McDonnell Douglas Corp. v. United States

United States Court of Appeals for the Federal Circuit
2007-5111, -5131

MCDONNELL DOUGLAS CORPORATION,

Plaintiff-Appellant,

and

GENERAL DYNAMICS CORPORATION,

Plaintiff-Appellant,

v.

UNITED STATES,

Defendant-Appellee.

Charles J. Cooper, Cooper & Kirk, PLLC, of Washington, DC, argued for plaintiff-
appellant McDonnell Douglas Corporation. With him on the brief were Michael W. Kirk,
Howard C. Nielson, Jr. and D. John Sauer. Of counsel on the brief were Caryl A.
Potter, III, and Elizabeth A. Ferrell, Sonnenschein, Nath & Rosenthal, LLP, of
Washington, DC; and J. Michael Luttig, The Boeing Company, of Chicago, Illinois.

Donald B. Verrilli, Jr., Jenner & Block, LLP, of Washington, DC, argued for
plaintiff-appellant General Dynamics Corporation. With him on the brief were David A.
Churchill; and Linda L. Listrom, of Chicago, Illinois.

Bryant G. Snee, Deputy Director, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellee. With him on the brief were Jeanne E. Davidson, Director, and Patricia M.
McCarthy, Assistant Director. Of counsel was Kirk T. Manhardt, Deputy Director. Of
counsel on the brief were Wendell A. Kjos and Mark A. Romano, Office of the General
Counsel, United States Department of the Navy, of Arlington, Virginia.

Gregory A. Smith, Cooley Godward Kronish LLP, of Reston, Virginia, for amicus
curiae National Defense Industrial Association. With him on the brief was David E.
Fletcher, of Washington, DC. Of counsel on the brief was Ralph C. Nash, Jr., George
Washington University Law School, of Washington, DC.

Appealed from: United States Court of Federal Claims

Senior Judge Robert H. Hodges, Jr.
 United States Court of Appeals for the Federal Circuit

2007-5111, -5131

MCDONNELL DOUGLAS CORPORATION,

Plaintiff-Appellant,

and

GENERAL DYNAMICS CORPORATION,

Plaintiff-Appellant,

v.

UNITED STATES,

Defendant-Appellee.

Appeal from United States Court of Federal Claims in 91-CV-1204,
Senior Judge Robert H. Hodges, Jr.

__________________________

DECIDED: June 2, 2009
__________________________

Before MICHEL, Chief Judge, MOORE, Circuit Judge, and HUFF, * District Judge.

MICHEL, Chief Judge.

This case arises from the government’s default termination in 1991 of a contract

between the United States Navy (“the government”) and two contractors, McDonnell

Douglas Corporation (“MDC”) and General Dynamics Corporation (“GD”) (collectively

“contractors”) to develop a carrier-based stealth aircraft, the A-12 Avenger. The

*
Honorable Marilyn L. Huff, District Judge, United States District Court for
the Southern District of California, sitting by designation.
contractors challenge the judgment of the Court of Federal Claims in favor of the

government. McDonnell Douglas Corp. v. United States, 76 Fed. Cl. 385 (2007)

(“McDonnell Douglas XIII”). We heard oral argument on December 3, 2008. Because

the overall evidence of record supports a conclusion that the government was justified

in terminating the contract for default, we affirm.

I. BACKGROUND

This American version of Jarndyce and Jarndyce has entered its eighteenth year

of litigation. The detailed facts have been repeated many times previously. See, e.g.,

McDonnell Douglas XIII; McDonnell Douglas Corp. v. United States, 323 F.3d 1006

(Fed. Cir. 2003) (“McDonnell Douglas XII”); McDonnell Douglas Corp. v. United States,

50 Fed. Cl. 311 (2001) (“McDonnell Douglas XI”); and McDonnell Douglas Corp. v.

United States, 182 F.3d 1319 (Fed. Cir. 1999) (“McDonnell Douglas X”). As we are

writing what necessarily will become “McDonnell Douglas XIV,” we will only provide a

summary of relevant facts here.

A. The A-12 contract

In January 1988, the Navy awarded the contractors a fixed-price research and

development contract for the A-12 stealth aircraft. The full-scale engineering and

development (“FSD”) contract was structured as an incrementally funded, fixed-price

incentive contract with a ceiling price of $4,777,330,294. The contract incorporated by

reference Federal Acquisition Regulation (FAR) 52.249-9 Default provision (Fixed-Price

Research and Development), which provides in relevant part:

(a)(1) The Government may . . . by written Notice of Default
to the Contractor, terminate this contract in whole or in part if
the Contractor fails to—
...

2007-5111, 5131 2
 (ii) Prosecute the work so as to endanger performance of
this contract (but see paragraph (a)(2) of this clause);
...
(2) The Government’s right to terminate this contract under
subdivisions (a)(1)(ii) and (iii) of this clause may be
exercised if the Contractor does not cure such failure within
10 days (or more, if authorized in writing by the Contracting
Officer) after receipt of the notice from the Contracting
Officer specifying the failure.

48 C.F.R. § 52.249-9 (1984).

Under the contract, the contractors were to design, manufacture, and test eight

A-12 prototypes according to a specified schedule, with the first aircraft to be delivered

in June 1990 (the “first flight” date) and the remaining seven to be delivered monthly

through January 1991. The contractors were to conclude their testing of the aircraft by

April 1993, the completion time of the Navy’s technical evaluation program

(“TCHEVAL”). The contractors would also support the Navy’s evaluation of the aircraft

and further provide training support for three years after delivering training equipment to

the Navy in June 1993. In addition, the contract gave the Navy the option to purchase

four production lots of aircraft. In May 1990, the Navy exercised its option on Lot I for

six aircraft to be delivered between June 1991 and May 1992.

B. Modification of the A-12 contract

From the start, the contractors encountered difficulties in performing the contract,

including meeting the contract schedule and keeping the aircraft weight within

specifications. McDonnell Douglas XII, 323 F.3d at 1011. Two weeks before the first

flight date, the contractors reported to the Navy that the projected first flight date would

be July-September 1991, instead of June 1990 as originally agreed, and the remainder

of the contract work would be delayed a corresponding twelve to fourteen months.

2007-5111, 5131 3
They also predicted that the cost of completing the contract would exceed the ceiling

price so substantially that it would be “unacceptable” to the contractors. The contractors

asserted that a fundamental problem with the FSD contract was its fixed-price structure

and proposed that the contract be modified.

At the end of June 1990, the contractors missed the first flight date. The Navy

did not terminate the contract. Instead, the contracting officer sent a letter to the

contractors in July, expressing “serious concern” regarding the deficient performance

under the contract. He warned that the contractors’ failure to meet the first flight date

“could jeopardize performance of the entire [contract] effort.” He also asked for the

contractors’ plan to meet the rest of the original schedule as well as their proposal for

contract revision.

As the parties failed to reach an agreement, on August 17, 1990, the Navy

unilaterally issued a contract modification, P00046, which revised the prototype aircraft

delivery dates but left Lot I and later milestones intact. The delivery schedules are:

Aircraft Number Original Delivery Date P00046 Modified Delivery Date

1 June 1990 December 1991
2 July 1990 February 1992
3 August 1990 June 1992
Prototype

4 September 1990 August 1992
5 October 1990 September 1992
6 November 1990 November 1992
7 December 1990 December 1992
8 January 1991 February 1993

9 June 1991
10 August 1991
Lot I

11 October 1991
12 December 1991
13 March 1992
14 May 1992

2007-5111, 5131 4
C. Performance after contract modification

After the contract modification, more problems arose concerning the performance

of the contract. During the months leading to termination, the contractors’ internal

schedules showed that they would not meet the P00046 modified first flight date in

December 1991. McDonnell Douglas XIII, 76 Fed. Cl. at 401. Instead, they projected

three more months’ delay with the first flight date in March 1992. By December 1990,

the contractors’ “confidence in the March 1992 flight date [was further] reduced.” They

believed that such a date was achievable “only after significant changes.”

At the same time, the contractors continued operations, spending $120-150

million of their own money every month. McDonnell Douglas XIII, 76 Fed. Cl. at 427. In

November 1990, the contractors submitted a formal request to the Navy to restructure

the contract as a cost-reimbursement type contract. McDonnell Douglas X, 182 F.3d at

1322.

D. The termination

The contractors’ continued difficulties in performing the contract led the

Department of Defense and the Navy to question the viability of the project. On Friday,

December 14, 1990, then-Secretary of Defense Dick Cheney directed the Secretary of

the Navy to show cause by January 4, 1991, why the A-12 program should not be

terminated.

The following Monday, December 17, the Navy issued a cure notice to the

contractors, stating that the government considered the contractors’ performance under

the contract “unsatisfactory.” In particular, the cure notice stated that the contractors

had “failed to fabricate parts sufficient to permit final assembly in time to meet the

2007-5111, 5131 5
schedule for delivery,” and had “failed to meet specification requirements.” The letter

asserted that “these conditions [were] endangering performance of [the] contract,” and

that unless these conditions were cured by January 2, 1991, the government might

terminate the contract for default.

In the following days, high-level meetings occurred between the responsible

government personnel and the contractors. McDonnell Douglas X, 182 F.3d at 1323.

During these meetings, the contractors asserted that they could not “get there if [they

didn’t] change the contract,” and that it “got to get reformed to a cost type contract or

[they could not] do it.” When asked by the government if they could “correct

deficiencies to provide an aircraft that meets the requirements,” the contractors replied

that “all deficiencies cannot be corrected. . . . Mother [N]ature won’t allow correction of

all defects. We’ll do the best we can and the Navy has to decide if that’s good enough.”

On January 2, 1991, in responding to the cure notice, the contractors admitted

that they would “not meet delivery schedules or certain specifications of the original

contract, or the revised FSD delivery schedule.” However, they denied that they were in

default because, in their view, the delivery schedules were invalid. They asserted that

“the fundamental factual assumptions of the original contract, with respect to schedule

and achievability of certain specification requirements, were gravely mistaken,” and

therefore, “the schedules and certain other specification requirements, such as weight,

were impossible to satisfy.” The contractors concluded that “[i]n these circumstances,

there [was] not an enforceable schedule or specifications against which to measure

their performance.” They further declared that compliance with the government’s

demand to cure by January 2, 1991 was “unachievable.”

2007-5111, 5131 6
 However, the contractors stated that they were “fully committed to the success of

the [A-12] Program.” They again submitted their proposal to restructure the contract to

a cost reimbursement contract. In exchange for that restructuring, the contractors

would absorb a $1.5 billion fixed loss and would waive their claims for equitable

adjustment.

On January 7, 1991, Rear Admiral William Morris, the contracting officer at the

time, issued a termination letter to the contractors stating that the government was

terminating the A-12 contract due to the contractors’ default. A few weeks later, the

Navy sent a letter to the contractors demanding the return of approximately $1.35 billion

in unliquidated progress payments under the terminated contract. McDonnell Douglas

X, 182 F.3d at 1324.

II. LITIGATION HISTORY

A. The first round

In June 1991, the contractors sought relief in the Court of Federal Claims under

the Contract Disputes Act, 41 U.S.C. § 609(a), requesting that the court: (1) grant the

contractors’ equitable adjustment claims, (2) convert the government’s termination for

default into a termination for convenience, (3) deny the government’s demand for return

of progress payments, (4) award the contractors costs and a reasonable profit under the

contract, (5) award the contractors settlement expenses, and (6) award damages for

breach of contract.

After several years of litigation, the Court of Federal Claims ruled that the

government’s default termination was invalid. McDonnell Douglas Corp. v. United

States, 35 Fed. Cl. 358, 368-71 (1996) (“McDonnell Douglas IV”). It found that the

2007-5111, 5131 7
contracting officer failed to exercise “reasoned discretion” before the default termination

because Secretary Cheney’s actions effectively forced the Navy to terminate the A-12

contract for default. Id. at 369-71. Therefore, it vacated the government’s termination

for default and converted it into a termination for convenience. Id. at 361. The court

ultimately denied the government’s claim for return of $1.35 billion in unliquidated

progress payments, and entered judgment of approximately $1.2 billion in favor of the

contractors. McDonnell Douglas Corp. v. United States, 40 Fed. Cl. 529, 555-56 (1996)

(“McDonnell Douglas IX”).

On appeal, we reversed, holding that because the termination for default was

related to the contractors’ performance, it was within the discretion of the government.

McDonnell Douglas X, 182 F.3d at 1321. We remanded the case for the trial court to

determine whether the default termination was justified. Id.

B. The second round

After a six-week trial on remand, the Court of Federal Claims ruled in favor of the

government. McDonnell Douglas XI, 50 Fed. Cl. at 319. The court sustained the

default termination based solely on the contractors’ failure to meet the December 1991

first flight date. Id. at 315-19. It declined to base its determination of justified default on

the contractors’ alleged financial inability to perform the contract, anticipatory

repudiation, and failure to comply with weight and other specification requirements. Id.

at 319-24. The court also rejected the contractors’ arguments that the unilateral

schedule was unreasonable and therefore unenforceable, or, if enforceable then the

Navy waived the unilateral schedule and first flight date of December 1991; that the

contract was commercially impossible to perform; and that the Navy had to disclose its

2007-5111, 5131 8
alleged superior knowledge despite the assertion of the state secrets privilege. Id. at

324-26. The court then entered judgment in favor of the government. Id. at 326.

On appeal, we affirmed the trial court’s determination that the unilateral schedule

imposed by the government was enforceable and not waived, that the Military and State

Secrets privilege precluded litigation of the contractors’ “superior knowledge” claim, and

that the government’s claim for progress payments was not at issue in the case.

McDonnell Douglas XII, 323 F.3d at 1018-24. However, we held that the trial court

misapplied the controlling standard in determining whether the default termination was

justified. Id. at 1012-14. Therefore, we again vacated and remanded. Id.

Specifically, we stated that a default termination did not require “absolute

impossibility of performance or a contractor’s complete repudiation or abandonment.”

Id. at 1015. On the other hand, the government cannot justify a default termination

“based solely on a contractor’s concerns about meeting a contractual schedule

milestone or specification requirements.” Id. Instead, the government must establish by

a preponderance of the evidence of a “reasonable belief on the part of the contracting

officer that there was no reasonable likelihood that the contractor could perform the

entire contract effort within the time remaining for contract performance.” Id. at 1016.

(citing Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 765 (Fed. Cir. 1987)).

C. The third round

On remand, the Court of Federal Claims stated as follows:

The case turns on whether the Circuit’s remand meant for
the clauses, “entire contract effort” and “contract completion
date” to mean exactly what they appear to mean—the
contractors’ expansive view; or whether the remand permits
our use of a more compact yardstick—coinciding with the
Government’s restricted view. The Government did not

2007-5111, 5131 9
 establish a contract closing date and the contracting officer
did not conduct a Lisbon analysis prior to termination.

McDonnell Douglas XIII, 76 Fed. Cl. at 437 n.92. The court concluded that the

government could not “prevail if the law require[d] an enforceable contract completion

date at termination,” but went on to state that the government’s “burden of proof [did]

not necessarily require the Government to provide a completion date for the entire

contract effort.” Id. at 388.

Based on its understanding that we “implied in this case that a court may choose

a reasonable period of performance to use as a measure of progress on the contract,”

id. at 420, the court found that the Navy’s unilateral modification, P00046, was a

yardstick that “enable[d] the court to consider the contractors’ progress in light of factors

that are probative of their ability and willingness to perform,” id. at 389. Using P00046

as the yardstick and considering “all of the relevant facts and testimony,” id. at 421,

including mitigating factors for the contractors, the court concluded that the overall

evidence of record supported a conclusion that the government was justified in

terminating the contract for failure to make progress, id. at 430.

In addition, the trial court stated that the judgment in the case mooted the

government’s alternative argument that the contractors did not provide adequate

assurances to the contracting officer after receiving the notice to cure. Id. at 434.

The contractors timely appealed. We have jurisdiction pursuant to 28 U.S.C.

§ 1295(a)(3).

2007-5111, 5131 10
 III. DISCUSSION

A. Standard of review

Whether the government is justified in terminating a contract for default is a

question of law based on factual underpinnings. McDonnell Douglas X, 182 F.3d at

1325. We review issues of law de novo, without deference to the trial court. McDonnell

Douglas XII, 323 F.3d at 1012 (citation omitted). However, we will not disturb the trial

court’s factual findings, such as its evaluation of evidence of default, unless they are

clearly erroneous. Id.

B. Analysis

1. Termination for failure to make progress in the absence of a contract
completion date

In McDonnell Douglas XII, we quoted the language from Lisbon in toto and

directed the Court of Federal Claims to determine “the performance required by the

contract 1 and the contract completion date.” 323 F.3d at 1018 (emphasis added,

footnote added). We acknowledge that this specific instruction, if read literally, turns out

to be difficult to apply. This is largely due to the unique facts of this case and the

disadvantage we faced last time when deciding the case without the benefit of sufficient

fact findings from the trial court. See id. at 1014.

1
Generally, obligations arising from the exercise of an option are part of a
new contract only when the option was the principal subject matter of the bargain, i.e.,
an option contract. Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1275
(Fed. Cir. 1999) (citing 3 Eric Mills Holmes, Corbin on Contracts § 11.1 (1996)). In this
case, because the option to purchase Lot I production aircraft is not the principal subject
matter of the original bargain, it is properly considered as part of the original A-12
contract between the contractors and the government. Thus, “the performance required
by the contract” includes the design, manufacturing, and testing of the eight prototype
planes under the FSD contract, the manufacturing and testing of the six Lot I production
aircraft, and other testing and supporting of the project.

2007-5111, 5131 11
 The difficulty in strictly applying the Lisbon test lies in the critical fact that P00046

revised the prototype aircraft delivery dates but left Lot I delivery dates unchanged. As

such, there is an overlap between the modified delivery schedule for the eight prototype

aircraft and the original delivery schedule for the Lot I production aircraft. See Delivery

Schedules, supra. The government insists that the Lot I schedule remains in effect

because that portion of the original contract was not modified by P00046. However,

“[t]he A-12 contract was designed as a long-term research and development effort,

structured so that each period of performance built upon preceding work.” McDonnell

Douglas XIII, 76 Fed. Cl. at 432. Because the eighth test plane would serve as the

prototype for the Lot I aircraft, the contractors could not have delivered Lot I aircraft

according to the original schedule as that would require delivering the production aircraft

prior to the prototype planes. Therefore, we agree with the Court of Federal Claims that

the “[a]pplication of the contract in [the] manner [advocated by the government] would

be nonsensical.” McDonnell Douglas XIII, 76 Fed. Cl. at 432. It follows that the

contract, as modified by P00046, does not provide a definite contract completion date. 2

Id. at 401.

The contractors would have us apply the Lisbon test literally and hold that the

absence of a contract completion date per se precludes the government from ever

justifiably terminating a contract for failure to make progress. We cannot adopt such a

broad categorical rule. The propriety of such a default termination, even though

2
The contractors offered legal principles, such as judicial estoppel and
waiver, to support this point. We do not believe it is necessary to reach those
arguments. Whether the contract has a completion date is a question of fact. Common
sense in this case dictates the conclusion that “[t]he overlapping schedule offered by the
Government as a basis for assessing default is unreasonable and likely unenforceable.”
McDonnell Douglas XIII, 76 Fed. Cl. at 432.

2007-5111, 5131 12
ultimately a question of law, is a fact-sensitive inquiry. The Lisbon test requires the

contracting officer’s reasonable belief that there was no reasonable likelihood of timely

completion. Lisbon, 828 F.2d at 765. Therefore, it is inevitable that some case-by-case

adjudication is required.

To be sure, just as the prior panel did, we reaffirm that the test formulated in

Lisbon is a correct standard for determining whether a default termination for failure to

make progress is justified. However, this test was announced in view of the specific

facts presented in that case, where there was a definite contract completion date.

Lisbon, 828 F.2d at 761, 762. It did not address the situation where, as in the present

case, the contract does not specify a fixed completion date. See United States v.

Alaska S.S. Co., 253 U.S. 113, 116 (1920) (stating that a court “will determine only

actual matters in controversy essential to the decision of the particular case before it,”

and that it “is not empowered to decide . . . abstract propositions . . . which cannot affect

the result as to the thing in issue in the case before it”). As such, the Lisbon standard

could not be literally applied in every default termination for failure to make progress

case.

We are confident that Lisbon does not, as the contractors argue, foreclose a

court’s review of a default termination for failure to make progress merely because of an

unascertainable contract completion date. This is evident from Lisbon itself, in which

the court approved the Claims Court’s citation and interpretation of Universal Fiberglass

Corp. v. United States, 537 F.2d 393, 397 (Ct. Cl. 1976). 3 Lisbon, 828 F.2d at 765.

3
Universal Fiberglass was also cited with approval by the previous two
panels in deciding the present case. See McDonnell Douglas X, 182 F.3d at 1328;
McDonnell Douglas XII, 323 F.3d at 1015.

2007-5111, 5131 13
 Universal Fiberglass involved a supply and service contract for more than 12,000

mail delivery trucks. 537 F.2d at 394. The contractor in that case repeatedly failed to

meet the installment delivery schedule, even after several extensions of time. Id. at

394-95. It closed down almost all of the production lines and laid off most of its labor

force. Id. at 395. Meanwhile, a government audit showed that the contractor was

insolvent. Id. Time and again, the government asked the contractor to furnish its

proposed revised delivery schedule, but to no avail. Id. The government issued a

Preliminary Notice of Default and gave the contractor ten days to cure all of its defaults.

Id. at 396. After the contractors waived its rights to the full ten-day notice period, the

government promptly terminated the contract for failure to make progress. Id.

The Court of Claims held that the contract was properly terminated for failure to

make progress. Id. The court found that in the absence of a delivery schedule, i.e., the

contract completion date, the “cure notice” served the purpose of advising the contractor

when the time for default has been reached. Id. at 398. The court reasoned:

The contractor had already been asked to submit a new
delivery schedule and had not done so. Nor had the
contracting officer learned, from the contractor or any other
source, any information to lead him to believe that deliveries
would or could ever be resumed. In such circumstances, a
unilateral delivery schedule prescribed by him would have
been an exercise in futility, except for forensic purposes,
should we be so foolish as to give the absence of such a
schedule any legal significance or weight.

Id.

We realize that the facts in Universal Fiberglass are not exactly the same as in

the present case. First, the difficulties in designing and manufacturing stealth aircraft

are incomparable to those in making small three-wheeled mail delivery trucks. More

2007-5111, 5131 14
importantly, as the contractors correctly point out, in Universal Fiberglass, the contractor

“was making no progress at all, had never manufactured a vehicle under the new

specifications it had agreed to, did not have the necessary parts and could not obtain

them and had allowed its labor force to wither away.” Id. at 398. In contrast, in the

present case, “[d]espite delays, the contractors continued operations. They were

spending $120 to $150 million of their own money every month. They were committed

to performing the A-12 contract until the date of termination.” McDonnell Douglas XIII,

76 Fed. Cl. at 427.

However, the contractors’ commitment to performing the contract was not without

conditions. Starting from as early as June 1990, the contractors had asserted that “the

A-12 contractual schedule [was] not achievable and need[ed] to be changed.” They

also predicted that the cost of completing the contract would exceed the ceiling price so

substantially that it would be “unacceptable” to the contractors. Insisting that the A-12

project could not “be accomplished under a fixed price type contract without [solving]

the financial, schedule and specification problems,” the contractors proposed that the

contract be modified. The contractors maintained this position throughout their

performance of the A-12 contract.

After missing the original first flight date, “[t]he contractors were working to an

aggressive schedule, but they would not sign up for one.” McDonnell Douglas XIII, 76

Fed. Cl. at 399. Because the contractors rejected the government’s proposal of a

bilateral modification of the contract, the government imposed the unilateral modification

of the delivery schedule for the prototype airplanes, P00046, “as a first step in achieving

the overall delivery schedule.” McDonnell Douglas XIII, 76 Fed. Cl. at 400.

2007-5111, 5131 15
 P00046 extended the first flight date from June 1990 to December 1991. The

contractors’ projected delivery date, however, further slipped away. “Six months prior to

termination, the contractors projected a twelve to fourteen-month delay in first flight

[June – August 1991]. By termination, the contractors’ expectations extended first flight

to March 1992.” McDonnell Douglas XIII, 76 Fed. Cl. at 422. In fact, by December

1990, the contractors’ confidence in even the March 1992 flight date was reduced.

They believed that such a date was achievable “only after significant changes.” As the

trial court found, “Navy officials . . . could not predict when the contractors would deliver

first flight.” McDonnell Douglas XIII, 76 Fed. Cl. at 401.

As the contractors themselves emphasize, “one cannot test an aircraft before it

has been built, nor build a production airplane before developing its prototype.”

Therefore, without the timely delivery of the prototype airplanes, there would be no

basis for the government to prescribe a new delivery schedule for Lot I aircraft. In this

sense, similar to the Court of Claim’s opinion in Universal Fiberglass, we believe

requiring the contracting officer to artificially reset the contract completion date would

have been “supererogatory,” “except for forensic purposes.” See Universal Fiberglass,

210 Ct. Cl. at 217. Therefore, we agree with the trial court that this case is similar to

Universal Fiberglass in that

a schedule is not necessary because the cure notice
supplants the schedule and serves a similar function. The
cure notice lets a contractor know that even if performance
or delivery is not yet due, the contracting officer believes the
contractor may not be making sufficient progress to
complete the contract on time. The burden is then on the
contractor to advise the Government how it will complete the
project on time, according to contract requirements.

Id. at 419.

2007-5111, 5131 16
 One could analogize the per se rule advocated by the contractors to an injunction

against the government. In granting or denying an injunction, a court follows traditional

equitable principles and “balances the conveniences of the parties and possible injuries

to them” to arrive at a “nice adjustment and reconciliation” between the competing

claims. Weinberger v. Romero-Barcelo, 456 U.S. 305, 312 (1982). When a

government contract is terminated, there are two interests at issue—the contractor’s

interest in holding the government to its obligation to carry out the contract, and the

government’s interest in not wasting taxpayer dollars. The contractors in this case,

however, would have us enjoin the government from ever terminating a contract for

failure to make progress based on a single factor—the contract lacks a set completion

date. We reject such a per se rule because it serves only the contractors’ interest.

Instead, we favor an ad hoc, factual inquiry that allows careful examination and

weighing of all relevant circumstances. See McDonnell Douglas XII, 323 F.3d at 1014

(stating that “[i]n determining whether a default termination was justified, a court must

review the evidence and circumstances surrounding the termination, and that

assessment involves a consideration of factual and evidentiary issues”).

In fact, in our 2003 opinion, we provided the same guidance, stating that to

determine whether a default termination is justified, “the trial court should focus on the

events, actions, and communications leading to the default decision in ascertaining

whether the contracting officer had a reasonable belief that there was no reasonable

likelihood of timely completion.” McDonnell Douglas XII, 323 F.3d at 1017. Of course,

in some cases, it is possible that a conclusion drawn from a comparison of the entire

contract effort and the time remaining for contract performance is so clear that it

2007-5111, 5131 17
becomes dispositive. See Lisbon, 828 F.2d at 765. However, in cases such as the

present one, where such a comparison is inapplicable, the court must examine other

factors, including the contractor’s failure to meet progress milestones, its problems with

subcontractors and suppliers, its financial situation, and its performance history. See

McDonnell Douglas XII, 323 F.3d at 1017. Only after analyzing the totality of the

circumstances can a court determine whether a contractor failed to “[p]rosecute the

work so as to endanger performance” of the contract. See 48 C.F.R. § 52.249-9.

2. Default termination of the A-12 contract

It is true that the A-12 contract, as modified by P00046, lacks a definite contract

completion date. However, this single factor, even though important, is insufficient to

support the contractors’ contention that the government cannot sustain the default

termination. A court must also take into account other relevant facts and testimony in

deciding whether the default termination was justified.

In Lisbon, we held that the government bears the burden of justifying the

propriety of a default termination. 828 F.2d at 765. We also stated that “the contracting

officer’s termination decision [must] be based on tangible, direct evidence reflecting the

impairment of timely completion.” McDonnell Douglas XII, 323 F.3d at 1016 (citing

Lisbon, 828 F.2d at 766). The direct evidence includes the contractors’ “statements that

they could not meet the contract specifications, the contract delivery schedule, nor

complete performance at the specified contract price.” Id. at 1013 (quoting McDonnell

Douglas X, 182 F.3d at 1332). The direct evidence also includes the “contracting

officer’s testimony and contemporaneous documents.” Id. at 1016. The Court of

Federal Claims made detailed factual findings based on the evidence. McDonnell

2007-5111, 5131 18
Douglas XIII, 76 Fed. Cl. at 422-30. After reviewing the record, we see no clear error.

Therefore, we only highlight a few important aspects here.

a. Contractors’ performance history and failure to meet progress milestones

The contractors missed several milestones under the original contract, the most

significant of which, of course, is the June 1990 first flight date. They also missed the

July 1990 delivery date for the second prototype airplane. More tellingly, after the

government unilaterally modified the contract through P00046, and in fact, in their

response to the cure notice, the contractors unequivocally stated that they would not

meet the revised delivery schedule for the eight prototype airplanes. Instead, they

projected that the first flight date would be in March 1992, three months after the date

imposed in P00046. By December 1990, the contractors were only “50%” confident in

this date, believing it was achievable “only after significant changes.”

The contractors and the amicus curiae argue that if we uphold the default

termination here, the government may terminate for failure to make progress a contract

for any minor slippage in meeting any insignificant interim milestone. This is an

exaggeration. First of all, due to the sequential “building block” structure of the A-12

contract, delivery of the prototype airplanes is not just any milestone. It is certainly not

an insignificant milestone. Quite to the contrary, it is clearly one of the most important

milestones in the entire contract. This is because, as the contractors admit, “one cannot

test an aircraft before it has been built, nor build a production airplane before developing

its prototype.”

Second, the delay in the delivery schedule is hardly just a minor slippage. The

A-12 contract provided the June 1990 first flight date. In other words, it provided the

2007-5111, 5131 19
contractors thirty months from the contract award time (January 1988) to deliver the first

prototype plane. P00046, in extending the first flight date to December 1991, gave the

contractors 60 percent more time to reach this significant milestone. Yet, the

contractors, even though at first predicting that they would, concluded that they could

not meet this schedule. In fact, they were not even sure if they could deliver in March

1992. According to the contractors’ own estimate, even assuming they could meet the

March 1992 first flight date, they would not complete the design, manufacturing, and

testing of the aircraft until July 1995, two years and three months after the April 1993

TCHEVAL deadline specified in the original contract.

More importantly, we are not upholding the default termination “based solely on a

contractor’s concerns about meeting a contractual schedule milestone.” McDonnell

Douglas XII, 323 F.3d at 1015 (citing Lisbon, 828 F.2d at 765). As we explained above,

the contractors’ failure to meet progress milestones is one factor to be considered in the

totality-of-the-circumstances analysis. In this respect, we agree with the trial court that

[m]issed milestones “indicate a pattern of nonperformance
and delay which should not be ignored. Although not
justifications for default in themselves, they provide a context
for understanding and evaluating plaintiff's continued
problems.” Such information should be relevant if we
consider whether a reasonable contracting officer might
reasonably have been concerned about [the contractors’]
ability to complete the contract on time.

McDonnell Douglas XIII, 76 Fed. Cl. at 426 (quoting Universal Fiberglass, 537 F.2d at

397).

b. Contractors’ financial situation

Another piece of relevant information we consider when reviewing a default

termination is the contractors’ financial situation. “The cost to complete a contract—

2007-5111, 5131 20
more particularly, the inability of a contractor to perform a contract at the specified

contract price . . . [is a] fundamental element[] of government contracts and [is] related

to contract performance; as such, [it is] highly relevant to the question of default.”

McDonnell Douglas X, 182 F.3d at 1328.

The A-12 contract as initially awarded had a target contract price of

$ 4,379,219,436 and a ceiling price of $ 4,777,330,294. In June 1990, the contractors

proposed that the fixed-price contract be modified because the cost of completing the

contract would exceed the ceiling price so substantially that it would be “unacceptable”

to the contractors.

The contractors repeatedly insisted on restructuring the contract from a fixed-

price contract to a cost-reimbursement type contract. Even during the high-level

negotiation meetings following the government’s issuance of the cure notice, Mr. John

McDonnell, the CEO of MDC, asserted that the contractors “can’t get there if we don’t

change the contract,” and that the contract “has got to get reformed to a cost type

contract or we cannot do it.” In their January 2, 1991, written response to the cure

notice, the contractors again submitted their proposal to restructure the contract to a

cost reimbursement contract. In exchange for that restructuring, the contractors would

absorb a $1.5 billion fixed loss and would waive their claims for equitable adjustment.

The sizeable concession the contractors were willing to make further illustrates the

grave inadequacy of the contract price.

Of course, the difficulty in the contractors’ financial situation, in and of itself, may

not be sufficient to justify the default termination. See McDonnell Douglas XI, 50 Fed.

Cl. at 320-21 (ruling that the contractors’ financial condition “was not endangering

2007-5111, 5131 21
performance of the A-12 contract”). However, in this case, “inadequate financing is not

collateral [because] it pervades the entire contract.” Universal Fiberglass, 210 Ct. Cl. at

216. Indeed, in the months leading to the termination, the contractors were spending

$120-150 million of their own money every month. McDonnell Douglas XIII, 76 Fed. Cl.

at 427. Captain Lawrence Elberfeld, the Navy’s A-12 Program Manager, testified that

the cost to complete the A-12 contract would be so “unthinkably” over the fixed-price

ceiling that the contractors’ internal “worst case estimate could bankrupt both

corporations.” Id. at 429.

More importantly, Captain Elberfeld testified that the cost overruns jeopardized

the contractors’ performance because the contractor engaged in “cost cutting efforts like

reducing staff, eliminating overtime, quick fixes that address and would remedy a cash

flow situation.” Id. at 428. For example, around the time when the contractors missed

the original first flight date, they removed 110 people from the A-12 program. Id.

Captain Elberfeld concluded that the contractors’ cost cutting efforts to avoid bankruptcy

led to “more corner-cutting and more incomplete effort and basically a longer process to

get a product that may not be the product that we desire or need for the Navy.” Id. at

429.

c. Conclusion

In summary, the government offered the 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,

2007-5111, 5131 22
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. 4

Once the government has met this burden of proving that timely performance is

beyond the contractors’ reach, the contractors have the burden of going forward to

prove either that they were making progress such that timely completion of the contract

was not endangered or that there was excusable delay. See Appeal of Mich. Joint

Sealing, Inc., ASBCA No. 41477, 93-3 BCA 26,011 (Apr. 26, 1993). On appeal, the

contractors assert no affirmative defense. They proffer no record evidence to show,

without contract restructuring, that they could have completed the contract on any date.

Certain arguments, such as waiver, are presented to support their proposition that, at

termination, the A-12 contract lacked an enforceable completion date. Even if these

arguments could be interpreted as the contractors’ defenses, we have already

addressed them elsewhere in this opinion. In conclusion, because the government was

justifiably insecure about the contract’s timely completion and the contractors do not

argue that their failure to make progress could be excused, we sustain the default

termination of the A-12 contract.

3. Default termination without contracting officer’s Lisbon analysis

The contractors and the amicus curiae also assert that we cannot uphold the

default termination because the contracting officer, Admiral Morris, did not conduct the
4
Our current analysis may appear different from the one we previously
instructed the trial court to perform, specifically, to determine the contract completion
date. See McDonnell Douglas XII, 323 F.3d at 1018. We believe that this is warranted
as under the law of the case doctrine, “it is not improper for a court to depart from a
prior holding if convinced that it is clearly erroneous and would work a manifest
injustice.” Arizona v. California, 460 U.S. 605, 619 (U.S. 1983).

2007-5111, 5131 23
Lisbon analysis before the termination. They base this argument on the trial court’s

finding that “Admiral Morris did not determine the entire effort required and the time left

to complete that contract effort prior to termination.” McDonnell Douglas XIII, 76 Fed.

Cl. at 424 n.72; see also id. at 437 n.92 (concluding “the contracting officer did not

conduct a Lisbon analysis prior to termination”). This argument is unpersuasive.

First of all, as we have stated earlier, because the modified A-12 contract does

not contain a fixed completion date, a Lisbon analysis cannot be strictly applied.

Second, we previously stated that “the government is not required to establish that the

contracting officer conducted the analysis necessary to sustain a default under the

alternative theory.” Empire Energy Mgmt. Sys. v. Roche, 362 F.3d 1343, 1357 (Fed.

Cir. 2004); see also Christopher Vill., L.P. v. United States, 360 F.3d 1319, 1337 (Fed.

Cir. 2004) (“This court sustains a default termination if justified by circumstances at the

time of termination, regardless of whether the Government originally removed the

contractor for another reason.” (quoting Kelso v. Kirk Bros. Mech. Contractors, Inc., 16

F.3d 1173, 1175 (Fed. Cir. 1994))).

The contractors and the amicus curiae attempt to distinguish the present case

from Empire Energy. The amicus curiae emphasizes that there is a “critical distinction

between failure to make progress as the asserted basis for default at the time of

termination, and failure to make progress as an alternative basis for default, proven at

trial, that supports an otherwise unsustainable termination for failure to timely deliver.”

We discern no such distinction. In fact, the amicus’s contention is illogical—it would

have us, on the one hand, uphold a default termination for failure to make progress

when the contracting officer never even contemplated, much less evaluated, such a

2007-5111, 5131 24
basis; while at the same time, reject another default termination for failure to make

progress even though the contracting officer explicitly asserted such a basis.

More importantly, we are less concerned about the label of the contracting

officer’s action so long as, in fulfilling his duty, the contracting officer exercised

reasoned judgment and did not act arbitrarily. After reviewing the record, we believe

that the contractors are not victims of arbitrary government action. Admiral Morris

testified that concerns about the A-12 Program “increased [and] the risks increased” in

the fall of 1990. Id. at 424 n.70. The trial court found that

[a]s the end of 1990 approached, [Admiral Morris] was
concerned that substantial development on the aircraft had
yet to occur. He testified “[t]he contractors were indicating
that they were experiencing an overrun that they could not
absorb. Cost was obviously a factor and their failure to
fabricate components, their failure to meet schedule were
clearly impacting cost.”

Id. at 423-24.

Admiral Morris also testified that in the weeks leading to termination, the

contractors “indicated that they would not be able to meet the delivery schedule that

was currently in the contract. And they would not be able to perform the contract

without extraordinary relief or additional funding for the contract.” Id. at 424 (alterations

omitted). He explained: “I didn’t know at that particular time when in fact they would be

able, if ever, to achieve performance of the contract and I was hearing ‘we will not’ or

‘we could not.’” Id. (alterations omitted).

On December 17, 1990, Admiral Morris issued a cure notice, warning the

contractors that their performance was “unsatisfactory” and the defect conditions were

“endangering performance” of the contract. He explained that “[t]he purpose of the cure

2007-5111, 5131 25
notice was to advise the contractors they were failing to make progress.” McDonnell

Douglas XIII, 76 Fed. Cl. at 402. He testified that he “had been extremely concerned

with the communications coming in from the contractors that unless extraordinary relief

were provided, unless the contract were restructured into a cost-type contract, that they

could not or would not perform, and that belief existed certainly on December 17th.”

Admiral Morris considered the problems of cost overruns to be a “real issue.”

McDonnell Douglas XIII, 76 Fed. Cl. at 404. Even though he made an effort to resolve

the issue “within the context of the contract” without restructuring the contract, “the

contractors were insisting upon Public Law 85-804 extraordinary relief.” 5 Even in their

January 2, 1991, written response to the cure notice, the contractors again requested

restructuring the contract to a cost reimbursement contract. On Sunday, January 6,

1991, Acting Under Secretary of Defense Donald Yockey told Admiral Morris that

Secretary Cheney would not provide 85-804 relief. As a result, Admiral Morris thought

that

he had three choices: to terminate the contract for
convenience, to terminate the contract for default, or to do
nothing. He rejected the latter as ‘irresponsible,’ thus
focusing his attention on the other two choices. He
eliminated the termination for convenience first, because he
believed Contractors to be in material breach of the contract.

McDonnell Douglas X, 182 F.3d at 1328.

Record evidence shows that at the time of termination, Admiral Morris was

justifiably insecure about the contract’s timely completion. In addition, “a court’s review

of a default justification does not turn on the contracting officer's subjective beliefs, but

5
Pub. L. No. 85-804, 72 Stat. 972 (1958) (codified as 50 U.S.C. § 1431),
authorizes the President of the United States to grant agencies the power to provide
extraordinary relief in furtherance of national defense.

2007-5111, 5131 26
rather requires an objective inquiry.” McDonnell Douglas XII, 323 F.3d at 1016. In this

regard, the facts in the record are sufficient for the court, in a de novo review, to sustain

the default termination. See Joseph Morton Co. v. United States, 757 F.2d 1273, 1277

(Fed. Cir. 1985) (“It is settled law that a party can justify a termination if there existed at

the time an adequate cause, even if then unknown.”).

4. Conclusion

This is indeed an unfortunate case for all the parties involved. We realize that

the court is not in a position to question the wisdom of the parties in entering this

contract and subsequently, in handling problems in this case. Nevertheless, as the trial

court recognized, “the Government rarely terminates fixed-price research and

development contracts for default.” McDonnell Douglas XIII, 76 Fed. Cl. at 418. We

also observe that the CEOs of both MDC and GD, in a letter dated June 27, 1990,

stated that “it was a mistake for the U.S. Navy to stipulate this type of contract and it

was a mistake for the contractors to accept it. Both are at fault.” Alas, the law of

contracts does not allow us to deviate from established principles of law and equity.

We therefore hold that the default termination of the A-12 contract is justified. 6

However, we emphasize that terminating a government contract for failure to make

progress when the contract does not specify a completion date is the exception, not the

norm. Therefore, we reiterate that the Lisbon test remains good law and our conclusion

here is dictated by the unique facts of this case.

6
The government argues that the contractors’ failed to provide adequate
assurance. As we hold that the default termination for failure to make progress is
justified, we do not need to reach this argument.

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 IV. CONCLUSION

For these reasons, the judgment of the Court of Federal Claims is affirmed.

COSTS

Each party shall bear its own costs.

AFFIRMED

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