The government retains the right to terminate a contract for default when the contractor fails to meet its performance obligations. The default termination, commonly considered one of the most undesirable outcomes for contractors, may nevertheless be converted into a termination for the government’s convenience if, on appeal, the government fails to prove that its default termination decision was justifiable. Notably, when the contractor appeals the government’s decision to terminate its contract for default, it is the government’s burden to prove default termination in the first instance. In other words, the government must demonstrate the correctness of its actions in terminating a contract for default. When contract modifications change the terms of the original contract such that the government’s default termination decision is no longer justified under the modified contract, adjudicative forums will typically convert the default termination to one for the convenience of the government, citing the change in circumstances from contract award to termination.
The Armed Services Board of Contract Appeals (ASBCA) in ASBCA 58866 and ASBCA 58867 converted the Army’s terminations for default for two similar contracts into terminations for convenience due to changes in the terms of the contracts due to later modifications. The Army awarded the underlying contracts for the acquisition of thousands of foreign language test items to assess the proficiency of military linguists. The contracts included the Federal Acquisition Regulation (FAR) 52.212-4 clause: “Contract Terms and Conditions—Commercial Products and Commercial Services.” During the performance, the government was only responsible for paying for the items it accepted, with no apparent definition of what constituted an acceptable item, presumably leaving the acceptability determination at the government’s discretion. The government retained intellectual property rights in both accepted and rejected items as the contracts provided the government sole ownership and exclusive rights to the deliverables. After the contracts were awarded to the same contractor, the Army issued nearly identical modifications, stating that any foreign language test items still required under the contracts but not accepted by the government would be “automatically descoped” from the contract. The Army eventually terminated the contracts for default, citing the contractor’s failure to provide the agreed-upon number of acceptable items.
The contractor appealed the government’s decision to terminate its contracts for default, arguing that it was no longer required to deliver the originally agreed-upon number of acceptable items because of the contract modifications. In conducting a plain meaning analysis of the descoping language, the ASBCA agreed with the contractor that its delivery obligations had changed because of the modifications. Specifically, the ASBCA ruled that under the modification, the contractor was no longer required to deliver the originally agreed-upon number of acceptable items under the contracts. The Board explained that since the modification stated that the test items that the government rejected would be “automatically descoped” from the contract – by entering the modification, the government had essentially agreed to reduce the number of acceptable items that were originally required to be delivered under the contract to however many acceptable items the contractor ultimately delivered. Therefore, after the parties agreed to the modifications, the contractor’s failure to provide the agreed-upon number of acceptable items was no longer an adequate reason for a default termination. The government also attempted to argue that the contractor failed to meet an agreed-upon delivery schedule as justification for terminating the contract for default. However, the government could not identify the relevant delivery schedule or provide specific evidence supporting this argument. Consequently, the ASBCA rejected this argument and converted the default terminations into terminations for the government’s convenience.
A default termination decision can present significant challenges for a contractor, including but not limited to loss of revenue and difficulties in obtaining future contracts. However, contractors may avoid such undesirable outcomes by successfully appealing the default termination decision and getting it converted into a termination for the government’s convenience. Therefore, contractors facing default termination decisions should carefully review any applicable contract modifications to determine if the terms of the underlying contract were sufficiently changed such that the government’s default termination decision may be deemed unreasonable or no longer supported by the terms of the modified contract. Depending on the specific circumstances, the contractor’s ability to demonstrate a change in circumstances during the appeals phase may also open avenues for alternate dispute resolution, potentially helping the contractor avoid a default termination.
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.
