The government has the right to terminate a contract under the default clause for the contractor’s unexcused failure to meet its performance obligations. In making the default termination decision, it is the responsibility of the contracting officer (CO) to exercise sound business judgment while generally considering the seven factors listed in Federal Acquisition Regulation (FAR) 49.402-3(f), including the totality of the circumstances. Once default is established, the burden shifts to the contractor to prove that its failure to meet contractual obligations was excusable. Although in the vast majority of cases the government’s decision to terminate for default is considered proper if the government has a right to terminate and the appropriate termination procedures are followed, there may be instances where the government’s motive to terminate may be implicated, such as when agency actions surrounding the termination amount to bad faith in the administration of the contract. In such cases, the contractor must present evidence that the government had some specific intent to injure it to overcome the presumption that government officials act in good faith. Such evidence showing a specific intent to injure the contractor satisfies the well-nigh irrefragable proof standard that must be met to show the government’s bad faith. This standard is considered higher than the legal standard necessary to prove arbitrary and capricious decisions of the government. Thus, if the contractor can establish that the government had some specific intent to injure it, the termination decision, if tainted by bad faith, may be considered arbitrary and capricious and the default termination may be converted into one for the government’s convenience.
In Libertatia Assocs., Inc. v. United States, 46 Fed. Cl. 702 (2000), the Court of Federal Claims (COFC) converted a default into a convenience termination, upon holding that the government acted with a specific intent to injure the contractor in administering the contract. The Army issued the underlying fixed-price contract for grounds maintenance at Fort Rucker in Alabama. Following performance issues noted on several of the orders issued under the requirements-type contract, the CO terminated the contract per its standard default clause at FAR 52.249-8. The contracting officer’s representative (COR) had the primary responsibility for evaluating the contractor’s performance and prepared the vast majority of inspection reports, which formed the basis of the CO’s termination decision. In the COFC suit that followed, the contractor presented evidence from several credible witnesses that the COR harbored personal animosity toward the contractor. According to the testimonies, the COR expressed his dislike for the contractor’s President almost daily and called him a vulgar epithet. Similarly, there were reports that at a meeting with the contractor’s President, the COR stated that he would break them. The COR also used intimidation and coercion in administering the contract, admitting during his testimony that he told many of the contractor’s employees that they should think of him as Jesus Christ and the CO as God. Testimonies also established that, several months before the contract termination, the COR repeatedly stated that the contractor would lose the contract.
The testimonies further established that the COR often boasted of deriving personal financial benefits from ordering the contractor’s employees to work overtime on the contract. Several witnesses testified that the COR boasted to other government employees in common areas about how he was working 80-100 hours of overtime a week and, as a result, was making GS-12 pay despite being a GS-6. The COR also said that the overtime would pay for his house and that he would make the contractor work a lot because he wanted to work overtime. The contractor presented additional evidence to support its position that the COR engaged in overzealous inspections, resulting in delays and increased performance costs. Testimonies also established that the COR later expressed pleasure in terminating the contractor for default. In light of the testimonies and facts presented, the Court determined that the COR expressed ill will and an intent to injure the contractor and thus acted in bad faith in administering the contract. The Court noted that it was this ill will and specific intent to injure that distinguished this case from past precedent cited by the government, in which default termination was upheld when an inspector, although acknowledged as biased against the contractor, merely insisted on strict compliance with contractual requirements. The COFC was also unpersuaded by the government’s arguments that the CO acted independently of the COR, noting several testimonies regarding the close relationship between the COR and the CO. Ultimately, the COFC held that the COR’s bad faith as imputed to the government resulted in an improper termination for default, and converted it into a termination for convenience.
Since termination for default is a drastic sanction, the CO must exercise sound business judgment in making the decision. Once default is established, it is the contractor’s burden to prove the excusability of its failure to perform. If the contractor presents clear and convincing evidence of the government’s bad faith, the government’s motive in the termination decision may be questioned. To meet the relevant well-nigh irrefragable proof standard to overcome the presumption that government employees act in good faith, the contractor must present evidence of a specific intent to injure the contractor or an animus toward it. In this regard, when multiple individuals, such as the CO, COR, and inspectors, act for the government, the adjudicative forum may look to the aggregate of all the government agents’ actions, as if all were performed by one individual, and determine whether that aggregate falls below the standard of good faith. If so, the government is held to have violated its duty of good faith implied in the contract. Thus, it is the government’s responsibility to ensure that the aggregate actions of individuals acting on its behalf meet the relevant good-faith standard. In the context of a default termination, if the government’s bad faith actions impact the contractor’s performance or otherwise lead to an abuse of discretion in the government’s termination decision, the default termination may be considered improper, potentially granting the contractor relief through a conversion into a termination for the government’s convenience.
This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.