Court Overturns Award in Navy Contract Case

<i> From Bloomberg News</i>

A U.S. appeals court Thursday overturned a $1.2-billion damage award to Boeing Co. and General Dynamics Corp. and ordered a new set of hearings into the Navy’s cancellation of a contract for the A-12 stealth attack aircraft.

A unanimous three-judge panel of the U.S. Court of Appeals for the Federal Circuit in Washington said a trial judge should not have awarded the damages--the highest amount ever against the federal government--without first deciding whether company delays and cost overruns justified the Pentagon’s decision to scrap the program. The appellate judges told U.S. Claims Court Judge Robert Hodges to conduct further proceedings on that issue.

The companies can still pursue other legal theories, however, and, depending on the ultimate court determinations, still be awarded damages plus interest accruing at $200,000 a day.

The ruling nevertheless marks a setback for the two defense contractors and could add several years to a court fight dating to 1991.


A Justice Department spokesman said the government was “gratified” by the ruling. General Dynamics said in a statement that it is confident that it will ultimately prevail.

The A-12 was one of the largest defense procurement fiascoes ever. The plane, designed to penetrate heavily defended locations, never made it into production despite years of costly development. In 1998, General Dynamics and McDonnell Douglas Corp., now part of Boeing, signed a contract to build eight of the planes for the Navy at a target price of $4.4 billion. Three years later, then-Secretary of Defense Dick Cheney canceled the contract, thus setting off the legal battle.

The government says it scrapped the A-12 because the companies defaulted on their obligations under the agreement. In court papers, the Justice Department argued that the two contractors did a poor job of trying to build the airplane, knew it could not be delivered on time or on budget, and sought “extraordinary” relief from key contract provisions because they faced default.

The Justice Department argues that the two companies should return some of the $2.68 billion they have already received on the contract, plus interest.

The appeals court said Thursday that Hodges should have considered those arguments before concluding that the cancellation amounted to a “termination for convenience"--a legal designation that would entitle Boeing and General Dynamics to large damage awards.

The government argues that the cancellation was a “termination for default"--a rarely used procedure designed to protect the government should a contractor renege on its obligations.

U.S. Circuit Judge Raymond C. Clevenger III, writing for the court, was quick to say that he was not concluding that Boeing and General Dynamics had defaulted on the contract and was sending that case back to Hodges for a new trial on that issue.