Court Ruled Feds Terminated Small Contractor Based On 'Hostility'

A little-known case decided earlier this summer could be seen as an important victory for small contractors who work for Uncle Sam. In essence, it says a small contractor can’t be terminated out of anger without solid reasons.

In it, a U.S. Court of Federal Claims nullified a federal agency’s decision to terminate a government contractor for default because the court found the government hadn’t demonstrated cause for doing so. The judge ruled that interpersonal conflicts, bad practices, and ineffective communication on the part of the government clouded its judgement, and then skewed its termination analysis, which resulted after various subcontractor disputes.

The trouble originated with a runway repair project at Buckley Air Force Base in Aurora, Colo., in 2014.

Filed on June 27, 2019, the decision in Alutiiq Manufacturing Contractors, LLC v. the U.S. seems to create a higher threshold for terminating a contractor, say attorneys who reviewed and wrote about the case.

The trouble originated with a runway repair project at Buckley Air Force Base in Aurora, Colo., in 2014. Selected under a 100% small business set-aside, Alutiiq is an Alaska native-owned corporation. The Dept. of Defense’s National Guard Bureau, the agency in charge, and the Alutiiq agreed on a firm fixed price of $13,680,965.

Things didn’t go well, according to the decision.

Bad practices and interpersonal conflicts “created a climate of dishonesty, distrust, and lack of effective communication. This resulted in a default termination, and performance concluded more than a year late on a time-critical project,” stated the opinion, issued by Senior Judge Loren Smith.

Allutiiq started off on the wrong foot with a bad management team, which then delayed the project for a month, Judge Smith wrote. The contractor’s early problems angered the National Guard Bureau’s project managers and Alutiiq replaced its management team and worked to rectify problems, fixing schedule issues and hiring an asphalt subcontractor.

But it wasn’t enough.

The Guard Bureau “gave [Alutiiq] no real chance to implement a more rapid schedule, and its analysis of whether to default [the Contract] ignored important sections of the Federal Acquisition Regulations,” wrote Smith. Most tellingly, the follow-on contractor hired after Alutiiq’s termination “encountered some of the same problems,” he wrote.

Essentially, Smith said, the government contract personnel jumped the gun and got rid of Alutiiq while it was trying to make things right and still had a chance to finish close to the contract deadline for completion

“While there were clear deficiencies in [Alutiiq’s] contract performance, those deficiencies would not have been fatal to completion of the contract within thirty days or less of the 400-day performance deadline,” said Smith.

The National Guard Bureau said it will appeal. Alutiiq, a unit of Afognak Native Corp., could not comment because the matter was still being litigated. "We are proud of our 20-plus years of providing exceptional services to the federal government," said Malia Villegas, the parent company's vice president for community investments.

The outcome of the decision appeared to be rooted in legal precedent.

According to a post on the case on the Inside Government Contracts blog, the Court “applied the standard set forth in Lisbon Contractors, Inc. v. United States, 828 F.2d 759 (Fed. Cir. 1997) — under which the government must demonstrate ‘a reasonable belief on the part of the contracting officer that there was no reasonable likelihood that the [contractor] could perform the entire contract effort within the time remaining for contract performance.’

The Court also relied, according to the blog post, on McDonnell Douglas Corp. v. United States (McDonnell Douglas XII), 323 F.3d 1006 (Fed. Cir. 2003), which clarified that the inquiry is an objective one ‘focus[ing] on the events, actions, and communications leading to the default decision.’

Finally, the blog post said the court looked to the factors in FAR 49.402-3(f) that must be considered by a contracting officer prior to issuing a termination for default.

Defects in The Termination

The blog post, by attorneys Alejandro Sarria and Carl Wiersum, noted all the defects Judge Smith cited in the Guard’s reasons for termination.

The first was Alutiiq’s inability to secure an asphalt subcontractor. A “red herring,” Smith wrote, since the eventual asphalt subcontractor said it could meet the Agency’s specifications in about a week.

The next reasons involved personnel gaps and failure to submit records and documents.

Not good enough, however, to justify the agency’s subjective belief that Alutiiq could not complete the project on time, particularly since Alutiiq new management had greatly improved these processes since the beginning of the project.

“The Agency’s determination thus turned on the belief of onsite government personnel that the project was at least 10% behind schedule," wrote Sarria and Wiersum of the decision.

Under both Lisbon and McDonnell Douglas XII, the government “cannot satisfy its burden by merely showing th