Appeals Court Affirms Government’s Default Termination

09:20 GMT, June 3, 2009 WASHINGTON | The U.S. Court of Appeals for the Federal Circuit has affirmed a judgment upholding the Navy’s termination for default of a contract with McDonnell Douglas and General Dynamics for the A-12 stealth attack aircraft, the Justice Department announced today.

In 1988, the Navy awarded the $4 billion fixed-price contract for development of the A-12, which was to be a stealthy, carrier-based attack aircraft. The program encountered serious technical difficulties, and in 1991, after the Department of Defense refused to approve additional funding for the program, the Navy terminated the contract because it was substantially over budget and behind schedule.

The contractors challenged the termination, resulting in 18 years of litigation. On appeal for the third time on June 2, 2009, the court of appeals affirmed the 2007 judgment of Court of Federal Claims Judge Robert B. Hodges Jr., holding that the Navy had properly terminated the contract for default. In a 29-page opinion, the court of appeals explained that the termination decision was justified under the parties’ contract because the contractors’ performance history demonstrated that "the government was justifiably insecure about the contract’s timely completion" and there was no excuse for the contractors’ failure to make progress toward completion of the contract.
"We are gratified by the appellate court’s decision upholding the Navy’s decision to protect the public fisc by terminating the A-12 contract for default," said Tony West, Assistant Attorney General for the Justice Department’s Civil Division. "Today’s decision also represents a critical step toward bringing this long litigation to an end."

Under the decision, the contractors are required to repay the government more than $1.35 billion in principle funds advanced under the contract, plus interest accruing since 1991, for a total sum that currently approaches $2.8 billion.


Pogo | One of the significant impediments to restoring fiscal accountability in the Department of Defense (DoD) is the (largely accurate) perception that once a weapons program is far enough into production, political engineering and consequences for the industrial base make it nearly impossible to cancel. And if those political and economic forces aren't enough to continue to propel production forward, DoD's experience trying to cancel the A-12 Avenger Navy fighter-bomber (a.k.a. the "Flying Dorito") has also served as a kind of procurement boogieman story of how challenging it can be to cancel a program for cause, even when a program cannot meet schedule, price, or technical requirements.

As former POGO Defense Program Coordinator Marcus Corbin wrote in 1997:
"If the Pentagon's plan of eliminating specifications is to work, it must replace the protections provided by specifications with some other method of ensuring that products work. The most obvious method - not buying any more products from contractors who build shoddy weapons or waste money - is currently not practiced seriously. The case of the A-12 Navy fighter-bomber fiasco is illustrative.

The Pentagon paid $3 billion for the A-12 but was forced to cancel the program in 1991 for technical failure and massive cost overruns. The prime contractors, McDonnell Douglas and General Dynamics, had the gall to sue the government for canceling the program, asking for an additional $1.5 billion in damages - for a program that never produced a single aircraft. Rather than cut off corporations that showed such lack of responsibility, remorse, and concern over their failure to produce acceptable products, the Defense Department has continued sending a steady diet of new contracts to them. If the Department couldn't exert the pressure required to get these corporations to back off in this egregious case, it is hard to imagine that contractors face much incentive to produce quality products out of fear of losing future business."
There remain concerns about whether the government considers contractor responsibility and past performance as much as they should, but after 18 years, the United States Court of Appeals for the Federal Circuit has decided that "the overall evidence of record supports a conclusion that the government was justified in terminating the contract for default."

According to DOJ, McDonnell Douglas and General Dynamics are required to repay the government a total sum of $2.8 billion.