Court of Appeals for Federal Circuit Holds That Government Did Not Waive Right to Terminate for Default Notwithstanding Contractor’s Continued Performance After Contract Completion Date, Where Contractor Continued to Delay Not Despite Numerous Efforts by Government to Spur Completion

State of Florida, Department of Insurance v. The United States,
81 F.3d 1093 (U.S. App. 1996) LEXIS (Fed. Cir. 1996).

The construction contract at issue in this case resulted in a default termination of the contractor and the contractor’s surety. The surety’s receiver sued the United States for damages based on losses suffered by the surety in connection with the project.

In October 1987, the Padula Construction Company (the general contractor) contracted with the Postal Service (the owner) to build a post-office in Florida. Padula failed to perform in accordance with the contract and the Post Office eventually terminated the contract for default in October 1988. Pursuant to the performance bond agreement, Southeastern Casualty + Indemnity Insurance Company (Southeastern) undertook to finish the building work promising to use best efforts to complete it within the terms of the original contract. Southeastern did not meet the deadline that they had initially given to the Postal Service and during the following 4 months continued to do little or no work, and would not respond to the Postal Services repeated complaints and requests for a project schedule. Southeastern were informed that liquidated damages under the contract for the delay were accruing, and yet they still did nothing about trying to complete the project on time.

Southeastern eventually hired a new contractor to complete the building who provided a project schedule giving August 1989 as the completion date. Despite repeated warnings of potential structural damage to the building, site inspection visits in March 1989 showed that work was not in progress and the roof was still incomplete. The Postal Service met with Southeastern in April to discuss termination for default, and Southeastern informed them that they were under no obligation to advise them of progress and suggested that possible corrective work could mean that the August completion date would be postponed.

On May 12, 1989, the Postal Service terminated Southeastern for default because of its failure to make progress, subsequently, a Florida court deemed Southeastern insolvent and a receiver was appointed. The receiver filed suit for over $400,000 declaring that improper progress payments to Padula were made and money was owed to Southeastern for funds expended after it took over the project.

The receiver argued that the Postal Service waived its right to terminate Southeastern, because it failed to set a deadline for completion after the original date had passed, therefore, leading Southeastern to believe that time was no longer of the essence and induced Southeastern to undertake substantial efforts to complete the contract.

Some of the leading cases in this subject area have demonstrated that a waiver of the government’s right to terminate a contract for default may be found when the government allows “a delinquent contractor to continue performance past a due date” and a new deadline for performance must be set so that the parties will understand when performance is required. The trial court found this doctrine to be inapplicable in this present case and this was affirmed by the Court of Appeals for the Federal Circuit.

On many occasions after Padula’s termination, the Postal Service reminded Southeastern of the accruing liquidated damages, and they also made clear to Southeastern that existing contract provisions had not been altered and must be adhered to. The Postal Service made numerous efforts to spur Southeastern to action. For these reasons, Southeastern could not reasonably have believed that time was not of the essence or that its previous periods of delay had been excused. The trial court also found that all of Southeastern’s efforts between October 1988 and May 1989 advanced the project by no more than 10%.

The Court of Appeal therefore agreed with the trial court that the Postal Service acted within its rights in terminating Southeastern’s right to proceed.

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