There is no doubt that the government has the right, and even the responsibility, to terminate a contract completely or partially for default “if the contractor fails to (a) make delivery of the supplies or perform the services within the time specified in the contract, (b) perform any other provision of the contract, or (c) make progress and that failure endangers performance of the contract.” FAR 49.402-1 and 52.249-8. The issue that frequently arises, however, is what should the government do if claims have been submitted that, if successful, would extend the contract completion date and thereby render a termination for default inappropriate? All too often Contracting Officers employ a termination for default as a weapon, or as a pre-emptive measure, to force a contractor into a position where it will offer to waive its claims in return for a rescission of the default termination.
The Court of Appeals for the Federal Circuit has held that a termination for default is “a drastic sanction, which should be imposed (or sustained) only for good grounds and on solid evidence.” Under the law, the Government bears the burden of proof to show that the contractor was in default at the time of termination and, if the government meets that burden, then the contractor must show that its default was excusable. A contractor can demonstrate that the default was excusable “by showing that improper government actions were the primary or controlling cause of the default.” If the court finds that the default was excusable, the termination for default is converted into a termination for convenience.
Unfortunately, it can take considerable time and effort to challenge a termination for default before a board of contract appeals or court, and the contractor suffers the consequences of the termination in the interim. Those “consequences” may include loss of bonding, poor past performance evaluations on upcoming solicitations, and the resulting inability to sustain the company. It is therefore incumbent upon the government to use its immense power wisely, and not as a means to “take the offensive” in order to defend itself against legitimate contractor claims. Contractors, however, must recognize that they are operating at a tactical disadvantage when a termination for default occurs and they should do everything possible to adequately address any issues raised in a show cause or cure notice. Most of the time, a termination for default is not in the interest of either the government or the contractor.
Michael H. Payne is the Chairman of the firm’s Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.