Darwin Construction Co., Inc. v. United States
33 Cont. Cas. Fed. 75,063, 1987 U.S. App. LEXIS 105, 811 F.2d 593 (1987)
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Rule of Law:
A government contracting officer's discretion to terminate a contract for default must be exercised reasonably and not arbitrarily or capriciously. A termination based solely on a desire to avoid dealing with the contractor, rather than on performance-related concerns, constitutes an abuse of discretion requiring the termination to be converted to one for the convenience of the government.
Facts:
- On June 3, 1983, Darwin Construction Company (Darwin) was awarded a fixed-price contract by the Navy for improvements at the Naval Ordnance Station in Maryland, with a completion date of November 15, 1983.
- The contract restricted Darwin's access to the construction site to two specific 14-day work periods.
- At the end of the second work period on November 7, 1983, Darwin had completed approximately 65% of the contract work.
- Darwin attributed the delay to the late delivery of necessary equipment and informed the Navy it was prepared to complete the remaining work within a two-week period starting in mid-December 1983.
- The Navy knew that any new contractor could not begin work until August 1984 at the earliest, a much later date than when Darwin could have completed the project.
- Darwin's delay in completing the work did not interfere with the Navy's ongoing use of the facility.
- On February 13, 1984, the Navy terminated the contract for default, alleging Darwin had not performed diligently.
Procedural Posture:
- The Navy terminated its contract with Darwin Construction Company for default.
- Darwin appealed the termination to the Armed Services Board of Contract Appeals (ASBCA), which is an administrative tribunal.
- The ASBCA initially ruled in Darwin's favor, finding the termination was arbitrary and capricious and converting it to a termination for the convenience of the government.
- Upon a motion for reconsideration by the Government, the ASBCA reversed its initial decision and upheld the termination for default.
- Darwin (Appellant) appealed the ASBCA's reconsidered decision to the U.S. Court of Appeals for the Federal Circuit, where the Government was the Appellee.
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Issue:
Does a contracting officer's arbitrary and capricious decision to terminate a contract for default constitute an abuse of discretion that requires converting the termination to one for the convenience of the government, even if the contractor is technically in default?
Opinions:
Majority - Cowen, Senior Circuit Judge
Yes. A contracting officer's arbitrary and capricious decision to terminate a contract for default is an abuse of discretion that must be overturned. The court held that the default article in a government contract gives the government the discretion to terminate, but that discretion must be reasonably exercised. Citing Schlesinger v. United States, the court found that a contractor's technical default cannot be used as a 'useful pretext for taking action found necessary on other grounds unrelated to the plaintiff's performance.' The Board's factual finding that the 'default action was taken solely to rid the Navy of having to further deal with Darwin' provided the legal basis for concluding the contracting officer abused his discretion. The court rejected the government's argument that a contractor must provide 'well-nigh irrefragable proof' of bad faith, clarifying that a showing of arbitrary and capricious action is sufficient. The decision also noted the contracting officer's failure to follow Armed Services Procurement Regulations, which required consideration of whether the original contractor could complete the work faster than a replacement.
Analysis:
This decision reinforces the principle that the government's power to terminate a contract for default is not absolute and is subject to judicial review for reasonableness. It clarifies that an 'arbitrary and capricious' or 'abuse of discretion' standard is sufficient to overturn a default termination, distinguishing it from the much higher 'bad faith' standard that requires proof of malice. The ruling empowers administrative boards and courts to scrutinize the motives behind a termination, ensuring that technical defaults are not used as a pretext for actions based on personal animus or other non-performance-related reasons. This provides a crucial protection for contractors against punitive government action and promotes fair dealing in public procurement.
