__________________________ GRANTED: NOVEMBER 9, 1993 __________________________ GSBCA 12197 MARCI ENTERPRISES, INC., Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Frederick P. Weiner, President of Marci Enterprises, Inc., Los Angeles, CA, appearing for Appellant. Michael D. Tully, Office of General Counsel, General Services Administration, Washington, DC, counsel for Respondent. Before Board Judges DANIELS (Chairman), PARKER, and NEILL. PARKER, Board Judge. Appellant, Marci Enterprises, Inc. (Marci), appeals the decision of respondent's contracting officer to terminate for default Marci's contract to provide waterproof barrier material. The parties have submitted the case for decision on the record. As discussed below, we find that respondent improperly terminated the contract. Thus, we grant the appeal. Findings of Fact 1. On January 17, 1992, the General Services Administration's (GSA's) Federal Supply Service (FSS) awarded contract number GS-02F-58159 to Marci. Appeal File, Exhibit 1. The contract required Marci to furnish GSA's normal requirements for waterproof, flexible barrier material. Id. 2. On February 4, 1992, GSA placed two orders with Marci for barrier material, designating March 30, 1992, as the date the shipment was due. Respondent's Record Submission, Exhibit 13. According to the terms of the contract, delivery was due at the destination within forty-five calendar days after receipt of the order. Appeal File, Exhibit 1 at 26. 3. On March 19, 1992, GSA's Quality Assurance Specialist (QAS) contacted Marci's subcontractor and supplier, Salinas Valley Wax Paper Company (Salinas), pursuant to the Source Inspection clause of the contract. Appeal File, Exhibit 3. That clause provides in part as follows: (c) Inspection by Government personnel. (1) Although the Government will normally rely upon the Contractor's certification as to the quality of supplies shipped, it reserves the right under the Inspection of Supplies -- Fixed Price clause to inspect and test all supplies called for by this contract, before acceptance, at all times and places, including the point of manufacture. When the Government notifies the Contractor of its intent to inspect supplies before shipment, the Contractor shall notify or arrange for subcontractors to notify the designated GSA quality assurance office 7 workdays before the date when supplies will be ready for inspection. Shipment shall not be made until inspection by the Government is completed and shipment is authorized by the Government. . . . . (d) Quality deficiencies. (2) If supplies in process, shipped, or awaiting shipment to fill Government orders are found not to comply with contract requirements, or if deficiencies in either plant quality or process controls are found, the Contractor may be issued a Quality Deficiency Notice (QDN). Upon receipt of a QDN, the Contractor shall take immediate corrective action and shall suspend shipment of the supplies covered by the QDN until such time as corrective action has been completed. The Contractor shall notify the GSA quality assurance office, within 5 workdays, of corrective action taken or to be taken to permit onsite verification by a Government representative. Shipments of nonconforming supplies will be returned at the Contractor's expense and may constitute cause for termination. Delays due to the issuance of a QDN do not constitute excusable delay under the Default clause. Failure to complete corrective action in a timely manner may result in termination of this contract. Id., Exhibit 1 at 22-23 (emphasis added). Mr. Nelson, President of Salinas, informed the QAS that the orders would be available for inspection either that day (March 19) or sometime in the next week. However, due to the QAS's work schedule and the 125-mile distance to Salinas' facility, the QAS scheduled the inspection for April 2, 1992, three days after the delivery date. Respondent's Record Submission, Exhibit 18. 4. On April 2, 1992, Salinas presented the material for inspection. The QAS inspected the first lot and found deficiencies in the subcontractor's quality control system and issued a Quality Deficiency Notice (QDN). Appeal File, Exhibit 4. The QDN required Marci to correct the deficiencies and provide a written response within five days after receiving the notice. Id. Marci did not respond to the QDN. Id., Exhibit 5. 5. The QAS, however, continued to work with Salinas: I also spent considerable time with this subcontractor reviewing their quality control manual and advising them as to certain changes that were required in order to bring their quality control program and manual into conformance with Federal Standard 368A. . . . Although I spent considerable time and energy assisting Salinas in order for them to be able to perform in accordance with the conditions of the contract, my duties do not require me to supervise or conduct the inspection procedures of the prime or its subcontractor. Respondent's Record Submission, Exhibit 18. 6. On May 1, 1992, the QAS returned to inspect Salinas' facility and two days later issued an Evaluation of Corrective Action which stated that no corrections had been implemented. Appeal File, Exhibit 5. The QAS stated that the facility was not in accordance with the quality control standards set forth in Federal Standard 368A and that the packaging had not been marked in accordance with Federal Standard 123F. Respondent's Record Submission, Exhibit 18. 7. The administrative contracting officer (ACO) stated in his declaration: On May 1, 1992, the QAS returned again to the subcontractor's facility and found that no corrective action was taken. . . . In light of the considerable time spent by the QAS assisting the subcontractor to bring its quality control system in compliance with the above reference standards and the fact that they could not, or would not, implement the necessary changes, the QAS referred this matter to me for appropriate action. Respondent's Record Submission, Exhibit 19. 8. Marci claimed that its subcontractor needed more time to correct the quality control and marking systems. See Respondent's Record Submission, Exhibit 17. On May 6, 1992, the ACO contacted Mr. Weiner, President of Marci, and negotiations for a contract extension took place. Appeal File, Exhibit 6. Marci alleges that the ACO offered, and Marci accepted, an extended delivery date in return for the consideration of $300 ($150 per order), while the ACO contends that no agreement was reached. See id., Exhibit 10; Respondent's Record Submission, Exhibit 19. 9. On May 14, 1992, the ACO terminated Marci's right to proceed with performance of the contract by reason of default. Appeal File, Exhibit 8. The termination letter stated that the termination was for Marci's failure to "deliver material to the Government pursuant to the delivery requirements of the contract." Id. 10. On May 18, 1992, Mr. Weiner wrote a letter to the ACO stating: I believed that we had an agreement due to the consideration you offered, and which I accepted in the aforementioned telephone call. Our plant subsequently proceeded to make the additions and corrections to the paperwork as requested by the QAS. . . . Both orders have been manufactured and have been sitting on the floor of our plant for many weeks. The plant has also completed the additional paperwork requested by the QAS. Appeal File, Exhibit 10. On September 5, 1992, Marci filed the instant appeal with the Board, contending that the ACO improperly terminated the contract. Id. 11. The contract incorporates by reference GSA Form 3507, which contains the clause found at Federal Acquisition Regulation (FAR) section 52.249-8, Default. That clause provides: (a)(1) The Government may . . . by written notice of default to the Contractor, terminate this contract in whole or in part if the Contractor fails to -- (i) Deliver the supplies or to perform the services within the time specified in this contract or any extension; (ii) Make progress, so as to endanger performance of this contract . . .; or (iii) Perform any of the other provisions of this contract . . . . Appeal File, Exhibit 2 at 22. Discussion Marci contends that GSA improperly terminated the contract, and we agree. GSA waived the delivery date when it told Marci to delay the first shipment for inspection and continued to encourage Marci to correct its deficiencies. Because GSA never established a new delivery date (and, thus, a date by which Marci had to comply with the packaging and quality control requirements), GSA could not terminate the contract based upon either Marci's failure to deliver by the original due date, or to comply with the packaging and quality control requirements. Timely Delivery The Government has the burden of proving that a default termination is warranted because it is a "drastic sanction . . . which should be imposed (or sustained) only for good grounds and on solid evidence." J.D. Hedin Construction Co. v. United States, 408 F.2d 424, 431 (Ct. Cl. 1969). When a contractor fails to make timely delivery of the contract item, the Government has a reasonable period of time, known as the period of forbearance, to settle upon its course of action. R & O Industries, Inc., GSBCA 4800, 80-1 BCA 14,195 at 69,874. If, however, the Government fails to act within a reasonable time, the original delivery schedule is deemed to have been waived: In essence, the Government loses its right to terminate a contract for default . . . if by its subsequent conduct it condones the default, encourages or asks for continued performance, or fails to set a new delivery schedule for the contractor's performance after it has permitted performance to continue unhampered for too long a period of time. Id. In DeVito v. United States, 413 F.2d 1147 (Ct. Cl. 1969), the Court of Claims articulated the two necessary elements for the non-defaulting party to waive the delivery schedule: (1) failure to terminate within reasonable time after the default under circumstances indicating forbearance; and (2) reliance by contractor on failure to terminate and continued performance by him under the contract, with the Government's knowledge and implied or express consent. Id. at 1154. Thus, if GSA's conduct following the March 30, 1992, delivery deadline constituted a constructive election to permit continued performance, which was relied upon by appellant, a waiver of the delivery date occurred.[foot #] 1 The two purchase orders dated February 4, 1992, designated March 30, 1992, as the delivery date. The QAS contacted Salinas on March 19, 1992, to inspect the first lot of material produced for the contract. Mr. Nelson, President of Salinas, informed the QAS that the orders would be available for inspection that day or sometime during the next week. The QAS, however, did not schedule the inspection until April 2, 1992, three days after delivery was due. Thus, even before the QAS's inspection, the Government indicated that the contractor was not to comply with the original delivery date. According to the terms of the contract, the shipment was not to proceed until inspection by the Government was completed. Once the inspection date was set by the QAS, the subcontractor could not ship the materials until after the inspection was completed or it risked violating that contract term. Obviously, it became impossible to comply with both the inspection clause and the designated delivery date; thus, it was reasonable for the contractor to assume that a new delivery schedule would need to be established. ----------- FOOTNOTE BEGINS --------- [foot #] 1 The underlying principle in termination of a contract containing fixed performance dates is that time is of the essence. Thus, when a due date has passed and the Government does not terminate for default, an inference is created that time is no longer of the essence. DeVito, 413 F.2d at 1154. ______ Thereafter, the proper way for the Government to proceed is "to issue a notice under the Default clause setting a reasonable but specific time for performance on pain of default termination." ________ Id. (emphasis added). Time is reinstated as being of the essence ___ and a new time for performance is given to the contractor. ----------- FOOTNOTE ENDS ----------- The QAS issued a Quality Deficiency Notice on the same day as the inspection, April 2, 1992. The QDN instructed Marci to provide the QAS with a written response of corrective action taken or to be taken QAS within 5 workdays after receiving the notice. This was neither a "cure notice" which allows the delinquent contractor additional time to deliver, nor a "show cause" letter which affords a delinquent contractor an opportunity to advance reasons why the contract should not be terminated. See 48 CFR 49.607 (1990). Although the QAS also noted that the "cited purchase orders are now delinquent" as one of the specific deficiencies, the QDN encouraged the subcontractor to make the necessary corrections and continue performance. FAR Part 49 regulates contract termination. 48 CFR Part 49 (1992). FAR 49.402-3(c) directs that "if the Government has taken any action that might be construed as a waiver of the contract delivery or performance date, the contracting officer shall send a notice to the contractor setting a new date for the contractor to make delivery or complete performance." In the typical "DeVito cure," the Government issues a cure notice, establishes a new delivery date, and terminates the contract in the event the contractor fails to deliver in accordance with the new schedule. W.S. Jenks & Son, GSBCA 10278, et al., 91-3 BCA 24,262, at 121,298. Here, after waiving the original delivery schedule, GSA never established a new delivery date upon which a default termination could be based. Marci relied on GSA's waiver of the original delivery schedule. According to both the QAS and the ACO, the QAS spent time assisting Salinas so that it could perform in accordance with the conditions of the contract. Marci claimed that its subcontractor needed time to make the changes requested by the QAS but, because no new delivery date had been provided, Marci did not know how much time it had to make those changes. The parties agree that negotiations for a contract modification took place on May 6, 1992, although they differ in regard to the outcome of those negotiations. Mr. Weiner believes that he and the ACO agreed to extend the due date for a consideration of $150 per shipment, whereas the ACO contends that no agreement was reached. By that time, however, the Government had already waived the delivery date. Although Marci's efforts to comply with the contract requirements were not as GSA would have liked, GSA could not suddenly terminate the contract for failure to deliver the goods without giving Marci a firm date by which the goods were to be delivered. Conforming Goods Although the Government terminated the contract based upon Marci's failure to make timely delivery, the Government in its brief offers additional grounds for the termination. The ACO's final letter of termination pointed out that Salinas did not furnish the QAS with an updated quality control manual, forward copies of GSA Form 1678, or conform to the requirements for case markings. Thus, according to GSA, the orders were incomplete at the time of inspection and the contract could have been terminated for that reason as well. The problem with respondent's argument, however, is that these requirements for packaging and quality control are all related to appellant's delivery schedule, which was waived by GSA. The Government waived the original delivery date when the QAS scheduled the inspection test three days after the deadline and continued to work with the contractor with respect to these other items. The Government should have established a new delivery schedule, and if the contractor subsequently failed to meet the new delivery date, or if the goods were not in accordance with the contract requirements at the later deadline, the ACO could have terminated the contract. After waiving the schedule, however, and encouraging the contractor to correct these items so that the first shipment could be made, the contracting officer was unreasonable in terminating the contract without giving the contractor a firm date by which the contractor had to comply with the contract requirements. Decision For the reasons set forth above, the appeal is GRANTED. The termination for default is converted to one for the convenience of the Government. As requested by appellant, the termination shall be at no cost to either party. ________________________ ROBERT W. PARKER Board Judge We concur: ________________________ ________________________ STEPHEN M. DANIELS EDWIN B. NEILL Board Judge Board Judge