Federal Construction Contracting Blog : Federal Construction Contracting Law Firm : Cohen Seglias Pallas Greenhall & Furman PC : Construction Law, Dredging and Claims

By: Michael H. Payne

A decision was issued by the United States Court of Federal Claims on December 20, 2011, in Martin Construction Co. v. United States, a case involving a Corps of Engineers construction project in North Dakota. Martin was represented by Michael Payne and Joseph Hackenbracht, of Cohen Seglias Pallas Greenhall & Furman, and the case involved a termination for default by the Omaha District of the Corps on a multi-million dollar project involving the construction of a marina. The termination occurred because the Contracting Officer concluded that Martin was at fault for failing to complete the project by the required contract completion date. Martin had argued that the Corps’ design of the cofferdam (temporary dam), which was critical to the construction of the marina, was defective and that the contractor was effectively prevented from completing the marina according to the original schedule. The Court agreed that there was a defective design and found that the Corps’ designer had grossly underestimated the amount of water that would flow through the cofferdam.

The decision is extremely critical of the Corps of Engineers and amounts to a complete vindication of Martin. The Court ruled that the termination for default was wrongful and ordered a conversion to a termination for convenience. This, of course, now exposes the Corps to the payment of damages amounting to millions of dollars to compensate Martin for the costs incurred in attempting to deal with the defective design. The Court aptly noted that “The most troubling aspect of this case is the Corps’ adamant refusal to accept any responsibility for the defective design, even while Martin made every effort to comply with it.” The Court was also very critical of the Contracting Officer and stated that “Competent procurement officials would have acknowledged the agency’s obvious design mistake, made the necessary corrections, and afforded the contractor the contractor the additional time and money to complete performance.”

The Court concluded that the “evidence is overwhelming” that Martin was entitled to a time extension and that the termination for default was improper. Judge Thomas Wheeler quoted Martin’s geotechnical and scheduling experts, and he also quoted the Plaintiff’s brief by stating that “As Plaintiff’s counsel aptly pointed out, the Defendant ‘ignored the elephant standing amongst the teacups in the living room.” The decision is an important verification to the federal contracting community that a termination for default is a “drastic action” that will not be sustained unless the government can meet its burden of proof that the termination was justified. It was unfortunate, however, that Martin was forced to suffer the consequences of the “black mark” associated with a default termination until, as in this case, justice was ultimately served.

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 teaming arrangements, negotiated procurements, bid protests, claims, and appeals.

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In a recent decision issued on July 6, 2007, Appeals of FFR-Bauelemente + Bausanierung GmbH, ASBCA Nos. 52152, 54563, 54808, 54809, 55017, the Armed Services Board of Contract Appeals held that the government had shown that the Contracting Officer was “justifiably insecure about the contract’s timely completion” and that a termination for default was justified.  The CO and COR (Contracting Officer’s Representative) believed, based on experience with other Corps of Engineers barracks renovations, that nine months was needed for a contractor to perform the barracks renovation work.  After 113 days of the 290 day revised performance period (or almost 40% of the period) expired with little or no work accomplished by FFR (i.e., clearly less than 5% of contract work completed), the CO terminated FFR’s contract for default.  While over 40% of the original performance period had passed, FFR had not yet obtained necessary approvals to commence the initial item of renovation work under the contract, the performance of asbestos abatement. The lack of activity by FFR with respect to the contract obviously made the CO insecure about FFR’s timely completion of the barracks renovation work. 

The contractor appeared to be having difficulty procuring a subcontractor to perform asbestos abatement work, failed to meet numerous contract progress milestones (timely submission of a BLG, mobilization within 15 days of issuance of NTP, and timely submission of its asbestos training certificates and other contract submittals), and apparently did not possess a contract performance history with respect to the barracks renovation that instilled confidence in the Contracting Officer.  These facts constituted further tangible, direct evidence that the CO was “justifiably insecure about the contract’s timely completion.”  Thus, the Board concluded that the government has met its prima facie burden of proving it was justified in terminating FFR’s contract for default.

A default termination is a drastic sanction, which should be imposed and sustained only on “good grounds and on solid evidence.” E.g., Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 765 (Fed. Cir. 1987).  Government contract provisions authorizing termination of a contract for default are a species of “forfeiture” and are to be strictly construed.  Forfeitures are not favored, and one who asserts that there has been a forfeiture is held to the letter of its authority.

The contract incorporated by reference a standard default clause for fixed-price construction contracts, which authorized the CO to terminate a contract for default when the CO was “justifiably insecure about the contract’s timely completion” due to “events, actions and communications leading to the default decision.” See McDonnell Douglas Corp. v. United States, 323 F.3d 1006, 1017 (Fed. Cir. 2003).  Thus, to default terminate, the clause required existence of a “‘reasonable belief on the part of the [CO] that there was no reasonable likelihood that the [contractor] could perform the entire contract effort within the time remaining for contract performance.’” McDonnell Douglas, 323 F.3d at 1016, quoting Lisbon, 828 F.2d at 765; Danzig v. AEC Corp., 224 F.3d 1333, 1336-37 (Fed. Cir. 2000), cert. denied, 532 U.S. 995 (2001). The CO’s assessment regarding the contractor’s ability to timely complete, accordingly, need not be found to be “correct.”  Rather, in order for a default termination to be sustained, the CO need only be found to have been “justifiably insecure about the contract’s timely completion.” McDonnell Douglas, 323 F.3d at 1017; Discount, 554 F.2d at 441.

Determination of the propriety of the CO’s default termination, however, does not turn on the CO’s subjective beliefs, but on an “objective” inquiry. Lisbon, 828 F.2d at 766. A decision to default terminate must be based on tangible, direct evidence reflecting impairment of timely contract completion. E.g., McDonnell Douglas, 323 F.3d at 1016. While CO testimony concerning the termination and contemporaneous documentation are relevant to deciding the propriety of the termination, other factors may also be considered, including comparison of the percentage of work completed and amount of time remaining under the contract (McDonnell Douglas, 323 F.3d at 1017), existence of problems with subcontractors (id.), a contractor’s failure to meet progress milestones (Kennedy v. United States, 164 Ct. Cl. 507, 512 (1964)), and the performance history (Decker & Co. v. West, 76 F.3d 1573, 1581 (Fed. Cir. 1996)). The government bears the burden of proving that the CO’s termination of the contract for default was proper. E.g., Lisbon Contractors, Inc. v. United States at 765.

A defaulted contractor has the “burden of proving that its nonperformance was excusable” under the provisions of the default termination clause, including occurrence of an event that was beyond its control and without its fault or negligence. E.g., DCX, Inc. v. Perry, 79 F.3d 132, 134 (Fed. Cir.), cert. denied, 519 U.S. 992 (1996). The Board found that FFR has not offered any evidence that its nonperformance was excusable under the provisions of the default termination clause. Rather, it simply had asserted that the COR made “repeated . . . false allegations” regarding FFR, the COR’s actions regarding FFR were “arbitrary and in bad faith,” the COR “hated FFR” and “no longer wished to do business with it,” and FFR was “ousted under false pretenses.”  Unlike private parties, however, the Board stated that the government is presumed to act in good faith and “we may abandon that presumption only upon clear and convincing evidence of a specific intent [by government officials] to injure.”  The Board further found that he record did not reflect that the COR and CO were motivated by malice or otherwise possessed any specific intent to injure FFR when they acted to default terminate FFR’s contract. Instead, it showed that the COR and CO made various efforts to assist FFR with the performance of its contract. FFR, therefore, did not demonstrate bad faith action by the Corps or any basis under the default clause that would excuse its nonperformance of the contract.

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