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Thelen Reid Brown Raysman & Steiner LLP
The
Navy contracted with AEC Corp. to complete the construction
of a training center. During construction, AEC fell behind
schedule. The Navy issued a cure notice in December 1990.
In January 1991, the parties agreed to a new schedule and
moved the completion date for the project to April 1991.
The Navy agreed not to terminate the contract for default
if AEC continued to make progress according to the new schedule.
In
March 1991, the Navy sent AEC another cure notice. In the
notice, the Navy stated that its prior agreement not to
pursue termination for default was contingent upon AEC's
diligently pursuing completion of the contract by April.
Based on the AEC's declining project staffing, the Navy
expressed concern about AEC's ability to complete the project
on time and advised that, unless that condition was cured
within 10 days, the Navy would consider terminating the
contract for default.
AEC
responded to the cure notice by blaming its poor performance
on the government for changes and delays. AEC also stated
that its surety was maintaining a "financial stranglehold"
by not releasing funds for construction, and that if this
continued, it would be doubtful that AEC could complete
the project. The Navy responded by asking AEC to "show
cause" why the contract should not be terminated for
default within 10 days. AEC did not respond, and throughout
the response period, AEC had only a handful of workers on
the jobsite. The Navy terminated the contract for default.
The
Armed Services Board of Contract Appeals held that the termination
was invalid. ASBCA concluded that delays and modifications
attributable to the government entitled AEC to an extension
of time, which changed the contract completion date to May
16, 1991. ASBCA further ruled that the Navy had not presented
any evidence that AEC could not complete contract performance
by May 16, 1991.
The
U.S. Court of Appeals for the Federal Circuit reversed ASBCA's
decision. Danzig, v. AEC Corp., 224 F.3d 1333 (Fed.
Cir. 2000) The court held that when the government justifiably
issues a cure notice, the contractor has an obligation to
take steps to demonstrate or give assurances that progress
is being made toward a timely completion of the contract
or to explain that the reasons for any prospective delay
in completion of the contract are not the responsibility
of the contractor. In this case, the issuance of a cure
notice was justified under the circumstances, even if the
circumstances did not, at that point, justify a termination
for default. The court found that in response to the Navy's
March 1991 cure notice, AEC failed to give the Navy adequate
assurances that it could complete the contract on a timely
basis or even that it could continue to make progress toward
completion.
The
court found that AEC's assertions of government-caused delay
did not respond adequately to the Navy's request for assurances.
AEC was not specific as to what changes had caused delay
or how much delay it considered the government to have caused,
and AEC did not represent that it could complete the contract
within the additional time to which it believed it was entitled.
Citing Restatement (Second) of Contracts §251 and Uniform
Commercial Code §2-609, the court concluded that AEC's
failure to respond adequately to the Navy's reasonable request
for assurances of timely performance justified the Navy's
termination of the contract for default.
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©2001 Thelen Reid Brown Raysman & Steiner LLP
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