Supreme Court May Redraw Contract Rules
Should the government be allowed to declare a contractor in default and then invoke a secrecy privilege to withhold information the contractor says it needs to dispute that finding in court?
Two decades after the Pentagon canceled the Navy’s A-12 Avenger II stealth aircraft, the fight over who is at fault for the program’s delays and cost overruns has brought that question before the U.S. Supreme Court. Last week, justices on the court sharply questioned lawyers on both sides of the dispute.
The court’s ruling, which is expected before the 2010-11 term ends in June, could have broad implications for any company working for the U.S. on classified technologies—even more so given the intense budget pressures that are leading the Defense Department to cancel more programs.
The A-12 effort began in January 1988, when the Navy tapped a McDonnell Douglas-General Dynamics team to develop a stealthy carrier-based aircraft. The contractors quickly encountered difficulties, especially with the aircraft’s weight. After the first-flight deadline was missed, in the summer of 1990, the Navy extended contract deadlines.
But in December 1990, then-Defense Secretary Dick Cheney effectively ordered that the $4.8-billion project be abandoned. The contractors had never delivered an airplane.
In terminating the contract, the Navy declared the industry team in default. In other words, the Navy said the team had not done the work it had promised to do. So the Navy demanded $1.35 billion in payments back. Settlement efforts failed. And there began a long legal saga that has taken the parties looping through the Court of Federal Claims and an appeals court and even outlasted one of the original companies.
Essentially, Boeing, the successor to McDonnell Douglas, and General Dynamics argue that the government withheld critical information about stealth technologies and that led to delays and cost overruns. They were aware of the B-2 bomber and the F-117 attack aircraft, lawyers say, but they did not realize before entering into the contract that the government’s “superior knowledge” from additional, “special access” programs made it clear the A-12 weight target would be impossible to achieve.
When the contractors sought to prove that in court, the government said it would damage national security to reveal the necessary information, even to a judge. While it is possible the Supreme Court will delve into the privilege to withhold “state secrets,” it is unlikely. The justices posed no questions about that last week. Instead, they explored what to do about a contract dispute when such information cannot be used in court.
The A-12 program could be canceled legally, the contractors concede, but not with the “default” penalties the government is seeking to apply to them. Such a fault-free cancelation is said to be for the “convenience” of the government. The difference between that and a default cancelation could amount to $3 billion or more when interest is figured in.
“They seemed sympathetic,” Carter G. Phillips, the lawyer representing the contractors in oral arguments on Jan. 18, told Aviation Week. Indeed, at least two, Chief Justice John Roberts and Associate Justice Antonin Scalia, seemed to suggest that the law might require that when fault cannot be determined in court, neither side should have a monetary claim on the other.
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