The government may terminate a federal contract if the contractor fails to meet its contractual obligations. The contracting officer (CO), in such cases, issues a final decision terminating the contract for default and outlines the reasons for the default. In the event of a termination for default, the government is only liable to the contractor for the portion of the contract that was already performed. While the CO may exercise discretion to terminate a contract for default, such a decision is appealable to the Board of Contract Appeals or the Court of Federal Claims (COFC) pursuant to the Contract Disputes Act (CDA). The CO’s decision to terminate may be set aside by the adjudicative forum if it is arbitrary, capricious, or constitutes an abuse of the CO’s discretion. For instance, a decision to terminate for default may be arbitrary and capricious if there is a lack of nexus between the CO’s decision to terminate the contract for default and the contractor’s performance on the contract. In such situations, while the concerned adjudicative forum may lack the ability to provide injunctive relief, it may nevertheless convert the CO’s default termination to one for the government’s convenience.

While the mechanics of a CDA claim require that the contractor initiate an appeal to a CO’s final decision to a Board of Contract Appeals or the COFC, an appeal challenging a CO’s final decision terminating a contract for default firmly places the burden of proof of the contractor’s default on the government. In a opinion issued in February 2024, the Armed Services Board of Contract Appeals (ASBCA) reminded the Navy of this burden in denying its motion to dismiss for lack of jurisdiction. The relevant appeal was filed by a contractor challenging the Navy CO’s final decision to terminate a task order under a Small Business Set-Aside, Multiple Award Construction Contract (MACC) for new design, construction, repair, and renovation of heating, ventilation, and air conditioning systems at various locations within the Naval Facilities Engineering Systems Command Southwest (NAVFAC SW), in San Diego, California.

The Navy CO had issued a final decision terminating the task order for default in January 2023. The contractor, in turn, timely appealed the termination decision to the ASBCA by filing a notice of appeal (NOA) in March 2023, within the 90-day deadline to file such appeals. In response, the Navy filed a motion to dismiss for lack of jurisdiction, requesting the ASBCA dismiss the contractor’s appeal because the contractor had allegedly advanced an excusable delay defense to the default termination in its complaint without first submitting a time extension claim to the CO. In support of its argument, the Navy cited several decisions for the proposition that contractors must first submit a time extension claim to the CO for a final decision before raising an excusable delay defense on appeal. Meanwhile, the contractor denied the Navy’s characterization that its complaint asserted excusable delay as a defense.

In issuing its opinion, the ASBCA did not find it necessary to discuss the contents of the contractor’s complaint, noting instead that the Navy’s motion to dismiss for lack of jurisdiction was fundamentally flawed. The ASBCA reiterated that since the termination for default was a government claim, it was the Navy’s burden to prove a default termination in the first instance. Therefore, as far as the jurisdiction of the ASBCA over the appeal was concerned at this stage, it was immaterial if the contractor raised an excusable delay defense in its complaint without first submitting a time extension claim to the CO for a final decision. In other words, the ASBCA had jurisdiction over the appeal challenging the termination for default, regardless of the affirmative defenses raised by the contractor in its complaint. In the opinion, the ASBCA clarified that the Navy’s motion to dismiss had to be denied because the Navy did not merely seek the dismissal of the contractor’s excusable delay defense but the entire appeal itself.

The ASBCA further explained that for it to possess jurisdiction over an appeal challenging a default termination, there need only be a CO’s final decision terminating the contract, followed by a NOA filed by the contractor within 90 days of its receipt. Since the contractor’s appeal challenging the default termination of the task order issued under the Navy MACC met these requirements, the ASBCA had jurisdiction over the appeal – regardless of whether the contractor raised any affirmative defenses in its complaint. The ASBCA further explained that since a default termination was being appealed, the ASBCA could have just as easily ordered the government to first file the complaint to outline the grounds for its default claim, instead of the contractor filing the compliant. The ASBCA noted that even if the contractor did not perfect the jurisdictional prerequisites for its affirmative defenses at this stage, it did not deprive the ASBCA of jurisdiction over the appeal. Therefore, in denying the motion to dismiss, the ASBCA reminded the Navy that it was not relieved of its burden to prove the contractor’s default in the first instance.

While a termination for default is one of the most undesirable scenarios in federal contracting, contractors should remember that they have the right to challenge the government’s decision and it is the government’s burden to prove the default. When challenging a CO’s decision to terminate a contract for default, it is sufficient that the contractor file a timely notice of appeal to establish the adjudicative forum’s jurisdiction over the appeal under the CDA. Through an overall understanding of the jurisdictional framework relevant to challenging a CO’s decision to terminate a contract for default, contractors can be better positioned to obtain a favorable outcome, such as a conversion of the default termination to one for the convenience of the government.

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.