## Facts

- McDonnell Douglas Corporation and General Dynamics Corporation contracted with the Navy to develop and produce eight A-12 carrier-based, low-observable aircraft under an incrementally funded, fixed-price incentive contract with a target price of about $4.38 billion and a ceiling price of about $4.78 billion.
- The contract required the first aircraft delivery by June 1990, with remaining deliveries through January 1991.
- The contractors encountered major schedule and technical problems, including weight and specification difficulties, and fell behind required milestones.
- By mid-1990, the contractors advised the government that delivery would be late, expected costs would exceed the ceiling, and requested contract restructuring, including conversion to a cost-reimbursement approach.
- The Navy refused to convert the contract and issued a cure notice warning of possible termination for default; the contractors responded in a manner indicating they could not meet the contract’s requirements and could not provide reliable total cost or completion estimates.
- During the same period, the Department of Defense reviewed major aircraft programs amid changing strategic priorities and budget pressures.
- The Secretary of Defense withdrew funding from the program, citing performance failures and the contractors’ inability to provide credible cost and schedule estimates, and the Navy terminated the contract for default on January 7, 1991.
- The Court of Federal Claims held the default termination could not be sustained, converted it to a termination for convenience, and awarded approximately $3.88 billion to the contractors; the government appealed and the contractors cross-appealed on additional monetary issues.

## Issues

1. Whether the government acted within its contractual discretion to terminate for default when the decision was based on performance-related deficiencies.
2. Whether the Court of Federal Claims erred by converting the termination for default into a termination for convenience and awarding costs without first determining whether the contractors were actually in default.
3. Whether additional monetary issues raised by the parties were ripe for decision given the unresolved default determination.

## Decision

- The Federal Circuit reversed the Court of Federal Claims.
- The court held the default termination was within the government’s discretion because it was predicated on contract-performance problems, including schedule slippage, technical deficiencies, and the contractors’ statements that costs would exceed the ceiling and completion could not be credibly estimated.
- The court rejected the trial court’s focus on the government’s alleged budgetary or political motives as a basis to invalidate a default termination where there was a substantial performance-based justification.
- The court held the trial court improperly converted the termination to one for convenience and entered a multibillion-dollar award without first determining whether the contractors were in default.
- The court remanded for determination of whether the default termination was justified and left downstream monetary issues unresolved pending that determination.

## Legal Principles

- A government termination for default is permissible when grounded in bona fide contract-performance deficiencies; the presence of budgetary or policy considerations does not negate a default termination that has a substantial performance-related basis.
- The legality of a default termination turns on whether the contractor was in default and whether any nonperformance was excusable under the contract and applicable procurement rules.
- A court may not convert a default termination to a termination for convenience, or award termination-for-convenience recovery, without first deciding whether the default termination was justified.
- Claims dependent on the default versus convenience characterization are generally not ripe until the default question is resolved.

## Conclusion

The Federal Circuit held that the A-12 default termination fell within the government’s discretion because it was tied to serious performance failures, and it required the trial court to determine whether the contractors were actually in default before any conversion to termination for convenience or related monetary recovery could stand.


McDonnell Douglas Corp. v. United States, 182 F.3d 1319 (Fed. Cir. 1999)