The latest A-12 wranglings: Honey, this letter from the collection agency says we owe $2.3 Billion

Army Lawyer, Jan-Feb, 2003

The Latest A-12 Wranglings: Honey, This Letter from the Collection Agency Says We Owe $2.3 Billion

Last year's Year in Review (1) reported that the Court of Federal Claims (COFC), on remand from the Court of Appeals for the Federal Circuit (CAFC), dismissed the plaintiffs' complaint in the longstanding, multi-billion dollar A-12 litigation, McDonnell Douglas Corp. v. United States. (2) hat decision, rendered on 31 August 2001, apparently left the Boeing Corp. (the successor to McDonnell Douglas) and General Dynamics Corp. billions of dollars in debt to the Navy. (3) Although the plaintiffs appealed that decision to the CAFC, (4) the parties spent most of the year in settlement talks. (5)

On 30 August 2002, the Navy Comptroller, Dionel M. Aviles, demanded that General Dynamics and Boeing pay the Navy $2.3 billion dollars, or the Navy would "refer the matter to the Defense Finance and Accounting Service for collection." (6) In response, General Dynamics called the letter "an unseemly negotiating tactic, and an apparent effort to gain advantage during settlement talks." (7) According to the Navy, the contractors owe a little over $1.3 billion in principal and $1 billion in interest. As of 30 September 2002, $191,804 in interest accrued each day. The letter concluded on a somewhat conciliatory note, stating that the Navy "fully support[s]" settlement discussions. (8)

Re-establishing a Delivery Schedule After Government Waiver: There's a Right Way and A Wrong Way

Generally, the government has the right to terminate a contract immediately upon a contractor's failure to deliver or perform on time. (9) When the government disregards the delivery schedule and encourages or condones continued performance, however, it waives the right to terminate, unless it re-establishes a delivery or performance schedule. (10) The government can reimpose the schedule either bilaterally or unilaterally. (11) Three boards of contract appeals recently considered variations on this scenario of failure to perform, waiver, and attempted reestablishment. (12)

In Beta Engineering, Inc. (13) the Defense Supply Center Philadelphia (DSCP) contracted with Beta Engineering, Inc. (Beta Engineering) to supply lock-release levers (14) for aircraft machine guns. (15) The contract required Beta Engineering to deliver first-article test samples (FATS) on a specified date. (16) A clause in the contract provided that if the contractor failed to deliver any FATS on time, "the Contractor shall be deemed to have failed to make delivery within the meaning of the Default clause." (17) The levers had to pass a detailed preliminary inspection before first article testing. (18)

Although Beta Engineering failed to meet the FATS submission deadline, 30 April 2001, the government procurement contracting officer (PCO) did not terminate the contract or notify Beta Engineering that it was delinquent. (19) After 30 April 2001, the PCO even authorized the contractor to use a different grade of steel and allowed the contractor to conduct a preliminary inspection. The Armed Services Board of Contract Appeals (ASBCA) found that these government acts and failures to act "disestablished 30 April 2001 as the deadline for submission of FATS." (20) On 17 May 2001, the contractor, with a government representative present, conducted a preliminary inspection. The inspection was not completed successfully. After the failed inspection, the contractor proposed a new date for a second FATS preliminary inspection. The PCO, however, took no action to reestablish a new FATS due date and failed to respond to the contractor's offer to submit new FATS, leaving Beta Engineering "in limbo." (21) The PCO terminated the contract on 15 August 2001. (22)

Citing an earlier decision, the board stated, "[w]e have held that a termination for default for failure to deliver a first article was improper where 'there was no enforceable first article delivery schedule in place at the time the government terminated the contract for default." (23) The board found that after Beta Engineering missed the FATS deadline, not only did the government fail to terminate the contract, but the government encouraged further performance by approving the lower-grade steel and by proceeding with preliminary inspections. The government thereby waived the FATS delivery due date. By leaving Beta Engineering in limbo about whether and when it could submit a second set of FATS, the government left itself "without an enforceable FATS delivery schedule." (24) The government, therefore, improperly terminated the contract for default. (25)

In Rowe, Inc., (26) the General Services Administration (GSA) also faced missed delivery dates. After allowing the contractor, Rowe, to miss two delivery dates, however, the GSA contracting officer (CO) properly set a new deadline. When Rowe missed the new delivery date, the government was in a position to properly terminate the contract for default. (27)

The GSA awarded Rowe a contract for, among other items, "modified type IX vans with cut-off cabs." (28) The order required shipment by 27 August 1996. (29) A government inspection of Rowe's facility on 20 August 1996 revealed that Rowe had not received the chassis for the vans and would not meet the 27 August deadline. On 17 September 1996, the CO sent a "cure letter," demanding an explanation for the delay, a new shipment date, and consideration for the delay. (30) In two letters dated 4 October and 8 November 1996, Rowe indicated it could have the vehicles ready within fourteen days of receipt of the chassis and that it expected to receive the chassis on 7 December 1996. The CO then issued a unilateral modification "establishing a new shipment date of December 26, 1996." (31) When Rowe missed this new deadline, the parties exchanged letters, the Government changed COs, and on 6 February 1997, the new CO issued a show cause letter. (32) Although the letter stated that the GSA was considering a default termination, it did not set a new delivery date. (33) In response, Rowe stated that it had received the chassis, but for the first time, Rowe alleged confusion over the specifications. (34) In a 4 April 1997 letter, after several exchanges concerning the technical specifications, the CO demanded a new production schedule from Rowe. (35) On 17 April 1997, although Rowe had requested approximately seventy additional days, the CO "unilaterally established a new completion date of May 14, 1997." (36) When Rowe failed to deliver the vehicles by 14 May 1997, the CO terminated the order. (37)