Whenever you elect to terminate the other party for cause or for default, you need to JUSTIFY the basis of the cause or default. The reason being is that a termination for default or cause is the harshest contractual remedy. This is why the other party will typically either (i) convert the termination for default into one for convenience, or (ii) if there is no termination for convenience provision in the contract, argue the terminating party breached the contract by terminating the contract without rightful justification.
The key is if you are going to terminate a party for cause of default, make sure you have memorialized the persuasive reasons for exercising the termination, and can otherwise reasonably support the justification. Do not, and I repeat, do not haphazardly exercise a termination for default and think you do not have to justify the basis for the termination.
In the federal arena on a federal construction project, “[w]hen a contracting officer terminates a contract for default, and the contractor appeals that termination decision, ‘the government…bear[s] the burden of proof with respect to the issue of whether termination for default was justified.’” Department of Transportation v. Eagle Peak Rock and Paving, Inc., 2023 WL 3829625, *4 (Fed. Civ. 2023) (citation omitted).
In Eagle Peak Rock and Paving, the government terminated the contractor for cause for not maintaining progress, i.e., the contractor was not going to timely complete the project. “In failure-to-make-progress cases, the government must establish that ‘the contracting officer’s decision to terminate…was reasonable given the events that occurred before the termination decision was made.’ If the government makes this showing, the contractor then bears the ‘burden of providing that its nonperformance was excusable.’” Eagle Peak Rock and Paving, supra, at *4 (internal citations omitted).
On the often-central issue of whether it was reasonable to view timely completion as not reasonably likely, the tribunal must focus on ‘tangible, direct evidence reflecting the impairment of timely completion. In particular, the [tribunal] must ‘decide the actual performance that the contract requires and the amount of time remaining for performance’ and ‘may also consider’ factors such as ‘the contracting officer’s testimony and contemporaneously documents[,]…a comparison of the percentage of work completed and the amount of time remaining under the contract, the contractor’s failure to meet progress milestones, problems with subcontractors and suppliers, the contractor’s financial situation,…a contractor’s performance history, and other pertinent circumstances.’ This is a de novo adjudication: If the adjudicatory tribunal finds, based on all the evidence before it, that the standard for termination under the contract’s default clause is met, it is to uphold that decision whether or not the contracting officer stated the basis for that finding.
Eagle Peak Rock and Paving, supra, at *4 (internal citations omitted).
Importantly, “the termination-for-default decision must be performance-based and not pretextual.” Eagle Peak Rock and Paving, supra, at *5 (citation omitted). There must be a connection between the decision to terminate for default and the terminated contractor’s performance. Id. (citation omitted).
[A]s long as ‘the termination for default was predicated on contract-related issues,’ i.e., ‘the government’s default termination was not pretextual or unrelated to Contractor’s alleged inability to fulfill their obligations under the contract,’ the reasoning of the contracting officer at the time of termination is not the subject of the [Contract Disputes Act] adjudication, must proceed on the evidence and arguments made in the adjudicatory proceeding, not through arbitrary-and-capricious or abuse-of-discretion review. Of course, the substantive contract standard in its endangerment-of-timely-completion component, doubly considers what is ‘reasonable’—whether it was ‘reasonable’ to find that there was no ‘reasonable likelihood’ of timely completion.
Eagle Peak Rock and Paving, supra, at *5 (internal citation omitted).
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.