Alert
Alert
07.18.22
When companies perform federal contracts, the government has a right to terminate for default when a contractor performs poorly. Historically, terminations for default have been considered draconian measures and species of forfeiture to which “the Government should not lightly resort.” See Eagle Peak Rock & Paving, Inc., CBCA No. 5692, 21-1 BCA ¶ 37,752. For that reason, agencies have used the remedy sparingly, and the Courts and Boards of Contract Appeals have heavily scrutinized default terminations because they impact revenue, damage past performance evaluations, and stigmatize contractors. See Vought Aircraft Co., ASBCA No. 38092, 96-2 BCA ¶ 28,321.
Is the pendulum swinging? We ask because we have noticed increased government threats of default termination over the past year or so. Whether this is a trend or an anomaly, the contracting community should be aware that the applicable regulations offer strategies and defenses under non-commercial item (FAR 52.249-8) and commercial item (FAR 52.212-4(m)) contracts.
Threatened default activity almost always starts with the issuance of a “Cure Notice,” demanding that the contractor remedy (usually within 10 days) an alleged performance deficiency under the threat of default termination. These can include requests to cure alleged failures to satisfy an operable schedule; make progress in performance; or perform a material provision of the contract. See FAR 52.249-8(a)(1); FAR 52.212-4(m).
Contractors should be aware that when the government alleges such a failure to satisfy a schedule obligation or make progress, they are entitled to a schedule extension as a matter of law if circumstances beyond their control or without their fault or negligence caused the delay. FAR 52.249-8(a)(2)(c). Such circumstances include severe weather, acts of God, and delays caused by epidemics and quarantine restrictions – i.e., circumstances that have been prevalent during the COVID-19 era in particular. When any of those facts exist, we recommend that contractors describe them with specificity and substantiate them with supporting evidence (such as documents contemporaneous with the events) when responding to a Cure Notice.
A Cure Notice must also cite the relevant contract provision that is allegedly being breached. It is not uncommon for the government to demand that the contractor perform an activity that is not required by the contract. When faced with these circumstances, we recommend that contractors illustrate the absence of any actual contract violation.
A Cure Notice can also escalate to “Show Cause” notice, which is a notice requiring the contractor to provide a response describing why the alleged contract default arose from causes beyond its control. In such a circumstance, if a contractor has fully resolved the alleged default in its response to the Cure Notice, the government no longer has grounds to terminate for default, and it also lacks grounds to require the contractor to “show cause.”
Finally, we note that before terminating for default, the contracting officer must consider the mitigating factors enumerated in FAR 49.402-3(f). These factors include: the specific failure alleged and the reasons for the alleged failure; the availability of supplies or services from other sources; and any other pertinent facts and circumstances. Contractors should carefully consider and apply these factors in responding to a Cure Notice or Show Cause notice. A termination can be found improper because, for example, no one could satisfy the contract provision under the circumstances or there is no alternate source available to perform.
In the event your company receives a Cure Notice or a Show Cause Notice, please consider these strategies and feel free to contact us for additional assistance.