PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

HANCOCK ELECTRONICS CORPORATION,
Plaintiff-Appellant,

v.
                                                                   No. 95-2159
WASHINGTON METROPOLITAN AREA
TRANSIT AUTHORITY,
Defendant-Appellee.

HANCOCK ELECTRONICS CORPORATION,
Plaintiff-Appellant,

v.
                                                                   No. 95-2920
WASHINGTON METROPOLITAN AREA
TRANSIT AUTHORITY,
Defendant-Appellee.

Appeals from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Claude M. Hilton and Leonie M. Brinkema, District Judges.
(CA-95-626-A)

Argued: December 7, 1995

Decided: April 16, 1996

Before WILKINSON, Chief Judge, and RUSSELL and
NIEMEYER, Circuit Judges.

_________________________________________________________________

Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Chief Judge Wilkinson and Judge Russell joined.

_________________________________________________________________
COUNSEL

ARGUED: Thomas Blaisdell Smith, ROPES & GRAY, Washington,
D.C., for Appellant. Joseph John Zimmerman, Assistant General
Counsel, WASHINGTON METROPOLITAN AREA TRANSIT
AUTHORITY, Washington, D.C., for Appellee. ON BRIEF:
Brian S. Chilton, ROPES & GRAY, Washington, D.C.; Steven A.
Kaufman, E. David Pemstein, ROPES & GRAY, Boston, Massachu-
setts, for Appellant. Robert L. Polk, General Counsel, Carol B.
O'Keeffe, Principal Deputy General Counsel, WASHINGTON MET-
ROPOLITAN AREA TRANSIT AUTHORITY, Washington, D.C.,
for Appellee.

_________________________________________________________________

OPINION

NIEMEYER, Circuit Judge:

Hancock Electronics Corporation, a Massachusetts company, filed
suit in May 1995 against Washington Metropolitan Area Transit
Authority (WMATA) for damages resulting from an alleged breach
of contract. The district court dismissed the action without prejudice
on the ground that Hancock had failed to exhaust its contractually
prescribed administrative remedies. We affirm.

I

WMATA, a quasi-governmental agency created by an interstate
compact and approved by Congress to provide a rapid transit system
for the Washington, D.C., metropolitan area, awarded Hancock a con-
tract in spring 1994 to provide replacement braking systems for
approximately 300 rail cars. The contract obligated Hancock to
design, manufacture, and install the braking systems, which contain
both mechanical and electronic components. The contract also
required Hancock to demonstrate its contract performance to
WMATA through testing and to provide WMATA with certain tech-
nical data about the systems.

WMATA contends that it does not possess the equipment or exper-
tise to monitor testing of the systems' software and, consequently,

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that it was required to subcontract that function to a third party.
Shortly before the scheduled testing of the brake systems in April
1995, WMATA wrote to Hancock, "You are kindly reminded that
Hancock Electronics can not [sic] start qualification testing unless the
technical documentation requested in the Reference is received and
reviewed." Less than a week later, WMATA again advised Hancock
that qualification testing "will not be permitted" until Hancock sub-
mits "all technical data including software to WMATA." WMATA
also demanded Hancock's permission to provide the technical data to
a third party to determine "whether the data is sufficient and complete
for a Failure Modes and Effects Analysis." At WMATA's request, the
third party agreed to enter into a lifetime nondisclosure agreement
with Hancock to protect Hancock's proprietary information, and
WMATA's contracting officer averred in his affidavit that Hancock
had consented, during a telephone conversation on April 7, 1995, "to
disclose the technical data and software documentation to [the third
party] provided that [the third party] entered into a lifetime nondisclo-
sure agreement."

Hancock, however, responded that its technical data and software
are proprietary and that its contract with WMATA does not provide
for their disclosure either to WMATA or to a third party. It further
claimed that WMATA's insistence that the data and software be pro-
vided before Hancock conducted contractually required qualification
testing constituted a breach of their contract. On May 11, 1995, Han-
cock notified WMATA by letter that WMATA's breach prevented
and excused Hancock's further performance of the contract and,
therefore, that Hancock was treating the contract as terminated. That
same day, Hancock filed suit against WMATA in the district court for
breach of contract, demanding more than $2 million in damages.

WMATA thereafter informed Hancock that WMATA was termi-
nating the contract pursuant to the contract's Default Clause, contend-
ing that Hancock's May 11 letter, its lawsuit, its cancellation of a
subcontract, and its "failure to deliver the technical data as of June 15,
1995 . . . constitute a repudiation and abandonment of all work under
the contract." WMATA's contracting officer stated that his decision
was a "Final Decision . . . appealable under the Disputes Clause of
the contract." WMATA also filed a motion to dismiss Hancock's

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complaint on the ground that Hancock had not exhausted its contrac-
tually prescribed administrative remedies.

Following a hearing, the district court granted WMATA's motion
to dismiss Hancock's complaint without prejudice. The court con-
cluded that even if WMATA had breached the contract, the contract's
"termination for convenience" provision limited WMATA's liability
and required Hancock to avail itself of the specified administrative
procedures. This appeal followed.

II

The contract between the parties in this case is a standard govern-
ment contract containing a Disputes Clause, a Default Clause, and a
Termination for Convenience Clause. The Disputes Clause states that
"[e]xcept as otherwise provided . . . any dispute concerning a question
of fact arising under this Contract which is not disposed of by agree-
ment shall be decided by the Contracting Officer." The Clause gives
Hancock the right to appeal to WMATA's Board of Directors or its
authorized representative, which in this case is the Army Corps of
Engineers Board of Contract Appeals. Ultimately, decisions resolving
factual disputes under the contract are reviewable by the courts under
a deferential standard.

The Default Clause permits WMATA to declare the contractor in
default and sets forth the procedures that the parties must follow when
a default has been declared. If the parties are unable to agree on a res-
olution, the Clause provides that their disagreement shall constitute "a
dispute concerning a question of fact within the meaning of the DIS-
PUTES article of this Contract."

Finally, the Termination for Convenience Clause confers upon
WMATA the option of terminating the contract "whenever the Con-
tracting Officer shall determine that such termination is in the best
interest of [WMATA]." The Clause provides for a quantum meruit
adjustment for performance already rendered by the contractor.
Again, any disputes about the parties' disengagement under the Ter-
mination for Convenience Clause are to be resolved according to the
Disputes Clause.

                     4
Under settled law, whether WMATA breaches or wrongfully ter-
minates a contract, the event is treated as a constructive termination
under the Termination for Convenience Clause. See, e.g., General
Builders Supply Co. v. United States, 409 F.2d 246, 249 (Ct. Cl.
1969). The law thus recognizes that, in entering into a contract, the
government limits its potential liability to the value of the perfor-
mance rendered at the time it terminates the contract for convenience.
The combination of Termination for Convenience, Default, and Dis-
pute Clauses in Hancock's contract with WMATA provides in
essence that upon WMATA's default, Hancock is entitled to its quan-
tum meruit performance under the contract but not its anticipated
profits. See generally Ralph C. Nash, Jr. & John Cibinic, Jr., Federal
Procurement Law 1104, 1124 (3d ed. 1980). The principle is unique
to government contracts and well understood by parties entering into
such contracts.

III

Hancock does not take issue with these generally established tenets
of government contract law. Rather, it seeks to invoke an exception
that applies when a government agency effects a cardinal change to
a government contract, thereby nullifying the contract and denying
the government agency the privilege of relying on any of the con-
tract's dispute resolution provisions. A cardinal change occurs--and
subjects the government to a suit for damages in court--when the
government demands a contractual alteration "so drastic that it effec-
tively requires the contractor to perform duties materially different
from those originally bargained for." Allied Materials & Equip. Co.
v. United States, 569 F.2d 562, 563-64 (Ct. Cl. 1978) (per curiam).

In this case, WMATA's demands, even if not covered by the con-
tract, did not effect a cardinal change to the contract so as to nullify
the contract's dispute resolution mechanisms. The electronic aspects
of Hancock's replacement brakes had to be tested, and WMATA was
entitled under the contract to determine whether they qualified.
Because the brakes contained, as one of their specified components,
a complex electronic system, WMATA insisted that it needed the
electronic software to understand whether its tests qualified the
brakes. Whether or not the contract requires Hancock to release its
proprietary software, Hancock had already created the software in the

                    5
course of performing the contract and acknowledged, as the tests were
about to begin, that it had the software with it. Hancock simply would
not permit WMATA to use the software, particularly when that use
would involve a third party's assistance.

Thus, the entire dispute between WMATA and Hancock reduces to
whether Hancock was required to turn over work it had already com-
pleted. No one claims that Hancock had to perform extra work or
develop new information to comply with WMATA's request. While
the contract explicitly provides for the production of certain technical
data, whether software and design data fall within that requirement is
not clear. What is clear, however, is that WMATA's demand did not
amount to a cardinal change to the contract. This dispute is typical
of those intended to be resolved through the administrative process
that the parties consented to by contract.

Accordingly, we affirm the district court's dismissal of Hancock's
complaint without prejudice. In so doing, we express no view on the
merits of the parties' underlying dispute. Our decision renders moot
Hancock's appeal from the district court's denial of its motion for a
preliminary injunction.

AFFIRMED

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