By Calvin Biesecker
A federal appeals court yesterday again upheld a 1991 decision by the Navy to terminate for default a contract that required teammates General Dynamics [GD] and McDonnell Douglas, which is now a subsidiary of Boeing [BA], to develop the A-12 stealth bomber because the contractors failed to make adequate progress in developing the aircraft.
Boeing yesterday said it would appeal the decision by the U.S. Court of Appeals for the Federal Circuit. GD is also expected to appeal the decision but had not made any announcement by our deadline.
“Today’s decision, which awards no amount of damages to either the contractors or the government, is but the next step in this regrettable litigation that is now in its eighteenth year,” J. Michael Luttig, Boeing’s general counsel, said in a statement. “The decision is fatally flawed under what has been the law governing this case from the outset. It creates out of whole cloth a new law that essentially requires the case to be tried anew from the beginning,” Luttig said.
In its opinion yesterday the appeals court said that “the government offered the [Navy] contracting officer’s testimony, the contractors’ statements, and contemporary documents as direct evidence. The evidence, such as the contractors’ performance history (e.g., the failure to meet several milestones, including the significant first flight), coupled with the contractors’ dire financial difficulty, which negatively impacted their performance under the contract, shows that the contracting officer was reasonably justified in feeling insecure about the contractors’ rate of progress. Therefore, the government has satisfied its burden to justify the default termination.”
It was then up to the contractors to prove they were making progress or that they had a good reason for the delay, none of which they did in their appeals, the court says.
The federal appeals court called the 18-year old litigation between the United States government and GD and Boeing the “American version of Jarndyce and Jarndyce,” a reference to a court case over an inheritance in the Charles Dickens novel Bleak House runs for generations and proceeds to the point that the mounting legal costs nearly outweigh the estate.
Not quite in this case so far, but if the two contractors ultimately lose the A-12 case, they will each incur substantial charges amounting to about $1.4 billion apiece. The government is seeking to recover $1.4 billion in progress payments made to the contractors under the original contract plus another $1.4 billion in interest.
The $2.8 billion isn’t reflected in either companies’ filings with the Securities and Exchange Commission. Instead, the companies are basing potential charges on previous estimates when the ultimate costs to each were expected to be $700 million if they lost the case.
At $1.4 billion in total damages, Boeing says it has previously made provisions for potential charges so that its costs would amount to $275 million. If the case had been decided once and for all, Boeing would owe another $700 million on top of that. GD, on the other hand, hasn’t made any reserves so it would take a $1.4 billion charge against its earnings if the case was closed. GD and McDonnell Douglas were awarded a 30-month, $4.4 billion contract in January 1988 for full-scale engineering and development of the A-12, with first flight of a prototype aircraft scheduled for June 1990. However, two weeks prior to first flight the contractors told the Navy the flight would take place sometime in the July to September 1991 period, according to the appeals court, which outlined a brief history of the program and the subsequent litigation. The two companies also believed they could not complete the work within the $4.8 billion ceiling price of the fixed-price contract and wanted the contract modified.
After GD and McDonnell Douglas missed the flight test and were unable to reach agreement with the Navy on a revised contract, the service in August 1990 unilaterally modified the contract with new delivery dates for the prototype aircraft, making first flight in March 1992. However, by the end of the year, the contractors weren’t confident they could meet the new flight date and still wanted the contract to be restructured, the appeals court says.
In December 1990, the Navy issued a cure notice to the contractors saying they had failed to meet certain contract requirements and unless they could rectify the problems the A-12 contract might be terminated for default in early January 1991. GD and McDonnell Douglas ultimately responded that they couldn’t meet the delivery schedules nor certain specifications but said they were not in default because the delivery schedules were “invalid,” the appeals court says.
On Jan. 7, 1991, the Navy terminated the A-12 contract for default, demanding that the contractors pay the government $1.4 billion in progress payments under the contract.