Default Termination
Attorneys - Federal Government Contracts - Default Terminations
Federal Acquisition Regulation 49.401 - Termination for Default
(a) Termination for default is generally the exercise of the Government’s contractual right to completely or partially terminate a contract because of the contractor’s actual or anticipated failure to perform its contractual obligations.
(b) If the contractor can establish, or it is otherwise determined that the contractor was not in default or that the failure to perform is excusable; i.e., arose out of causes beyond the control and without the fault or negligence of the contractor, the default clauses prescribed in 49.503 and located at 52.249 provide that a termination for default will be considered to have been a termination for the convenience of the Government, and the rights and obligations of the parties governed accordingly.
(c) The Government may, in appropriate cases, exercise termination or cancellation rights in addition to those in the contract clauses (see for example, paragraph (h) of the Default clause at 52.249-8).
(d) For default terminations of orders under Federal Supply Schedule contracts, see Subpart 8.4.
(e) Notwithstanding the provisions of this 49.401, the contracting officer may, with the written consent of the contractor, reinstate the terminated contract by amending the notice of termination, after a written determination is made that the supplies or services are still required and reinstatement is advantageous to the Government.
Case Law - Termination for Default is a "Drastic Sanction"
A default termination is a "drastic sanction" to be imposed only on "good grounds and on solid evidence." J.D. Hedin Construction Co. v. United States, 408 F.2d 424, 431, 187 Ct. Cl. 45 (Ct. Cl. 1969) Our lawyers have successfully defended contractors against improper terminations for default. Since a termination for default negatively impacts a contractor’s past performance record, and may result in liability to the Government for excess reprocurement costs, the terminated contractor must document all mitigating factors and excusable delays.
Show Cause or Cure Notice Requirement
The Contracting Officer will issue a Show Cause Notice before terminating for default. This is the contractor's opportunity to raise all the reasons why the Government cannot terminate for default. Lawyers at our office can assist you in responding to a Show Cause Notice on why the Government should not terminate for default. Put the Government to the test by asking whether the Contracting Officer considered all the FAR factors when terminating for default.
In Brent Packer and Myrna Palasi v. Social Security Administration, CBCA 5038, 5039 (February 22, 2016), the Civilian Board of Contract appeals held that the termination was improper because the Government failed to issue a cure notice first.
Default Termination - Factors to Consider Before Terminating
The Contracting Officer must consider the factors noted at FAR 49.402-3(f) before terminating a contract for default. In particular, the Contracting Officer must fairly consider the following factors in determining whether to terminate for default:
- The terms of the contract and applicable laws and regulations;
- The specific failure of the contractor and the excuses for the failure;
- The availability of the supplies or services from other sources;
- The urgency of the need for the services and the time period to obtain them from other sources, as compared to the time the delinquent contractor can complete the work;
- The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments;
- The degree of essentiality of the contractor in the Government acquisition program; and
- Any other pertinent facts and circumstances.
(FAR 49.402-3(f))
Consideration of the above factors may not be a “pro forma check off of [the FAR] factors,” but is instead “an active and reasoned consideration of available and sometimes contradictory information.” Appeal of Fraya S.E., 02-2 BCA ¶52,222. Courts and boards have ruled it an abuse of discretion where a contracting officer default terminates a contract without considering the above FAR factors. Appeal of Walsky Construction Co., ASBCA No. 41,541, 94-2 BCA ¶ 26,698. See also, e.g., Appeal of ABS Baumaschinenvertrieb, Gmbh, ASBCA No. 48,207, 00-2 BCA ¶31,090 (contracting officer’s default determination fatally flawed because there was no evidence that she consider all of the factors); Rowe Inc. v. GSA, GSBCA No. 14,211, 01-2 BCA ¶31,630 (contracting officer must actually consider all FAR factors prior to termination for default).
Government Waiver of Right to Terminate for Default
The Government can waive its right to terminate for default, if (i) the Government failed to terminate within a reasonable time after the default under circumstances indicating forbearance and (2) the contractor relied on the failure to terminate and continued performance by it under the contract with the Government's knowledge and implied or express consent. State Corps. v. United States, United States Court of Federal Claims (February 15, 2019) In the case just cited, the court found that the government did not waive the right to terminate because it advised the contractor that ir reserved the right to terminate and to imposed liquidated damages. So, even though the contractor was allowed to work past the completion date, the contractor knew or should have known that the Government had not waived its right to terminate and assess liquidated damage Now, if the Government had not reserved its rights and sat idly by as the contactor worked past the completion date, then waiver would have been found.
Contractor Excused from Performance due to Government Nonpayment
In order for the contractor to be excused for failure to perform as a result of the government's withholding of progress payments, the contractor must show that the government wrongfully refused to make progress payments. Local Contractors, Inc., ASBCA No. 37108, 92-1 BCA P 24,491, [**38] recon. denied, 92-1 BCA P 24,693, aff'd, 988 F.2d 131 (Fed. Cir. 1993) (table) (contractor's failure to provide first articles not excused by the government's failure to make progress payments); Meyer Labs, Inc., ASBCA No. 18989, 83-2 BCA P 16,598 (suspension of progress payments for failure to make progress did not constitute wrongful action). Pursuant to the Progress Payments clause of the contract, the contracting officer may reduce or suspend progress payments if the contractor fails to comply with any material requirement of the contract and if contract performance is endangered by the contractor's failure to make progress or unsatisfactory financial condition.
Government Right to Excess Reprocurement Costs
The government may generally recover excess reprocurement costs for the entire reprocurement period, including option years, of the follow-on contractor, as long as the original contractor had agreed to perform for that duration, as CDA has here. Lewis Management & Service Co., ASBCA 24802, et al., 85-3 BCA P 18,416, at 92,467. However, the Government is not entitled to assess excess procurement costs for an option year until performance for that year is complete and final payment has been made. National Medical Staffing, Inc., ASBCA 45046, et al., 96-2 BCA P 28,483, at 142,259
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Please contact our office today if you are facing a termination for default. A government contracts attorney will respond immediately to assist you through this difficult process.
