Earlier this month, the Federal Circuit provided new guidance on the high burden that the government must carry to terminate a contract for default.  In Dep’t of Transp. v. Eagle Peak Rock & Paving, Inc., the Federal Circuit held that the validity of a termination decision does not depend exclusively on the contracting officer’s reasoning — rather, the government must produce evidence during litigation to prove the contractor’s default under a de novo standard of review.  The Eagle Peak decision illustrates that, absent a threshold showing that the contracting officer’s decision was pretextual, contractors challenging a default decision should focus on developing the “clean slate” record needed to rebut the government’s allegations, rather than disputing the contracting officer’s rationale (or lack thereof) for termination.

Background and Overview of the Federal Circuit’s Decision

Eagle Peak concerns a Federal Highway Administration (“FHWA”) contract for construction work at Yellowstone National Park.  The contractor allegedly failed to submit acceptable construction schedules, and FHWA terminated the contractor for failure to make timely progress under FAR 52.249-10(a).  The contractor appealed this default termination to the Civilian Board of Contract Appeals (“CBCA”). 

The CBCA evaluated whether the contractor was “reasonably likely” to complete work within the time specified in the schedule.  Specifically, the CBCA assessed whether the contracting officer had considered all the relevant factors in FAR 49.402-3(f), such as the “urgency” of the need for services and the “period of time required to obtain them” from other sources.  The CBCA concluded that the contracting officer had not considered these factors, and thus found that the agency had not justified its default termination of Eagle Peak.  Notably, the CBCA stated that it “need not resolve” whether Eagle Peak was in fact making sufficient progress on the contract — because the contracting officer had failed to consider all of the relevant FAR 49.402-3(f) factors, the CBCA held that the termination for default was improper and converted it to a termination for convenience.

On appeal, the Federal Circuit vacated the CBCA’s decision, explaining that the CBCA had “focused heavily, though not entirely, on what the contracting officer said and considered in determining that timely completion was in sufficient doubt, rather than on what the record developed before the Board showed about whether timely completion was in sufficient doubt.” 

The Federal Circuit held that this was improper under the Contract Disputes Act of 1978 (“CDA”), which provides that a contracting officer’s findings of fact “are not binding in any subsequent proceeding.”  Consistent with that requirement, the Federal Circuit explained that litigation of CDA claims “must proceed de novo, based on the evidentiary record before the Board and not the [contracting] officer’s reasoning or findings of fact.”  In other words, the CBCA could not rely on the reasonableness of the contracting officer’s decision to decide the appeal.  The Federal Circuit thus remanded the case for further proceedings.

In a dissent, Judge Newman wrote that the CBCA’s findings would support affirmance even under the de novo standard articulated by the majority.  Among other reasons, Judge Newman observed that there was “undisputed” evidence “showing that the company had adequate resources to timely complete the project.”  Her dissent thus concluded that a remand was unnecessary and would only delay justice.

Key Takeaways and Guidance for Contractors

The Federal Circuit’s decision confirms that the government bears the heavy burden of proving that a default termination was justified based on the objective evidence developed in litigation.  The reasoning of the contracting officer at the time of termination is relevant, but not the focus of the proceeding.  In particular, Eagle Peak has three key implications for contractors and the government.

First, although Eagle Peak lost the appeal, the Federal Circuit’s decision is generally helpful for contractors seeking to challenge a default termination, because a de novo standard of review typically presents a high burden for the government. 

The CBCA’s rejected standard of review was similar to the arbitrary and capricious standard applied in administrative law cases (such as bid protests).  As compared to a de novo standard, this standard typically favors the government by focusing on the agency’s subjective consideration of the facts and circumstances at the time of the decision, without the benefit or detriment of additional fact finding.  Under that standard, an agency’s decision will generally be affirmed so long as the agency reasonably considers the relevant circumstances, documents its decision, and complies with the law.  The Federal Circuit’s opinion confirms that, in future cases, the government cannot rely on the reasoning and findings of a contracting officer’s decision alone, and instead must provide evidence to prove its case on the merits.

Second, the Federal Circuit’s opinion shows that contractors challenging a default termination should not focus exclusively on the reasoning in a contracting officer’s decision, but should also be sure to rebut the government’s arguments and evidence developed during litigation.  Eagle Peak may thus be helpful to the government in cases where a contracting officer’s written decision fails to document the government’s reasons for termination or disregards important facts and circumstances. 

Of course, contractors can and should still point to failings in a contracting officer’s reasoning, which may help to rebut the government’s affirmative case.  And, in cases where the contracting officer has failed to act in good faith or has terminated the contract based on a pretext, Eagle Peak recognizes that a contractor may still challenge the contracting officer’s reasoning.

Third, when the government claims that a contractor was not reasonably likely to complete work on time, the government must provide “tangible, direct evidence reflecting the impairment of timely completion.”  The contracting officer’s opinion about the likelihood of the contractor’s ability to complete work is not controlling.  This underscores an opportunity for contractors who face default termination for schedule reasons — contractors may offer testimony and documents to show that they would have been able to complete work on time, and that the contracting officer’s judgment was simply incorrect.