## Facts

- Fischer Imaging Corporation (FIC) entered into an indefinite-delivery, indefinite-quantity (IDIQ) contract with the Veterans Administration (VA).
- Under a delivery order issued under the IDIQ contract, FIC delivered an Epic 32 Single Plane Electrophysiology System (EP32)—a medical device used to measure cell electrical activity—to a VA Medical Center in September 1996 and requested inspection.
- The VA became aware of defects in the EP32 shortly after delivery.
- The VA did not inspect the EP32 or notify FIC of the defects until September 1998, about two years after delivery.
- The contract limited the government’s ability to revoke acceptance to situations where revocation occurred (1) within a reasonable time after discovery of defects, and (2) before any substantial change in the condition of the EP32.
- In February 2000, about 18 months after the 1998 inspection/notice, the VA issued a cure notice identifying 13 alleged defects.
- The VA continued to use the EP32 during this period.
- FIC corrected all 13 items identified in the cure notice by March 2000.
- Despite the corrections, the VA terminated the delivery order for cause, directed FIC to remove the EP32, and demanded repayment of amounts already paid.
- The Board record reflected that the termination occurred 597 days after delivery and 540 days after the VA first became aware of the EP32’s defects.
- FIC removed the EP32 and appealed to the Veterans Administration Board of Contract Appeals (VABCA), seeking conversion of the termination for cause to a termination for the convenience of the government.

## Issues

1. Whether the VA could revoke acceptance and terminate for cause based on alleged defects when it waited an unreasonable time after learning of the defects, despite contractual limits requiring revocation within a reasonable time.
2. Whether the VA’s continued use of the EP32, together with FIC’s correction of the 13 defects listed in the cure notice, defeated the VA’s stated basis for terminating for cause and demanding a refund.
3. If the termination for cause was improper, whether the proper remedy was conversion to a termination for the convenience of the government.

## Decision

- The VABCA held the VA did not justify termination for cause on this record.
- The VABCA concluded the VA’s delay in acting after learning of the alleged defects was unreasonable under the contract’s revocation-of-acceptance limitations, particularly given the time elapsed and the VA’s continued use of the EP32.
- The VABCA converted the termination for cause to a termination for the convenience of the government.

## Legal Principles

- When a contract permits revocation of acceptance only within a “reasonable time” after defect discovery, the government must act promptly once it knows (or should know) of the alleged defect.
- An extended delay between knowledge of alleged defects and later revocation/termination can bar revocation where the contract conditions revocation on timely action.
- Continued government use of delivered equipment after learning of alleged defects is evidence against a later claim that acceptance was effectively revoked based on those defects.
- A cure notice is meant to give the contractor a fair opportunity to correct listed deficiencies; when the contractor corrects the cited items, a termination for cause based on those same items generally lacks support absent remaining, material nonconformance.
- If a termination for cause is found improper, the usual board remedy is conversion to a termination for the convenience of the government, with financial consequences determined under convenience-termination rules rather than default rules.

## Conclusion

The VABCA concluded that the VA waited too long after learning of the EP32’s alleged defects to revoke acceptance and terminate for cause, especially given the VA’s continued use of the equipment and FIC’s correction of the defects identified in the cure notice; the Board therefore converted the termination for cause into a termination for the convenience of the government.


Appeal of Fischer Imaging Corporation, 2002 WL 31424586 (2002)