Terminating a contractor for default is a “‘drastic sanction’ and ‘should be imposed (or sustained) only for good grounds and on solid evidence.’” Cherokee General Corp. v. U.S., 150 Fed.Cl. 270, 278 (Fed.Cl. 2020) (citation omitted). This is true with any termination for default because terminating a contract for default is the harshest recourse that can be taken under a contract. It is a caused-based termination. For this reason, the party terminating a contract for default needs to be in a position to carry its burden supporting the evidentiary basis in exercising the default-based (or caused-based) termination. Stated differently, the party terminating a contract for default needs to justify the reasonableness in terminating the contract for default.
A party looking to terminate a contract for default should smartly work with counsel to best position its justification in exercising the termination for default. Likewise, a contractor terminated for default should immediately work with counsel to best position the unreasonableness or the lack of justification for the default-based termination.
The recent Court of Federal Claims opinion in Cherokee General Corp. contains a worthwhile discussion on termination of contracts for default in the federal government contracting arena (including the contractor’s argument that the termination for default should be converted into a termination for convenience). As explained by the Cherokee General Corp. Court, a contracting officer is given broad discretion to terminate a contract for default. Cherokee General Corp., 150 Fed. Cl. at 277 (citation omitted). This discretion may be overturned if the contracting officer’s decision to terminate the contract for default is “arbitrary, capricious, or an abuse of discretion. Id. (citation omitted). In support of this broad discretion, however, a court can “sustain a [contracting officer’s] default termination ‘for all of the reasons noted by the contracting officer at the time [of his/her default termination letter],’ or ‘for any additional valid reason [justifiable by the circumstances].’” Cherokee General Corp. at 280 (citation omitted).
A termination based on the contractor’s refusal or inability to perform the work with the necessary diligence is appropriate where the contracting officer reasonably believed that “there was ‘no reasonable likelihood that the [contractor] could perform the entire contract effort within the time remaining for contract performance.’ If, however, “[t]he delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor,” then “[t]he Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages.” “Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers.”
The government bears the initial burden of proving a contractor’s“demonstrated lack of diligence” which “indicat[ed] that [the government] could not be assured of timely completion. The “factors usually relied upon by courts and contract boards” to determine whether the government has met its burden include “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; as well as a contractor’s performance history; and other pertinent circumstances.” If the government meets its burden of proof, then the burden shifts to the contractorto show that its default was excusable.
Cherokee General Corp., 150 Fed.Cl. at 278.
Mentioned above, but worthy of repeating, a party terminating another based on a contractual default needs to appreciate that it maintains a burden supporting the basis of the termination. Ignoring this burden, or not appreciating the significance of this burden, can result in a party not being able to substantiate the reasonableness and justification for the termination for default. Noteworthy, the discretion afforded a contracting officer under a federal government contract is not the same discretion afforded to every party under every contract. Knowing this makes the appreciation of the burden supporting the basis of the termination for default a very important consideration.