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

In the June ruling, the U.S. Court of Federal Claims nullified a federal agency’s decision to terminate a government contractor for default. The judge ruled that interpersonal conflicts, bad practices and ineffective communication by the federal contracting agency clouded its judgment and skewed its termination analysis.

The decision in Alutiiq Manufacturing Contractors, LLC v. the U.S. indicated to two attorneys who analyzed the case in an online posting that terminations should be grounded in firm reasons, a “back to basics” approach.

The legal dispute originated with a 2014 runway repair project at Buckley Air Force Base in Aurora, Colo. Selected for the $13.68 million project under a 100% small business set-aside, Alutiiq is an Alaska native-owned corporation.

DOD's National Guard Bureau, the agency in charge, and Alutiiq agreed on a firm fixed price.

The project did not proceed well, according to the decision. Ineffective practices and interpersonal conflicts “created a climate of dishonesty and distrust" and communication was poor.

After terminating Alutiiq, the Guard Bureau hired another contractor that finished the project more than a year past its original deadline, according to the opinion by Senior Judge Loren Smith.

Allutiiq was unable to supply an asphalt mix design according to the government’s specifications—early problems that angered the Guard Bureau’s project managers. The firm replaced its management team and worked to rectify problems, fixing schedule issues and hiring an asphalt subcontractor.

But the firm was terminated.

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.

According to Smith, government project managers jumped the gun and terminated Alutiiq while it was trying to make project execution corrections 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 appears to be rooted in legal precedent.

According to a post on the case by two attorneys 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 the Federal Acquisition Regulation 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 Covington & Burling attorneys Alejandro Sarria and Carl Wiersum noted all the defects that Smith cited in the agencys 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 agency 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 that the contractor was behind schedule.” And the Agency’s personnel, in Smith's opinion, had a “history of dishonesty and hostility” toward the contractor.