Two Contractors Win Ruling on A-12 Project : Defense: McDonnell Douglas and General Dynamics could receive $2.4 billion. Judge finds program improperly canceled.

In a surprise decision that could cost the U.S. government $2.4 billion, a federal judge ruled late Friday that the Pentagon erred in 1991 when it canceled the A-12 attack jet contract under unfavorable terms with McDonnell Douglas and General Dynamics.

The decision, which could result in the largest judgment won by any contractor against the government, may have major political repercussions--owing both to its size in a tight budget environment and the two firms’ allegations that the Pentagon deliberately destroyed crucial documents in the case.

U.S. Claims Court Judge Robert H. Hodges’ ruling means the Pentagon now could pay about $2 billion for the firm’s development costs on the attack jet and perhaps $400 million for legal costs. The government had been demanding $1.5 billion in repayments from the two firms.

In recent hearings on evidence and future trial dates, Hodges had given no warning that he was about to issue a ruling, and the order Friday left Navy officials stunned. “We are vigorously pursuing our remedies,” a Navy spokesman said.

Meanwhile, McDonnell Douglas spokesman Jim Reed said: “We are obviously very pleased with Judge Hodges’ order.”

The government could appeal the decision, opening the possibility of further legal battles or even a negotiated settlement. Until now, however, the Navy has been reluctant to settle the case.

The A-12, a heavy attack bomber, was to replace the aging A-6 Intruder on aircraft carriers. It would have been the Navy’s first stealth-type aircraft, and its cancellation came as a blow to naval aviation.

The case developed into one of the largest and most acrimonious legal disputes in defense industry history. It involved about 60 full-time attorneys working for the two firms and the Justice Department. Several million pages of documents had been subpoenaed.

In a hearing Thursday, the two firms had said the Pentagon knowingly destroyed thousands of top-secret documents on the Air Force B-2 bomber program they had subpoenaed for the A-12 case. The Navy denied that either it or the Air Force had knowingly destroyed evidence.

The aircraft program was as messy as the legal case.

The controversy erupted in late 1990, when Defense Secretary Dick Cheney fired several admirals who allegedly failed to disclose serious problems in the program. Cheney had assured Congress that it was in good shape.

Just several weeks later, Cheney was embarrassed by the disclosure that the A-12 program was between $2 billion and $9 billion over budget. Cheney canceled the program in January, 1991.

The Navy issued a termination order charging that the two contractors were behind schedule developing the jet, and that the aircraft was too heavy.

Under complex contract regulations, the Navy issued a “default termination,” meaning the contractors would be forced to repay the government about $1.5 billion of the money they had received to develop the plane. The hurried legal document was actually a slightly rewritten version of the cancellation order for the Lockheed P-7A program.

The two firms filed suit a short time later, charging the government erred in its default termination and seeking to convert the termination to favorable terms--known as “for convenience of the government.”

Hodges ruled Friday that the Navy had not intended to default the contractors before Cheney decided to end the program, and had done so only after the Defense Department withdrew the funds.

“Testimony and other evidence at trial showed that the A-12 contract was not terminated because of contractor default,” Hodges wrote. “The contract was terminated because the Office of Secretary of Defense withdrew support and funding from the A-12. Prior to that, the Navy did not believe that the contractor’s performance justified termination for default.”

It was unclear how the Justice Department or the Pentagon would come up with money to pay the settlement. Byron Callan, Merrill Lynch aerospace analyst, said it could require a congressional appropriation.