A recent case makes clear the importance of focusing on the fundamentals, such as knowing the rules on who the government is required to pay on a government contract.  In The Hanover Insurance v. United States, the U.S. Court of Federal Claims recently found that a surety’s letter to the Government adequately notified it of the contractor’s default of bond agreement, triggering the surety’s equitable subrogation right to payments issued by the Government.

In that case, the surety, Hanover Insurance Company (Hanover), overcame a summary judgment motion filed by the Government, concerning a Veterans Administration (VA) contract awarded to B&J Multi-Service Corporation (“B&J”) for facilities maintenance at a VA facility in West Haven, Connecticut.  The Government paid termination for convenience (“T/C”) costs to B&J to which Hanover as surety claimed it was entitled.

The Government asserted that Hanover, as surety to B&J, had not given proper notice of B&J’s default, thereby precluding any Government obligation to pay Hanover directly.  The Government argued proper notice was not given because Hanover did not invoke the precise words “the principal is in default” prior to the VA’s payment to B&J.  As evident from the court’s opinion, the Government was aware that Hanover was making payments to B&J’s subcontractors.  Hanover put the Government on notice that the funds for termination for convenience should not be paid directly to B&J, because Hanover was asserting a subrogation right to the T/C funds.  However, the Government ignored the surety and paid the termination for convenience funds directly to B&J. Continue Reading Termination for Convenience: Government Pays the Wrong Party, No Magic Words Needed to Trigger Surety’s Right of Equitable Subrogation

16064264536_9c9caeb509_hWhen a government contractor is terminated for reasons other than default, the response from the contractor is often to evaluate the contracting officer’s decision and rationale for the termination and determine if an appeal is warranted.  Government contractors sometimes appeal a contracting officer’s decision to terminate their contract by alleging bad faith and an abuse of discretion.  While the contractor may legitimately believe that the contracting officer acted in bad faith or abused their discretion, proving its allegations and convincing the Court of Federal Claims or a Board of Contract Appeals to reverse the contracting officer’s decision is no simple task.  Even a contracting officer who terminated a contract based on a mistaken understanding of the facts and circumstances may not constitute bad faith or an abuse of discretion.

Recently the Postal Service Board of Contract Appeals (“PSBCA”) had the opportunity to address this situation in the consolidated appeals of Cook Mail Carriers, Inc. v. United States Postal Service and Patricia J. Sasnett v. United States Postal Service.  PSBCA No. 6583, 6584 (March 24, 2017).   In these appeals two government contractors – Cook Mail Carriers, Inc (“Cook”) and Patricia J. Sasnett (“Sasnett”) – who provide mail transportation services in Alabama for the US Postal Service were terminated due to revisions in the mail routes directed at simplifying the transportation network, pooling resources, managing workloads, and gaining contract administration efficiencies.  The contracting officer invoked the Postal Service’s “Termination with Notice” clause in order to terminate these contracts, a clause that allows either party to terminate the contract, without cost, provided proper notice (60 days) is given.

When the contracting officer decided to terminate the Cook and Sasnett contracts he believed that the need for revised routes was due to a mail processing plant in Gadsden, Alabama being closed and merged into a larger facility in Birmingham, Alabama.  However, after the termination, the contracting officer learned that the Gadsden facility had previously been closed and the reason for the revised routes was due to mail transportation hubs (as opposed to processing plants) being relocated to Fort Payne and Boaz, Alabama.

Cook and Sasnett appealed the contracting officer’s decision arguing, among other points, that the contracting officer’s decision to terminate the contracts on 60 days’ notice (as permitted by the Termination with Notice provisions of the respective contracts) was made in bad faith or constituted an abuse of his discretion.

While the contracting officer terminated the contracts under the Termination with Notice clause, which does not include any express limitation to its use, the contracting officer’s exercise of the clause is not truly unlimited.  A decision to exercise that clause can breach the contract if it was made in bad faith or as an abuse of discretion.  Continue Reading Does a Contracting Officer’s Mistake about the Reasons for a Termination Constitute Bad Faith or an Abuse of Discretion?

The nonmanufacturer rule is one of the more complicated small business rules.  Under 13 CFR § 121.406(b), a small business may qualify as a nonmanufacturer if it 1) does not exceed 500 employees; 2) is primarily engaged in the retail or wholesale trade and normally sells the type of item being supplied; 3) takes ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice; and (4) will supply the end item of a small business manufacturer, processor or producer made in the United States.  Recently, in Third Coast Fresh Distribution, LLC, ASBCA No. 59696, the ASBCA determined that a contractor’s failure to comply with this requirement in an applicable contract was grounds for a termination for cause (i.e. default termination). Continue Reading ASBCA Confirms Violation of the Nonmanufacturer Rule is Grounds for Termination for Cause

Debarment is not just for ethics violations anymore. Suspending and Debarring Officials are looking to a new source for referrals – Contracting Officers. FAR 9.406-2(b)(1)(i)(A) and FAR 9.406-2(b)(1)(i)(B) allow Suspending and Debarring Officials to debar companies for a history of performance issues or a willful failure to perform in accordance with the terms of one or more contracts. Debarment is intended to be a business risk decision designed to protect the Government from contractors that present risks, including performance risks. Termination for default is one of the premier ways to demonstrate that a contractor is a performance risk to the Government.

Over the past year, the Air Force has debarred 5 contractors for failing to perform resulting in a termination for default. In each of these cases, the contractor was responsible for performing in accordance with the contract, failed to do so, and eventually was terminated for default. In one particular case, a prime contractor failed to repair deficient work or even respond to the Air Force’s Cure Notice. The prime contractor had a previous contract with the Air Force, which it had also subcontracted to the same contractor that had done the rejected work. The work was satisfactory for this contract, and the prime contractor was paid in full. However, the prime contractor failed to pay its subcontractor. Supporting its debarment decision on both of these bases, the Air Force debarred the prime contractor for three years.  Continue Reading Terminated for Default? Debarment Could Be In Your Future