Federal Circuit Clarifies the De Novo Review Standard for a Termination for Default

Department of Transportation v. Eagle Peak Rock & Paving, Inc., concerns a $35 million contract that the U.S. Department of Transportation Highway Administration ("FHWA") awarded to Eagle Peak Rock & Paving, Inc. ("Eagle Peak"), under which Eagle Peak would perform improvement work on the roads, parking areas, trails, and overlooks in Yellowstone National Park.

FHWA issued to Eagle Peak the notice to proceed with performance. In turn, Eagle Peak was required to provide FHWA with a baseline project schedule. However, Eagle Peak failed to issue a schedule by the deadline for submission. Eagle Peak provided multiple draft schedules to FHWA, which FHWA's project engineer rejected as noncompliant with the contract. FHWA further began to withhold progress payments as a result of Eagle Peak's failure to provide a compliant schedule. FHWA subsequently issued to Eagle Peak a "cure" notice, which indicated that FHWA was considering termination of Eagle Peak for default due to the contractor's failure to submit a compliant schedule to the Government. Shortly thereafter, Eagle Peak submitted five additional schedules, each of which was rejected by the FHWA Contracting Officer. The Contracting Officer ultimately terminated Eagle Peak for default citing a "lack of confidence in Eagle Peak's ability to create a schedule or complete the project by the deadline."

Eagle Peak appealed the termination for default to the U.S. Civilian Board of Contract Appeals (the "Board"). The Board found in favor of Eagle Peak. In its review, the Board looked to the Contracting Officer's reasoning behind Eagle Peak's termination, and whether the contractor was "reasonably likely" to complete performance within the time provided in the contract. The Board noted that the Contracting Officer failed to consider a number of factors pursuant to FAR 49.402-3(f), such as the Government's urgency of the need for the contractor's services and the contractor's "resource capability" on the project. Additionally, the Board noted that the Contracting Officer's substantial basis for the termination due to the contractor's failure to submit a compliant schedule was insufficient to support the termination. Because the Contracting Officer failed to consider all relevant factors, the Board further stated that it did not need to resolve whether Eagle Peak was actually making sufficient progress on the project. As a result, the Board found the termination to be improper and converted the default termination into a termination for convenience. FHWA appealed the Board's decision to the U.S. Court of Appeals for the Federal Circuit ("Federal Circuit").

Appeal to the Federal Circuit

On appeal, the Federal Circuit vacated the judgment and remanded the decision to the Board for further proceedings. At the outset, the Federal Circuit noted that FHWA was required to show that there was a "reasonable basis" for the Contracting Officer's decision to terminate Eagle Peak for default, particularly given the events that occurred before the termination was executed. However, the Federal Circuit further stated that the "reasonable basis" language under the applicable termination standard did not "put the focus on the contracting officer's own reasoning" for the termination.

Further, the Federal Circuit expressed that when performing de novo review of an appeal under the Contract Disputes Act, the Board was required to make an objective finding as to the reasonability of the termination based on the evidentiary record as developed throughout the proceedings. As such, when reaching a determination as to whether project completion was reasonably likely, the Board was required to focus on "tangible, direct evidence reflecting the impairment of timely [project] completion."

The Federal Circuit additionally noted that the Board should have considered the actual performance required under the contract, as well as the amount of time remaining for project completion, rather than the Contracting Officer's stated reason for the termination. Further, the Federal Circuit indicated that the nature of de novo proceedings did not afford the Contracting Officer's basis for termination any deference on review. Thus, even where the Contracting Officer's decision failed to adequately state the basis for termination, the Board was required to uphold the termination as proper if the evidentiary record suggested that the standard for termination was met.

The Federal Circuit ultimately determined that the Board failed to adequately separate its de novo review of the record from the Contracting Officer's asserted basis for termination. The Federal Circuit found that the Board focused largely on what the Contracting Officer said and considered in determining whether timely completion of the contract was sufficiently in doubt, rather than what the evidentiary record reflected. As a result, the Board's review of the termination exceeded the limited scope of review recognized by the Federal Circuit and the Contract Disputes Act.

Takeaway

The Federal Circuit's decision in Eagle Peak makes it clear that a Contracting Officer's bases for termination do not receive deference on appeal. As such, when challenging a termination for default, particularly for schedule-related reasons, government contractors should not focus wholly on the reasoning used by the Contracting Officer in its decision to terminate. Rather, the contractor should seek to establish an evidentiary record that supports the adequacy of the contractor's performance and reflects that the contractor could have successfully completed the project in a timely manner.