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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
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 2
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
“The CO didn’t delays were not
follow FAR Pt. 49” excused!”

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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 19
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 28
Cure Notice Response Strategy
Termination Continued
• High Risk Performance
• Unjustified • Low Risk
• Costly • Low Cost
• Time- • Efficient
Consuming • In the Gov’ts
• Not in Best Interest
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. 35
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. 38
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 40
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 44
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. 51
The Goal
“They didn’t
terminate us
for default!!!”

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Contact Information
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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