Where contractor failed to respond adequately to the Navy’s reasonable request of assurances of timely performance, the Navy was entitled to regard the contractor’s failure to provide such assurances as a breach of the contract. The issuance of a cure notice may be justified even if the circumstances at that point do not justify a termination for default. When the government issues a cure notice the contractor has an obligation to take steps to demonstrate progress, or give assurance that progress is being made, toward timely completion. Failure to adequately respond to the notice justifies termination for default.
In Richard Danzig v. AEC Corporation, 224 F.3d 1333 (Fed. Cir. 2000), the Navy became concerned when the progress of the contractor’s work began to fall behind schedule. The contractor was apparently having financial difficulties with its surety, and this was delaying the work. As a result of the schedule slippage the Navy issued a cure notice demanding the contractor to get back on schedule. This resulted in a meeting at which the contractor and Navy agreed to a revised schedule. The Navy agreed not to terminate the contractor if made progress according to that new schedule.
For reasons not explained by the court, the surety subsequently froze the project’s bank account, and the number of workers doing productive work on the project began to decline. Due to the decreasing number of man-hours being devoted to the job, the Navy advised the contractor that its failure to diligently pursue completion was a condition endangering performance of the contract, and must be cured within 10 days otherwise the Navy would consider terminating the contractor for default.
Contractor responded by advising the Navy that the meeting the completion date was impossible due to many changes and delays caused by the Government. In addition, the contractor claimed its surety was interfering with and hampering its progress on the job by blocking the release of funds sufficient to enable it to pay its subcontractors and meet other project expenses. This action by the surety was termed “financial strangulation” by the contractor which “made it impossible to predict an ultimate completion date at this time.”
The Navy reacted to this bad news by directing the contractor to provide a detailed response to substantiate its allegations with regard to delays allegedly caused by changes and government-caused delays. Instead of giving the required detailed response, the contractor wrote a short letter back to the Navy referring the Navy to earlier correspondence which it stated described the details of the problems caused by the government.
After this, the Navy gave the contractor a letter directing it to show cause why the contract should not be terminated for default, and once again directed the contractor to respond within 10 days. During the next 10 days the contractor did not respond to the letter and, in fact, appeared to maintain only a handful of workers on the job. When the Navy subsequently default terminated it, the contractor appealed to the Armed Services Board of Contract Appeals, arguing that the termination was improper because the Navy had not proved that the contractor could not complete performance by the extended contract date. The Board agreed with the contractor and held against the Navy.
In appealing the adverse decision to the Federal Circuit Court of Appeals, the Navy argued that the Board focused on the wrong issue. Instead of ruling on whether there were sufficient grounds for termination, the Board should have looked instead at the question of whether the contractor had adequately responded to the 10 day cure notice by providing adequate assurances that it would, in fact, complete the project on schedule.
The court agreed with the Navy’s position and reversed the Board, explaining that when the government has reasonable grounds to believe that the contractor may not be able to perform the contract on a timely basis, the government may issue a cure notice as a precursor to a possible termination of the contract. Once that notice is issued, the contractor has an obligation to take steps to demonstrate or give assurances that progress is being made toward timely completion.
Contractor’s response to the cure notice did not satisfy its obligation to provide those assurances. In fact, the contractor reiterated that its financial strangulation by its surety made it impossible to predict an ultimate completion date. A contractor’s financial difficulties are not a legitimate excuse, says the court, for failure to make progress. In view of this, the court held that as a matter of law, the contractor failed to respond adequately to the Navy’s reasonable request for assurances.
Risk Management Note: The decision does not offer any explanation for what was happening between the contractor and its surety that caused the surety to take the action it did with regard to the project financing. Unfortunately, there are occasions when a surety (for good reason) may take actions that, while protecting its position, do not release funds in a prompt manner to foster timely project completion. In response to the perceived need for a new type of product to respond to defaults or threatened defaults, Zurich Insurance has created default insurance to be used in lieu of surety bonds. This product is titled “Subguard.” ™ A detailed paper was presented by Kent Holland at the last conference of the Forum on Construction of the American Bar Association. A copy may be obtained by sending an e-mail to email@example.com, including your name and address, and including the words ABA PAPER in the regard line.
Copyright 2001, ConstructionRisk.com, LLC – Virginia
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 3, No. 4 (Jul 2001).