Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca13-14-05095/USCOURTS-ca13-14-05095-0/pdf.json

Parties Involved:
Allen Engineering Contractor Inc.
Appellant
United States
Appellee

Document Text:

NOTE: This disposition is nonprecedential.

United States Court of Appeals 

for the Federal Circuit ______________________ 

ALLEN ENGINEERING CONTRACTOR INC.,

Plaintiff-Appellant

v.

UNITED STATES,

Defendant-Appellee

______________________ 

2014-5094, 2014-5095, 2014-5096

______________________ 

Appeals from the United States Court of Federal 

Claims in Nos. 1:13-cv-00684-JFM, 1:13-cv-00695-JFM, 

1:13-cv-00720-JFM, Senior Judge James F. Merow.

______________________ 

Decided: May 7, 2015

______________________ 

WILLIAM L. BRUCKNER, Bruckner & Walker, San Diego, CA, for plaintiff-appellant. Also represented by 

CHELSEY N. DEL TESTA. 

ERIC LAUFGRABEN, Commercial Litigation Branch, 

Civil Division, United States Department of Justice, 

Washington, DC, for defendant-appellee. Also represented by JOYCE R. BRANDA, ROBERT E. KIRSCHMAN, JR.,

DONALD E. KINNER; STEPHEN TOBIN, Office of Litigation, 

United States Navy, Washington, DC. 

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2 ALLEN ENGINEERING CONTRACTOR v. US

______________________ 

Before MOORE, CLEVENGER, and WALLACH, Circuit 

Judges.

CLEVENGER, Circuit Judge. 

Allen Engineering Contractor Inc. appeals the decisions of the Court of Federal Claims, granting motions to 

dismiss, in their entirety, complaints for improper termination of a contract. Allen Eng’g Contractor Inc. v. United 

States, 115 Fed. Cl. 457 (2014); Allen Eng’g Contractor

Inc. v. United States, No. 13-720 C, 2014 WL 1862269 

(Fed. Cl. May 8, 2014); Allen Eng’g Contractor Inc. v. 

United States, No. 13-695 C, 2014 WL 1860074 (Fed. Cl. 

May 8, 2014). This court has jurisdiction under 28 U.S.C. 

§ 1295(a)(3) (2012). Because Allen Engineering Contractor 

Inc. breached its agreement with the Navy, and has failed 

to establish any grounds for excusing this breach or

shifting liability to the Navy, we affirm. 

I 

This case concerns the same set of operative facts, 

pertaining to three distinct construction contracts between Allen Engineering Contractor Inc. (“AECI”) and the 

United States Navy. Between June and July 2012, AECI 

entered into three construction contracts with the Navy 

individually valued at $2,855,419, $11,553,083, and

$ 12,301,127.05.1 In May 2013, the Navy terminated all 

1 AECI filed three complaints alleging improper 

termination of contracts. The court issued one detailed 

opinion and order, pertaining to one contract. Allen Eng’g 

Contractor Inc. v. United States, 115 Fed. Cl. 457 (2014). 

Then, finding no material differences between the first 

case and the other two, the court issued two brief orders, 

based on the same reasons set forth in the prior opinion. 

No. 13-720 C, 2014 WL 1862269 (Fed. Cl. May 8, 2014); 

 

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ALLEN ENGINEERING CONTRACTOR v. US 3

three of the contracts because AECI had failed to maintain valid performance and payment bonds covering each 

of them. This was a material breach of AECI’s agreement 

with the Navy, and the Navy appropriately terminated 

the contracts under 48 C.F.R. § 52.249-10(a). 

A contractor on a construction project worth more 

than $150,000 is required to post and maintain performance and payment bonds covering 100 percent of the 

contract price. 40 U.S.C. § 3131; 48 C.F.R. § 52.228-15(b).2

The regulations require that the “bonds shall be in the 

form of firm commitment, supported by corporate sureties 

whose names appear on the list contained in Treasury 

Department Circular 570 . . .” 48 C.F.R. § 52.228-15(d).

“Under a performance bond, a surety guarantees that 

the project will be completed if a contractor defaults. It is 

designed to ensure ‘that [the government] is not left with 

a partially completed project because of an insolvent 

contractor.’” Dependable Ins. Co. v. United States, 846 

F.2d 65, 66 (Fed. Cir. 1988) (citing Aetna Casualty & Sur. 

Co. v. United States, 845 F.2d 971, 973 (Fed. Cir. 1988); 

Morrison Assurance Co. v. United States, 3 Cl. Ct. 626, 

632 (1983)). And payment bonds are designed to protect 

people who have contractual relationships with the prime 

contractor or a subcontractor. J.W. Bateson Co., Inc. v. 

United States ex rel. Bd. Of Trustees of Nat. Automatic 

Sprinkler Industry Pension Fund, 434 U.S. 586, 587 

(1978). “Because ‘a lien cannot attach to Government 

No. 13-695 C, 2014 WL 1860074 (Fed. Cl. May 8, 2014). 

AECI filed three appeals, and this court consolidated 

them under the case number 2014-5094.

2 In 2010, the government increased the threshold 

for payment and performance bonds from $100,000 to 

$150,000. Federal Acquisition Regulation; Inflation Adjustment of Acquisition-Related Thresholds, 75 Fed. Reg. 

53129, 53135 (Aug. 30, 2010). 

 

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4 ALLEN ENGINEERING CONTRACTOR v. US

property,’ persons supplying labor or materials on a 

federal construction project [are] protected by a payment 

bond.” Id. at 589 (quoting F.D. Rich Co. v. United States 

ex rel. Industrial Lumber Co., 417 U.S. 116, 121–22 

(1974)). 

Shortly after the Navy awarded the contracts in question, AECI provided performance and payment bonds 

from Liberty Mutual Insurance Company (“Liberty”). The 

Navy accepted each of the Liberty bonds, and work commenced on all three projects.

Between February and March 2013, AECI sought to 

replace those Liberty bonds with bonds from the Pacific 

Indemnity Company (“PIC”). After investigating the 

validity and authenticity of the PIC bonds, and per 

AECI’s request, the Navy replaced the Liberty bonds with 

PIC bonds. Also per AECI’s request, the Navy returned 

the Liberty bonds. Then, in May 2013, PIC called AECI 

and the Navy to inform them that the bonds supposedly 

issued by PIC were fraudulent. The supposed-PIC bonds 

were not issued by PIC and were therefore invalid. 

In light of that fact, the Navy suspended work on each 

of the three contracts in question. The Navy asked AECI 

to provide valid replacement bonds, but AECI was unable 

to secure them. Because AECI failed to secure valid 

bonds, on July 5, 2013, the Navy terminated one contract 

for default and on July 10, 2013, terminated the other two

for default. 

In the present action, AECI is seeking to have the default terminations converted to convenience terminations. 

It would be appropriate to convert these to terminations 

for the convenience of the government if “it is determined 

that the Contractor was not in default, or that the delay 

was excusable.” 48 C.F.R. § 52.249-10(c).

AECI relies on multiple theories to allege that the 

Navy improperly terminated these contracts, and that it 

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ALLEN ENGINEERING CONTRACTOR v. US 5

therefore did not default on the contracts. The Court of 

Federal Claims (“CFC”) held AECI had failed to state a 

claim on which relief could be granted, and therefore 

granted the government’s motion to dismiss. This court 

reviews de novo a CFC decision to dismiss for failure to 

state a claim. Hearts Bluff Game Ranch, Inc. v. United 

States, 669 F.3d 1326, 1328 (Fed. Cir. 2012).

II

AECI’s arguments on appeal are the same as those it 

raised to the CFC. “[O]nly a complaint that states a 

plausible claim for relief survives a motion to dismiss.” 

Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) (citing Bell 

Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007)). And 

a “claim has facial plausibility when the plaintiff pleads 

factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. We agree that the CFC correctly 

rejected each of AECI’s arguments, and address each 

argument in turn.

A 

The Navy terminated the AECI contracts for default 

under 48 C.F.R. § 52.249-10(a). “If [a] Contractor refuses 

or fails to prosecute [] work . . . , with the diligence that 

will insure its completion within the time specified in [a]

contract . . . , the Government may . . . terminate the right 

to proceed with the work . . . .” 48 C.F.R. § 52.249-10(a).

AECI argues that the termination was wrong, because it

merely failed to provide a third set of bonds and there is 

no evidence that it failed to perform work. 

We disagree. For one, AECI breached the contracts by 

failing to furnish valid bonds. This material breach was, 

itself, grounds for termination. Moreover, the CFC has 

recognized other, non-delay related grounds for default 

terminations. Finally, AECI was prohibited from working 

on the contract until valid bonds were in place. Therefore, 

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6 ALLEN ENGINEERING CONTRACTOR v. US

it would not have been able to complete the work in the 

allotted time.

As a general matter, government contracting officers 

have “broad discretion to determine whether to terminate 

a contract for default.” Lanterman v. United States, 75 

Fed. Cl. 731, 733–34 (2007). The CFC overturns those 

decisions only if they are arbitrary, capricious, or an 

abuse of discretion. However, the government bears the 

burden of establishing that a termination was justified. 

Id.

In this case, AECI’s failure to maintain valid payment 

and performance bonds was a material breach of the 

contract. “A breach is material when it relates to a matter 

of vital importance, or goes to the essence of the contract.” 

Thomas v. Dep't of Hous. & Urban Dev., 124 F.3d 1439, 

1442 (Fed. Cir. 1997). And, even for the government, it is 

true that “[a] party to a contract, faced with a breach by 

the opposing party, can choose either to terminate the 

contract or to continue the contract. . .” McDonnell Douglas Corp. v. United States, 182 F.3d 1319, 1327 (Fed. Cir. 

1999). Even AECI seems to agree that the bonds are

material to these contracts. It suggests that the Navy 

materially breached the agreement by failing to investigate the validity of the bonds. If a failure to investigate 

the bonds is of vital importance to the agreement, as 

AECI says, then the bonds themselves must also be vital. 

The CFC has previously held that “failure to furnish 

adequate bonding . . . is a material breach that justifies 

termination for default.” Airport Indus. Park, Inc. v. 

United States, 59 Fed. Cl. 332, 334 (2004). In Airport 

Industrial, the contractor obtained bonds from a surety 

that became insolvent before work on the contract was 

complete. Id. at 333. When the contractor failed to obtain 

a replacement payment bond, the government terminated 

the contract for default under 48 C.F.R. § 52.249-10(a). Id.

at 333–34. The contractor argued, in part, that its failure 

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ALLEN ENGINEERING CONTRACTOR v. US 7

to maintain adequate bonds was caused by government 

delay. Id. at 337. The parties had agreed to contract 

modifications and extended the time of completion. Id. 

And the contractor argued that, absent that delay, it 

would have maintained bonds throughout the project. Id. 

In that case, the CFC held that the termination for 

default was justified. Id. at 338. The CFC concluded that, 

to prevail, and excuse its default, the contractor would 

have to prove that the government materially breached 

the contract. Id. And the contractor failed to point to 

specific contract terms or implied obligations that the 

government breached. Id. 

In its opinion below, the CFC emphasized Airport Industrial to establish that failure to maintain bonds constitutes a material breach. On appeal, AECI attempts to 

distinguish the present case. It argues that, in Airport 

Industrial, the government was not at fault in causing the 

contractor’s inability to obtain bonds, and in this case, 

AECI claims that the Navy directly caused AECI’s lack of 

adequate bonding. 

As discussed in the following section, we find no 

grounds to excuse AECI’s default based on government 

actions. And if, as in Airport Industrial, AECI must prove 

that the government materially breached the contract to 

establish excusable default, it has failed to do that. Finally, the Navy’s actions to investigate the PIC bonds and 

honor AECI’s request to replace the Liberty bonds did not 

cause this default. AECI provided fraudulent bonds to the 

Navy, and AECI failed to furnish valid bonds after that.

Therefore, AECI’s attempt to distinguish Airport Industrial based on the Navy’s actions in this case is unconvincing.

Beyond the bonding requirement, the CFC has held 

that other, non-delay related breaches can be grounds to

terminate for default under § 52.249-10(a). See Professional Servs. Supplier, Inc. v. United States, 45 Fed. Cl. 

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8 ALLEN ENGINEERING CONTRACTOR v. US

808 (2000) (problems with materials and workmanship 

may give rise to termination for default); Aptus Co. v. 

United States, 61 Fed. Cl. 638, 663 (2004) aff'd sub nom. 

Lin v. United States, 159 F. App’x 186 (Fed. Cir. 2005) 

(non-compliant submission of details about a product 

design, failure to get advance approval for purchases, and 

failure to comply with staffing requirements may all 

constitute material breach of contract and termination for 

default was appropriate). Case law reveals one relevant 

limiting factor—termination for default must be related to 

contract performance. McDonnell Douglas Corp. v. United 

States, 182 F.3d 1319, 1326 (Fed. Cir. 1999) (when pressure from a congressional oversight committee is the sole 

grounds for termination, that is unrelated to contract 

performance and termination for default is improper). The 

payment and performance bonds in this case are embodied in the contract, and failure to maintain them relates 

to contract performance. 

Finally, even on a narrow read of the “failure to prosecute work” standard at 48 C.F.R. § 52.249-10(a), termination for default was appropriate here. AECI itself 

admits that if a contractor fails to maintain payment and 

performance bonds, the contract will be terminated. The 

government is allowed to terminate contracts for default 

when it knows that the contractor will be unable to complete the work. McDonnell Douglas Corp. v. United States, 

323 F.3d 1006, 1016 (Fed. Cir. 2003) (exercising default 

provision requires a reasonable belief that there was no 

reasonable likelihood the contractor would be able to 

perform the entire project in the allotted time). So termination was appropriate here, under § 52.249-10(a), because the government knew that AECI could not complete 

the project because it had no proper bonds in place. 

B 

AECI makes two related arguments. First, AECI suggests that it complied with § 52.228-15, the requirement 

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ALLEN ENGINEERING CONTRACTOR v. US 9

for performance and payment bonds, when it secured the 

Liberty bonds at the outset of the contract. However, 

AECI itself admits that the bonds are a condition to both 

starting and continuing work on the contract. Because 

§ 52.228-15 requires maintaining bonds through the term 

of the work, merely furnishing bonds at the outset of the 

contract is not enough to constitute compliance. 

Second, § 52.228-2 requires that contractors must 

furnish additional securities if a surety becomes unacceptable to the government. AECI argues that the Navy 

cannot find bonds acceptable and then later reverse 

course and determine that the surety is unacceptable. For 

one, AECI cites no authority for this argument. Moreover, 

this argument does not comport with the plain meaning of 

§ 52.228-2. That regulation specifically pertains to situations where a surety on a bond subsequently becomes 

unacceptable to the government. Therefore, it only applies 

to situations where the government accepts a bond in the 

first place, then later determines the surety is unacceptable. In those situation, additional security is required. 

These two regulations afford no relief for AECI. Instead, they confirm that the Navy had solid grounds for 

terminating the contracts. 

C 

AECI presents several arguments that fall generally 

under the rubric of excusable default. Overall, AECI 

asserts that the Navy’s investigation of the replacement 

PIC bonds was inadequate, and that if the Navy had done 

a proper investigation, it would have caught the fraud 

before it approved the PIC bonds. Even if true, there is 

nothing about the Navy’s investigation that relieves AECI 

of its responsibility for the breach.

Under various theories of liability, AECI argues that 

the Navy’s review and approval is relevant because: (1) 

the Navy breached its agreement with AECI, (2) the Navy 

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10 ALLEN ENGINEERING CONTRACTOR v. US

owes an independent duty to AECI when investigating 

bonds; (3) the Navy’s review and approval excuses default 

under 48 C.F.R. § 52.249-10(b); (4) the Navy caused 

AECI’s bonding problem, so Airport Industrial does not 

apply; and (5) the Navy violated its duty of good faith and 

fair dealing under this contract. 

“In order for a private contractor to bring suit against 

the Government for violation of a regulation, that regulation must exist for the benefit of the private contractor.” 

Freightliner Corp. v. Caldera, 225 F.3d 1361, 1365 (Fed. 

Cir. 2000). This general proposition essentially excludes 

each of AECI’s arguments regarding the Navy’s flawed 

review and approval of the PIC bonds. 

The CFC found that the Navy’s review and approval 

of bonds is for the government’s benefit—not for the 

benefit of AECI. This is consistent with the statutory 

description of these bonds. Performance bonds are “for the 

protection of the Government.” 40 U.S.C. § 3131(b)(1).

Payment bonds are “for the protection of all persons 

supplying labor and material and carrying out the work 

provided for in the contract for the use of each person.” 40 

U.S.C. § 3131(b)(2). Logic dictates that, if the bonds are 

for the protection of the government and third party 

suppliers, then the investigation of the bonds is also for 

the benefit of those parties.

AECI suggests that, when the government fails to follow its own written procedures for investigating bonds, 

then contractors are at risk of losing their contracts. Put 

another way, the government’s approval of a fraudulent 

bond makes the contractor vulnerable to a termination for 

default. And therefore, AECI argues, the government 

owes a duty to the contractor when reviewing bonds. This 

argument ignores the fact that the contractor has total 

control over procuring bonds in the first place. AECI 

sought replacement bonds from PIC, and submitted them 

to the government. AECI’s acquisition of fraudulent bonds

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ALLEN ENGINEERING CONTRACTOR v. US 11

exposed it to the risk of having the contract cancelled. The 

government reviews those bonds, submitted by the contractor, to ensure they provide adequate protection. The 

government does not review the bonds in the interest of 

catching the contractor’s own mistakes. Therefore, we 

agree with the CFC that the Navy’s review and approval 

of bonds is done for the benefit of the government. 

However, the court must also address AECI’s claims 

that the Navy violated a specific Federal Acquisition 

Regulation (“FAR”) or policy.3 See Chris Berg, Inc. v. 

United States, 426 F.2d 314, 317 (Ct. Cl. 1970) (different 

parts of the FAR may have different purposes, and some 

of them may be for the benefit of the contractor). AECI 

argues that the Navy violated two provisions in the Naval 

Facilities Engineering Command (“NAVFAC”) Contracting Manual (P-68). 

Part 28.102-1(b) of the NAVFAC manual instructs 

contracting officers to contact the surety directly when

authenticating bonds, as opposed to contacting a surety 

agent’s office. In this case, the Navy contacted the agent 

who perpetrated the fraud, instead of contacting PIC 

directly. And part 28.106-2 of the manual specifies that a 

Level III contracting officer has to approve substituting 

an original bond with a replacement one. In this case, a 

contracting officer who is not a Level III officer returned 

the Liberty bonds and approved the substitution with PIC 

bonds. 

The NAVFAC P-68 contracting manual provides general guidance to Navy contracting officers. “It is not a 

stand-alone document, but must be read together” with 

the FAR and other Navy and Department of Defense 

acquisition regulations. NAVFAC P-68, 1.301. We agree 

3 Federal Acquisition Regulations are codified at Title 48, Chapter 1 of the C.F.R. 

 

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12 ALLEN ENGINEERING CONTRACTOR v. US

that both parts 28.102-1(b) and 28.106-2 exist for the 

benefit of the government, and not for the benefit of 

private contractors. These are internal operating procedures that give the Navy the information it needs to 

decide whether to approve the bonds. See, e.g., Am. Farm 

Lines v. Black Ball Freight Serv., 397 U.S. 532, 538 (1970) 

(rules intended to provide the government with necessary 

information to reach an informed decision do not benefit 

private contractors); Freightliner Corp. v. Caldera, 225 

F.3d 1361, 1365 (Fed. Cir. 2000) (internal operating 

procedures that ensure contract officers are acting in the 

best interest of the government are not for the benefit of 

private contractors). Since the review of the bonds exists 

for the benefit of the government, AECI cannot establish 

breach or shift liability to the Navy for failure in the 

review procedures.

Relatedly, AECI argues that the government’s flawed 

review of the bonds should excuse its default. Termination 

for default is not appropriate where the “delay in completing the work arises from unforeseeable causes beyond the 

control and without the fault or negligence of the Contractor. Examples of such causes include . . . (ii) acts of the 

Government in either its sovereign or contractual capacity 

. . . .” 48 C.F.R. § 52.249-10(b). Here, the Navy did not 

cause this default. The Navy might have caused the 

default if it breached its agreement with AECI, see Airport Indus. Park, Inc. v. United States, 59 Fed. Cl. 332, 

338 (2004), if it failed to communicate obligations to 

AECI, or if it otherwise failed to satisfy terms of its 

agreement with AECI, e.g., United Partition Sys., Inc. v. 

United States, 90 Fed. Cl. 74 (2009); Abcon Assoc., Inc. v. 

United States, 49 Fed. Cl. 678 (2001). But in the present 

case, AECI caused this default. AECI procured and submitted the bonds—later found to be fraudulent and invalid—and that caused the default. 

Finally, AECI argues that the Navy breached the implied duty of good faith and fair dealing. According to 

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ALLEN ENGINEERING CONTRACTOR v. US 13

AECI, it had a reasonable expectation the Navy would 

follow its own procedures when investigating the PIC 

bonds. By failing to comply with those procedures, the 

Navy effectively denied AECI the benefits of the contract. 

See Metcalf Constr. Co. v. United States, 742 F.3d 984, 

991 (Fed. Cir. 2014) (defining the implied duty of good 

faith and fair dealing). 

However, the implied duty of good faith and fair dealing cannot expand a party’s contractual duties. This 

means that “an act will not be found to violate the duty 

. . . if such a finding would be at odds with the terms of 

the original bargain, . . . by altering the contract’s discernible allocation of risks and benefits . . .” Id. In this case, 

the Navy and AECI struck a bargain that included AECI 

furnishing valid payment and performance bonds, which 

by definition must be supported by an approved surety. 48 

C.F.R. § 52.228-15(d). AECI failed to do that. Requiring 

the Navy, as a contractual duty, to catch AECI’s mistake 

would expand the government’s duties.

D 

AECI also argues that the Navy knew this particular 

agent was submitting fraudulent bonds. As such, the 

Navy should not have approved them. The question here 

turns on whether the Navy knew this agent was submitting fraudulent bonds. See J.A. Jones Constr. Co. v. United States, 182 Ct. Cl. 615, 619–20 (1968). And AECI has 

failed to point to any evidence establishing the Navy 

knew about the fraudulent bonds before it investigated 

the bonds under these contracts. 

E 

Finally, AECI argues that the Navy had an opportunity to rescind its return of the Liberty bonds, and that 

the Navy was unreasonable when it refused to demand 

Liberty reinstate them. However, AECI cites no legal 

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14 ALLEN ENGINEERING CONTRACTOR v. US

authority for this argument and fails to allege facts that 

establish the Navy had such an opportunity.

CONCLUSION

Because AECI has failed to establish any grounds for 

excusing its material breach or otherwise shifting liability 

to the Navy, the CFC’s decision to dismiss these claims is 

affirmed. 

AFFIRMED

No costs.

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