making such pronouncements have any business experience let alone experience in doing business with the Commonwealth of Australia (or any other sovereign state of note, for that matter).

Firstly, all major Defence contracts are required, in keeping with the Commonwealth Procurement Guidelines (CPG) under the FMA Act, to have a clause known as the “Termination for the Convenience of the Commonwealth” clause. Even a cursory look through the history of Defence contracting and the resulting contracting templates shows this practice to be the mandated norm. As to what effects the formation of the DMO prescribed agency and its ‘now-on-extended-gardening-leave’ General Counsel's attempts to 'revamp’ these contracting templates have had are yet to be seen.

Similar type clauses are used in US DoD contracts, as stipulated in the US Federal Acquisition Regulations (FARs).

Understandably and rightly, the purpose of such clauses is for protecting the interests of the people (a.k.a. the Nation) when mistakes have been made by those charged with the responsibility of protecting the interests of the people or when circumstances have changed, requiring termination of a contract ‘in the national interest’.

No better example could be found for enacting such a clause than the Super Hornet contract if, for no other reason, than that of executive necessity to act in the national interest.

This is a non-prejudicial clause and, when invoked, is intended to return the parties, as best as practicable, to the position they were at prior to the contract being signed or a position negotiated ‘in good faith’ that is in keeping with this intention.

Therefore, enacting this clause has two principal effects in terms of the contract. Firstly, it crystallises the costs expended by the Contractor up to the time the clause is invoked. Such costs are to be fully auditable and substantiated as foregone costs with the Contractor required to minimise any further costs that may need to be expended to terminate the Contract. Secondly, a negotiation is initiated on the overall costs the Contractor may be required to expend to terminate the Contract. This is a negotiated settlement which, as is the norm, does not include any future, indirect, contingent or consequential costs such as ‘loss of profit’.

Secondly, given where Boeing St Louis is in relation to their provision of Super Hornets to Australia, the actual costs incurred to date would not be very high and a large portion of these would be readily recoverable via re-allocation of the resulting assets back into the production line for the US Navy. Therefore, such costs would not be a burden Australia should be required to carry under this clause unless, of course, it chooses to acquire some of these assets for use on other platforms; for example, the APG-79 Radars, EW/ESM systems and weapons.

What would be interesting is if this particular clause had been excised from its mandatory status in the standard Defence contracting boilerplate or somehow changed to make it unenforceable without, say, severe penalties on the Commonwealth.

If this latter scenario proves to be the case, then the Attorney General and the Auditor General will likely have some questions of an interrogative nature to ask and actions to take, particularly in relation to the validity/legality of the Contract, itself, and whether any malfeasance or other defective actions have contributed to the situation.

This, in turn, would likely result in greater scrutiny by these and other Government agencies into the representations and claims that led to the Contract in the first place.

In any such happenstance, it would be wise for all concerned, particularly the Contractor, to seek a negotiated settlement. To do otherwise would likely bring the resulting stoush into stark relief with the precedent Darleen Druyun / USAF Tanker Affair.



Peter Goon

Head of Test and Evaluation
Co-Founder
Air Power Australia


Dr Carlo Kopp, MIEEE, SMAIAA, PEng
Defence Analyst and Consulting Engineer
Editor: Air Power Australia @ http://www.ausairpower.net