"A [TFC] clause is generally understood to be a risk-allocating tool, intended to permit a government to 'terminate a contract, even in the absence of fault or breach by the other party, without incurring the usual financial consequences of breach.' " Mb Oil Ltd., Co. v. City of Albuquerque, 382 P.3d 975, 976 (N.M. Ct. App. 2016) (quoting Mark Dunning Indus. v. Cheney, 934 F.2d 266, 267 n.1 (11th Cir. 1991) (per curiam)). "The Government's right to terminate a contract for convenience is broad.
"A [TFC] clause is generally understood to be a risk-allocating tool, intended to permit a government to ‘terminate a contract, even in the absence of fault or breach by the other party, without incurring the usual financial consequences of breach.’ " Mb Oil Ltd., Co. v. City of Albuquerque , 382 P.3d 975, 976 (N.M. Ct. App. 2016) (quoting Mark Dunning Indus. v. Cheney , 934 F.2d 266, 267 n.1 (11th Cir. 1991) (per curiam)). TFC clauses are rooted in Civil War-era procurement contracts.
Although a TFC clause generally empowers a party to terminate a contract without cause, New Mexico law recognizes that TFC clauses render the host contract illusory if read literally. Mb Oil Ltd., Co. v. City of Albuquerque, 382 P.3d 975, 979 (N.M. Ct. App. 2016) (citing Torncello v. United States, 681 F.2d 756, 769 (Ct. Cl. 1982)). To prevent illusory government contracts, New Mexico courts apply the approach of the Federal Circuit: if a government party exercises a TFC clause as an abuse of discretion or in bad faith, it breaches the government contract.
A public entity's power unilaterally to walk away from a contract, without restrictions, therefore would render the contract illusory. See Mb Oil Ltd. Co. v. Albuquerque, 382 P.3d 975, 978 (N.M. Ct. App. 2016) (government's unlimited right to terminate could render contract illusory). That is a situation, however, not confronting us in the contract at issue here.