When the Government terminates a contract for default (“T for D”), there can be a series of nasty consequences for contractors. Among other things, the contractor may be liable for actual or liquidated damages and for excess costs of reprocurement or completion; the contractor can be suspended or debarred; and the Government is not liable for the costs of unaccepted work and is entitled to the return of progress, partial, or advance payments. In contrast, when a contract is terminated for convenience (“T for C”), the contractor is usually entitled to the costs of goods and services furnished, demobilization costs, and a reasonable profit on the work performed. Also, because a T for C is not a breach, neither party is liable for lost profits or other damages allowed for breach of contract.

Default, directional sign

Suffice it to say, a contractor has a big incentive to fight a T for D—and try to have it converted to a T for C (which is the remedy if a T for D is not justified under the circumstances). Recently, the ASBCA issued parallel decisions denying the Government’s motions for summary judgment in a contractor’s challenges to T for Ds, finding in both cases that the Government had not established a prima facie case that the termination was justified. The Board’s opinions in the Capy Machine Shop, Inc. cases may prove useful to contractors challenging a default termination.

The facts in the two decisions are similar. On two occasions, the Capy Machine Shop accepted an order for aircraft parts. Both orders incorporated FAR 52.249-8 Default (Fixed-Price Supply and Service). Several months later, but before the delivery dates, the contractor asked the contracting officer to cancel the contracts at no cost because “Capy’s forming vendor cannot locate his tooling.” In response, the contracting officer issued show cause notices and advised Capy that it was considering terminating the contracts for default. The contracting officer wrote:

Pending a final decision in this matter, it will be necessary to determine whether your failure to perform arose from causes beyond your control and without your fault or negligence. Accordingly, you are given the opportunity to present, in writing, any facts bearing on the question to me . . . within 10 days after receipt of this notice . . ..

In response, Capy’s general manager explained that the cost of new tooling for one contract was $19,647 and $26,512 for the other, and those costs were not included in either quote. The agency terminated the contracts for default, and Capy appealed the decisions to the Board. In its appeal, Capy noted that the ordered parts required tooling, and when Capy provided its quote, it believed the tooling was available. After award, Capy discovered that the tooling could not be located, and it would have to create new tooling—which it could not afford.

At the Board, the Government moved for summary judgment. The Board denied that motion, finding that the Government had not demonstrated that Capy repudiated the contract. The Board pointed out that Capy contacted the agency twice about each order—once to request a no-cost cancellation, and once to explain that the cost of new tooling was not included in its quote. At no point did the communications “reflect a positive, definitive, unconditional and unequivocal refusal to perform”—as required for anticipatory repudiation.

Although the recent decisions did not resolve Capy’s claims, they are important victories for the contractor. If the Board ultimately finds that the termination was not justified, the contractor will not be liable for damages, reprocurement costs, or completion costs. The Capy Machine Shop, Inc. decisions are useful precedent to cite when challenging a termination for convenience if the contractor has not expressly repudiated performance.