Responding to Cure Notices—A Strategic Approach Breakout Session #: F07

David Black & Gregory Hallmark, Holland & Knight LLP

Date: Tuesday, July 26

Time: 4:00pm-5:15pm

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Today’s Outline • The Problem: Aggressive Use of Cure

Notices

• The Contractor’s Risk: Present and Future

• Understanding the Government’s Perspective: Costs and Benefits of Various Options

• The Opportunity: The Cure Period as a Critical Time

• A Strategic Approach to Responding

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A Strategic Approach to Responding:

• “Carrot and Stick” Framework of the

Response

• Assembling the Right Team

• Spotting the Key Issues

• Gathering Key Information

• Preparing the “Quality Improvement Plan” and “Default Termination Legal Analysis”

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The Problem: Aggressive Use of Cure Notices

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Government’s Options to Address Poor Quality • Rejection of Delivery

• Deficiency Notice

• Non-Exercise of Options

• Termination for Convenience

• Cure Notice or Show Cause Notice

• Termination for Default

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What is a Cure Notice? • Government anticipates Contractor will fail

to perform contractual obligations.

• Contractor has 10 days (or more, if stated in the notice) to cure the failure.

• Or else Government may terminate for default.

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What is Termination for Default?

• Government’s right to terminate the contract because of the contractor’s “actual or anticipated failure to perform”

• A “drastic sanction” and “species of forfeiture” that is “not favored in law”

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Key Procedures

• Government may be required to issue a cure notice specifying the default and providing at least 10 days to cure

– “Show Cause” Notice: default has already occurred or insufficient time to cure (notice not required).

– Cure notice may request to show cause.

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10-Day Cure Notice • Fixed Price Contracts (52.249-8)

– Not Required for failure to deliver supplies or perform services by required deadline

– Required for failure to perform any other provision of the Contract.

– Required for failure to “make progress” as to endanger performance in accordance with its terms.

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10-Day Cure Notice

• Cost Reimbursement Contracts (52.249-6)

– Cure Notice Always Required

.“The Government may terminate performance of work under this contract in whole or, from time to time, in part, if—

(2) The Contractor defaults in performing this contract and fails to cure the default within 10 days (unless extended by the Contracting Officer) after receiving a notice specifying the default.”

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10-Day Cure Notice

• Commercial Item Contracts (52.212-4(m) & 12.403(c)

– Requires a cure notice for defaults other than for late delivery.

– “The contracting officer shall send a cure notice prior to terminating a contract for a reason other than late delivery.”

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Termination Notice • After cure period expires, or if cure

notice not required, Contracting Officer may determine that default termination is proper

• Must issue a termination notice to Contractor “The Contracting

Officer sent me.”

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Contractor Appeal • Termination Notice is a CO’s “Final

Decision” under the Disputes Clause • Appeal to BCA or COFC • Remedy: Convert termination for

default to “convenience” “The contractor’s delays were not excused!”

“The CO didn’t follow FAR Pt. 49”

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Cure Notice Abuse

Theory Practice

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The Risk to the Contractor: Present and Future

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Effect of Default Termination

• Present • Loss of contract revenue

• Possible liability for excess reprocurement costs

• Damage to strategic relationship with customer

• Loss of key personnel or capabilities

• Litigation Expenses from Appeal

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Effect of Default Termination

• Future • 52.209-5 Representation: “Default”

• Adverse CPAR

• 42.1503(h): Default Termination Disclosed in FAPIIS

• Harder to win future contracts

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Understanding the Government’s Perspective:

The Costs and Benefits of Various Options

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Alternatives to Termination for Default • Government Not Required to Terminate for

Default – The Government may:

• Permit contractor to continue performance

• Permit contractor to subcontract the work • Enter agreement with project surety • Terminate for convenience • Execute a no-cost termination if

requirement no longer exists and contractor is not liable for liquidated damages

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Legal Standards for Default Termination • It is difficult for the Government to

terminate for default • High legal bar:

– Default terminations are a “species of forfeiture,” which “are not favored in law.”

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Legal Standards for Default Termination • It is difficult for the Government to

terminate for default • High legal bar:

– Government “must comply strictly with all contract requirements and conditions authorizing the forfeiture, and be free from blame for the other party’s default.”

– Government is “held to the very letter of [its] authority.”

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Legal Standards for Default Termination • High legal bar:

– Government bears the burden of proof on whether default termination was justified

– Government must establish that the Contractor breached a material provision of the contract

– Government must establish that the Contractor has been given the opportunity to rectify or cure its breach.

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Legal Standards for Default Termination • High legal bar:

– For a service contract, Government must demonstrate “the accumulation of a sufficient number of items of unperformed or unsatisfactorily performed services to establish such a ‘substantial failure of performance.’”

– A mere “technical default” cannot justify a default termination.

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Legal Standards for Default Termination • High legal bar:

– Contracting Officer must first consider factors, including:

• Terms of the contract and applicable law

• The contractor’s specific failure and excuses

• The availability of other sources

• The urgency of the need and time needed to obtain from other sources

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Legal Standards for Default Termination • High legal bar:

– Contracting Officer must consider: • Degree to which contractor is essential to the program

• Effect of default termination on contractor’s capability as a supplier under other contracts

• Effect of default termination on contractor’s ability to liquidate guaranteed loans, progress payments, or advance payments

• Any other pertinent facts and circumstances

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Key Contractor Defenses • Contractor not in default • Government waived requirements • Government caused the default • Causes beyond contractor’s control • Defective notice

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The Opportunity:

The Cure Period as a Critical Time

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Alternatives to Termination for Default • Government Not Required to Terminate for

Default – The Government may:

• Permit contractor to continue performance

• Permit contractor to subcontract the work • Enter agreement with project surety • Terminate for convenience • Execute a no-cost termination if

requirement no longer exists and contractor is not liable for liquidated damages

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Cure Notice Response Strategy Termination • High Risk • Unjustified • Costly • Time-

Consuming • Not in

Gov’ts Best Interest

Continued Performance • Low Risk • Low Cost • Efficient • In the Gov’ts

Best Interest

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Cure Notice Response Strategy Contractor needs:

• The right team

• Looking at the right issues

• With access to the right information

• With time to prepare the right response package

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Cure Notice Response Strategy • Upon receipt of cure notice:

– Immediately Assemble the Response Team –Executive Management –Contracting –Program Management –Legal –SMEs

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Cure Notice Response Strategy • Upon receipt of cure notice:

– Response Team Analyzes the Right Issues

–The “Carrots”

–What can we do to assure the Customer that Performance will improve?

–The “Sticks”

–What defenses do we have to show that a default termination cannot be legally justified?

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Key Contractor Defenses

• Contractor Not in Default

– The Swanson Group, ASBCA No. 44664: a few instances of undermanned security guard posts, though technically defaults, did not show “substantial failure of performance.”

– Nomura Enterprise, ASBCA No. 50959: Govt terminated for default because contractor’s first articles failed testing, but Govt used incorrect testing procedure

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Key Contractor Defenses

• Government waived contract requirements

– Where Government knowingly permits continued performance despite non-compliance with requirement and contractor relies on the forbearance to continue, it waives the requirement.

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Key Contractor Defenses

• Government waiver

– DODS, Inc., ASBCA No. 57667:

• Contract called for delivery of first articles within 30 days. Contractor missed deadline. Govt actively encouraged performance.

• 21 months later, Govt terminated for default.

• Board: Govt waived delivery date. Had to establish new, reasonable deadline.

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Key Contractor Defenses

• Government waiver – B.V. Construction, ASBCA No. 47766:

• NASA waived completion date -- let it pass without concern as performance continued.

• NASA then unilaterally set new completion date without considering contractor’s availability at the time.

• Board: Given waiver, NASA had to consider existing circumstances when setting new schedule. Improper termination.

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Key Contractor Defenses

• Government waived contract requirements

– The Swanson Group, ASBCA No. 44664:

• Govt’s complaints about various deficiencies were waived because they were overtaken by contractor’s unexcused stoppage and Govt’s subsequent waiver by allowing contractor to resume performance.

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Key Contractor Defenses

• Government caused the default

– B.V. Construction, ASBCA No. 47766:

• Government breached implied duty not to hinder or interfere by directing certain work but failing to modify contract to include it.

• Contractor could not bill for the work, creating payment dispute with sub. Sub refused to perform, creating delay.

• Board: Improper to terminate for default for delay Government caused.

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Key Contractor Defenses

• Government caused the default

– Turbine Aviation, ASBCA No. 51323:

• Govt hindered contractor’s performance and caused delays by failing to timely clarify specifications when reasonably requested, then terminated for default when contractor did not complete on time.

• Board: the default was excusable.

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Key Contractor Defenses

• Default arose from causes beyond the contractor’s control and without its fault or negligence

– Examples:

• Acts of God or of the public enemy

• Acts of Government in its sovereign capacity

• Fires, floods, epidemics, quarantine restrictions, unusually severe weather

• Strikes

• Freight embargoes

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Key Contractor Defenses

• Causes beyond contractor’s control – Defaults caused by default of

subcontractor:

• No default, if beyond contractor’s and subcontractor’s control and without their fault or negligence

–Unless CO had ordered Contractor to purchase the subcontractor’s supplies/services from another available source and Contractor did not comply (Cost-type or T&M/LH only)

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Key Contractor Defenses

• Causes beyond contractor’s control – Nogler Tree Farm, AGBCA No. 81-104-1:

Mt. St. Helens eruption excused non-performance of tree-planting contract in nearby national forest

– Defense Sys. Corp., ASBCA No. 42939: contract was commercially impracticable due to flawed specs and “zero defect” standard; contractor would have to produce 100 lots to get 3 accepted

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Key Contractor Defenses

• Defective notice

– The Swanson Group, ASBCA No. 44664: Govt demanded cure within 3 days. ASBCA held failure to give 10 days is fatal to default termination for failure to make progress.

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Cure Notice Response Strategy • Response Team gathers the Right

Information • Contract Documents • Correspondence • Technical Info

• Historical Info • Legal Info • Supporting Docs

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Cure Notice Response Strategy

• Response team activities:

– Review the history of each alleged contractual non-compliance

– Analyze contract docs to determine whether identified problem is actually a failure to perform a contractual obligation

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Cure Notice Response Strategy

• Response team activities:

– Catalog every instance in which the Government:

• Failed to perform its contractual obligations

• Changed contractual requirements

• Imposed new requirements

• Made performance more difficult

– Gather correspondence and other evidence of each instance

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Cure Notices Response Strategy

• Response team activities:

– Catalog every other occurrence beyond Contractor’s control that impacted performance

• Gather correspondence and other evidence of these occurrences

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Cure Notices Response Strategy

• Response team activities:

– Brainstorm potential fixes for the problem, whether a default or not

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Cure Notice Response Strategy • Response Team prepares the Right

Response Package

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Cure Notice Response Strategy

• Quality Improvement Plan

– Propose solutions to show CO that any problems will be fixed

• Signals cooperation

• Convince CO that alleged or anticipated failure to perform is cured

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Cure Notice Response Strategy

• Annex: Default Termination Legal Analysis

• Attach legal analysis showing that default termination is improper:

• Describe tough legal standards for default

• Demonstrate waiver or absence of default

• Identify every Government non-compliance and other cause beyond Contractor’s control

– Shows CO (and agency counsel) that defending a legal challenge will not be easy.

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The Goal

“They didn’t terminate us for default!!!”

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Holland & Knight LLP Tysons Corner, VA

• David S. Black (703) 720-8680 David.Black@hklaw.com • Gregory R. Hallmark (703) 720-8680 Gregory.Hallmark@hklaw.com

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