Federal Contract Law: A lesson in default terminations

Joseph J. Petrillo

You may remember the Navy's ill-fated A-12 program. After the Air Force had successfully developed stealth aircraft, the Navy tried to develop its own carrier-based stealthy strike planes.

A billion or so dollars later, the Navy's program was late and over budget. This was not an uncommon situation for a new weapon system, but the Navy needed help from on high to keep the program going. When the secretary of Defense, then Richard Cheney, withdrew support, the game was over.

The Navy terminated the A-12 contract, for 'default,' instead of for 'convenience.' The difference between those two little words was a staggering sum of money. Rather than recover almost $4 billion in unpaid costs, the contractors would have to repay over a billion dollars in progress payments. Predictably, litigation ensued.

The A-12 mess has been in court now for a dozen years. During that time, all attempts to settle the dispute through alternative dispute resolution (ADR) have failed, including one led by a former cabinet official. There are also 12 judicial opinions in the case so far, and more to come.

The Mar. 17 ruling in the case of McDonnell Douglas Corp. & General Dynamics Corp. vs. U.S. by the Court of Appeals for the Federal Circuit elucidates the law of default terminations. The A-12 contractors had been terminated for failure to 'prosecute the work so as to endanger performance of the contract.' But how much would the government have to show to justify its termination?

The appellate court disagreed with the contractors. The contractors argued that the standard was absolute impossibility of completion, or else a total abandonment by the contractor.

But the court also declined the government's suggestion that it was enough if the contractor expressed concern about meeting progress milestones or specifications. Instead, the court held that the contracting officer had to have a reasonable belief that the contractor wouldn't perform the entire contract on time.

This wasn't an exercise in mind-reading. Whether the belief was reasonable depended on tangible, direct evidence, an objective test. And that evidence had to be available at the time of the termination; neither party could point to later events.

So, the facts rule here. The court's list of potential factors included the percentage of completion and remaining time, failure to meet progress milestones, problems with subcontractors, financial woes and performance history.

Since there wasn't enough detail in the record, the appellate court sent the case back to the trial court for more fact-finding. This will be a major effort; the parties don't even agree about what constitutes contract completion. Was it delivery of the first aircraft, or all eight prototypes, or the first production lot (which the Navy had exercised)?

The court's focus on information available to and considered by the contracting officer is particularly interesting. Ordinarily, the government can defend a default termination by asserting any sufficient cause, even if it was unknown when the termination occurred. Here, the court makes the contracting officer's decision stand or fall on the facts that he or she considered.

At this point, the A-12 program is a threefold failure. ADR hasn't been able to find a solution to the dispute. Twelve years of litigation haven't produced a final result. And the Navy still doesn't have a stealth attack plane to launch from its carriers.

Joseph J. Petrillo is a lawyer with the Washington law firm of Petrillo & Powell. E-mail him at jp@petrillopowell.com.

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