A recent decision by the Armed Services Board of Contract Appeals provides guidance on overturning a termination for cause of a supply contract. In AEY, Inc. (June 22, 2018), the ASBCA in large part overturned the Government’s termination for cause of a Government contractor who had missed several of the original contract deadlines for supplying arms and accessories under five separate supply contracts.

In overturning the termination for cause, the Board observed that termination for cause is a drastic sanction and that the Government bears the initial burden of establishing default. Once the Government meets that burden, the burden shifts to the contractor to establish that the default is excused or that the Government’s material breach caused the default.

The Board first determined that, based on the nature of the contracts and CLINs and the parties’ conduct, the contracts and CLINs were severable. The significance of this determination is that the entire contract could not be terminated for default for failure to deliver one or more line items by a due date. Instead, each contract and CLIN would be examined to determine if its delivery due date was met. The consequence of this determination was that the Government had to prove the contractor was late for each CLIN delivery item, rather than being able to rely upon a single late delivery to justify termination. To the extent that delivery under a CLIN was not due at the time of termination and the government had not provided a notice to cure, the Board held that termination of those CLINs was improper.

With respect to those CLINs for which delivery was late, the Board considered whether the Government had waived those delivery dates. The Board first noted that the contractor had the burden to establish that (a) the Government had failed to terminate within a reasonable time after default under circumstances indicating forbearance, and (b) reliance by the contractor on the failure to terminate and continued performance under the contract, with the Government’s knowledge and implied or express consent. Once a waiver has occurred, the Government must establish a new, reasonable delivery date by written notice to the contractor. With respect to several of the CLINs and contracts, the Board held that the Government had waived the original performance date and had failed to provide a new date and, therefore, the termination for cause of these contracts was improper.

The contractor asserted that timely performance of one of its contracts was excused by the export country’s failure to timely deliver an export license. The Government countered that the contractor had assumed this risk pursuant to its obligation to “process all necessary licenses, approvals, and/or certificates” pursuant to the contract. The Board rejected the Government’s argument, stating that the plain meaning of the clause that that “the contractor shall be diligent in expediting those matters that are within its control.” The Board further stated that “[a] clause placing the risk on the contractor of acts solely within the control of a foreign nation would clearly (or should clearly) say so.” The Board held the contractor had established an excuse for failure to meet the performance date with respect to this contract, and converted the termination for cause into a termination for convenience.

Finally, the Board found instances where the Government had failed to justify its basis for termination of contracts where the arms that had been delivered were allegedly non-conforming. The teaching point of this decision is that if you fail to meet a delivery date, there still may be ample and justifiable reasons why your contract should not be terminated, ranging from failure by the Government to act in a timely manner to failure of a third party to act in a timely manner.

If you have further questions about an actual or threatened termination for default, please don’t hesitate to contact us.