In the latest Weekly Wright Report:
Federal Circuit Court Clarifies Termination for Default Standard
On June 6, 2023, the Federal Circuit Court of Appeals clarified the standard for the government to terminate a construction contractor in the case of Dep’t of Transportation v. Eagle Peak Rock & Paving, Inc., No. 2021-1837, 2023 WL 3829625, at *1 (Fed. Cir. June 6, 2023). In May 2016, the Federal Highway Administration (FHWA) entered into a $35 million contract with Eagle Peak Rock & Paving, Inc., under which Eagle Peak would perform construction work including improving roads, parking areas, trails, and overlooks in Yellowstone National Park. The work was to be completed by October 5, 2018. The contract required Eagle Peak to submit to FHWA a schedule detailing how it would complete the project on time. But, by late January 2017, FHWA had rejected all eight formal schedule submissions by Eagle Peak as not complying with the contract’s requirements, and a few weeks later, the contracting officer terminated the contract for default, concluding that Eagle Peak was insufficiently likely to complete the project on time.
Eagle Peak challenged the termination for default under the Contract Disputes Act of 1978 (CDA), 41 U.S.C. §§ 7101–7109, choosing to proceed before the Civilian Board of Contract Appeals under 41 U.S.C. §§ 7104(a) and 7105(b). The Board ruled that the termination for default was improper and converted the termination to one for the convenience of the government. The Federal Circuit vacated the Board’s judgment and remanded the case to the Board for a new trial applying the correct standard.
The Eagle Peak contract included Federal Acquisition Regulations (FAR), clause 52.249-10, which provides that “[i]f the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time,” then the government may terminate the right to proceed with the work (or the separable part of the work) that has been delayed.
When a contracting officer terminates a contract for default, and the contractor appeals that termination decision, the government bears the burden of proof with respect to the issue of whether termination for default was justified. In “failure-to-make-progress cases,” the government must establish that “the contracting officer’s decision to terminate … was reasonable given the events that occurred before the termination decision was made.” Empire Energy Management Systems, Inc. v. Roche, 362 F.3d 1343, 1357–58 (Fed. Cir. 2004); Danzig v. AEC Corp., 224 F.3d 1333, 1336 (Fed. Cir. 2000). If the government makes this showing, the contractor then bears the burden of proving that its nonperformance was excusable.
Importantly, the “reasonable basis” language of the substantive standard does not put the focus on the contracting officer’s own reasoning. The CDA demands an objective inquiry, not an evaluation of the contracting officer’s subjective beliefs, when ascertaining whether the government has met its burden. The court must focus on tangible, direct evidence reflecting the impairment of timely completion. In particular, the Board must “decide the actual performance that the contract requires and the amount of time remaining for performance” and “may also consider” factors such as “the contracting officer’s testimony and contemporaneous documents[,] … a comparison of the percentage of work completed and the amount of time remaining under the contract, the contractor’s failure to meet progress milestones, problems with subcontractors and suppliers, the contractor’s financial situation, … a contractor’s performance history, and other pertinent circumstances.”
As the Court noted, it has consistently approved default terminations where the contracting officer’s ground for termination was not sustainable if there was another existing ground for a default termination, regardless of whether that ground was known to the contracting officer at the time of the termination. Thus, the subjective knowledge of the contracting officer is irrelevant, and the government is not required to establish that the contracting officer conducted the analysis necessary to sustain a default under the alternative theory.
In addition, the termination for default clause presents a threshold issue—whether the contracting officer actually terminated the contract for default on the basis of a perceived performance problem. Specifically, the termination for default decision must be performance-based and not pretextual. Accordingly, “the termination for default must be predicated on contract-related issues,” i.e., the Contractors’ alleged inability to fulfill their obligations under the contract.
If, as occurred in this case, the contractor challenges the contracting officer’s decision in the Court of Federal Claims or Board of Contract Appeals, the action must proceed de novo, based on the evidence received before the Claims Court or Board and may not be based solely on the contracting officer’s reasoning or findings of fact. De novo review precludes reliance upon any “presumed correctness” of the contracting officer’s decision. Thus, once an action is brought following a contracting officer’s decision, the parties start in court or before the Board with a clean slate.
Because the Board of Contract Appeals in this case failed to conduct a de novo evaluation of whether the termination for default was justified, the Court vacated and remanded for a new trial.
If you have any questions regarding this matter, please contact any member of the WCS Government Contracts practice group.