A termination for default (T for D) is “a drastic sanction which should be imposed or sustained only for good grounds and on solid evidence.” A T for D will impact future responsibility determinations and needs to be fought by contractors who want to continue to work in the Government market. In DMW Marine Group v. Department of Commerce, the Civilian Board of Contract Appeals (CBCA) granted a contractor’s appeal, effectively reversing the National Oceanic and Atmospheric Administration’s (NOAA) T for D based on the contractor’s failure to provide a certification called for under the contract. The Board’s decision reflects a common-sense understanding of the exchanges between the parties—and a proper rejection of an overly aggressive use of the “drastic sanction.”
The contract at issue in DMW Marine required delivery of a crane to a NOAA coastal mapping vessel. Throughout performance, the parties had a disagreement about the certification requirements imposed by the contract, with the agency asserting that a certain type of American Bureau of Shipping (ABS) certification was required. When work on the crane was almost complete, DMW Marine sent the CO a letter stating:
The requirements for ABS [s]tate: contractor shall receive Government and ABS approval of the crane system. It is our intent that upon installation ABS will certify the onboard load test thereby approving the crane system. Please issue concurrence with above, as we are not shipping this crane until it is agreed upon.
The CO accepted DMW Marine’s position regarding “the ABS requirements,” noting “it appears that you and ABS have a good path forward that meets the requirements of the contract and is acceptable to the Government.”
After delivery of the crane, the CO asserted that the “onboard load test” certification was inadequate, and that DMW Marine should have “inform[ed] [ABS] prior to the commencement of construction in order to initiate the necessary surveys in due time.” As going back in time wasn’t possible, and as the Government wasn’t paying, the frustrated contractor made increasingly colorful responses to the CO’s correspondence, e.g., “[j]ust ship the crane back to us and we will refund your slow and late payments,” “if full payment[i]s not made, ‘[w]e are ready to repossess the crane,’” “[w]e will pick up our crane tomorrow.” Not amused, the CO terminated the contract for default, after paying only 71% of the contract price for a “crane [that] continues to be installed on” NOAA’s vessel.
The CBCA’s problem with NOAA’s actions are obvious: the interpretation of the inspection clause had been disputed between the parties, but when DMW Marine made clear what it was going to do and asked for the CO’s concurrence before shipment and installation of the crane, the CO unambiguously agreed. Then, after obtaining the crane, the CO flip-flopped and asserted that a further certification was required. The CBCA reached back to the basic commercial legal principles taught to law school 1Ls, i.e., UCC § 2-607(2), to explain that “[a]cceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a non-conformity cannot be revoked because of it . . ..”
When NOAA accepted delivery of the crane, it “knew well” that it was not ABS-certified in the manner the agency later demanded. Given “all that had transpired during the previous months,” the agency’s attempted rejection of the crane was improper and, thus, “[t]erminating the contract for cause was not justified.”
It should be noted that, although DMW Marine is surely pleased to have the T for D thrown out, it will likely not obtain the complete recovery it likely believes is due. The CBCA ordered that the termination be converted to one for the convenience of the Government. Under FAR 52.212-4(l), an agency that T for Cs a contract must pay “a percentage of the contract price reflecting the percentage of work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate . . . resulted from the termination.” The parties can usually negotiate T for C settlements, but agencies can resist full payments and, given the history of this case, may do so here.