Takeover Agreements and Excusable Delays No Good Deed Goes Unpunished

Client Alert


When the federal government terminates a contractor for default, the terminated contractor’s sureties will often contract with another contractor to complete the work, and the government may enter into a takeover agreement with the new contractor for the project. As the Federal Circuit recently demonstrated in the non-precedential decision, E&I Global Energy Services, Inc. v. U.S., the terms of the contract between the surety and takeover contractor require careful planning and consideration, particularly when the defaulted contractor has outstanding debts to subcontractors and suppliers.

In E&I Global, E&I entered into a contract with the sureties of a defaulted contractor to complete the work and a takeover agreement with the Government. The contract between E&I and the sureties stated that E&I would not be responsible for the original contractor's outstanding debts to subcontractors and suppliers, and it barred either party from unilaterally “enter[ing] into any settlement with respect to any Third Party Claim.” Although obligated, the sureties failed to pay the defaulted contractor’s outstanding debts to its subcontractors. Unsurprisingly, the subcontractors refused to return to work until paid, forcing E&I to make the payments itself. This left E&I without the funds needed to complete the contract on time, which ultimately led the government to terminate E&I for default.

E&I appealed to the Court of Federal Claims arguing that the termination for default should be converted into a termination for convenience pursuant to FAR 52.249-10(c) because the delay was excusable as it resulted from unforeseeable causes beyond the control and without the fault or negligence of E&I. The trial court rejected this argument, holding that E&I’s delay was inexcusable because the contractor's voluntary payments to the subcontractors violated its contract with the sureties.

The Federal Circuit court reversed and remanded back to the Court of Federal Claims, holding in a nonprecedential decision that this situation may have constituted an excusable delay. First, the Court reasoned that the government’s argument that E&I breached its contract with the sureties was without merit because the purpose of the settlement provision was to protect the sureties, not the government, and the “breach of an obligation to third parties is not an absolute defense to the government's allegedly erroneous termination of its contract with E&I for default.” Second, the Court found that the trial court ignored part of E&I’s argument “that the unwillingness of its subcontractors and suppliers to work without being paid delayed things from the start, even before E&I encountered financial difficulties” from having to pay the original contractor’s subcontractors. Finally, the Court noted that the government did not establish that E&I breached its contract with the sureties because E&I's payment of the subcontractor and supplier claims did not settle these claims within the meaning of the contract. Ultimately, the Federal Circuit did not decide whether the sequence of events established an excusable delay, but the Court’s remand back to the Court of Federal Claims entitles it “to try and do so.”