Boeing, General Dynamics Lose appeal of canceled A-12 contract

The U.S. was justified in canceling a contract for General Dynamics Corp. and Boeing Co. to develop the A-12 Navy jet fighter after executives admitted they couldn't meet the deadlines, a federal appeals court said.

The U.S. Court of Appeals for the Federal Circuit in Washington said today that even though there was no agreed completion date, the U.S. was within its right to cancel the project when little progress was made.

The U.S. has been trying for more than 17 years to get Boeing and General Dynamics to repay $1.4 billion in progress payments and about $1.4 billion in interest. Boeing had argued that because the U.S. Navy agreed to extend the terms of the original 1987 contract without setting a new delivery schedule, it had no basis for declaring the companies in default in 1991.

While it was a mistake for the Navy to stipulate this type of contract, it was also wrong for the contractors to accept it, the court said, echoing the lower court's finding.

"Both are at fault," though contact law allows the U.S. to terminate the agreement, the appeals court said. "The default termination of the A-12 contract was justified," the court said.

John Dern, a spokesman for Chicago-based Boeing, the second-biggest U.S. defense contractor, declined to make an immediate comment on the ruling.

Second Appeal

It's the second time the court has heard an appeal in the case. In 2001, the court reversed a 1998 judgment in the companies' favor and sent it back to the U.S. Court of Federal Claims to focus on the issue of contractor performance.

General Dynamics, based in Falls Church, Virginia, said in a regulatory filing in November that its after-tax charge if it loses the case would be about $770 million, or $1.91 a share, to be recorded in discontinued operations. General Dynamics is the U.S. army's second-largest equipment supplier.

The company has said it has the resources to satisfy its obligation if required.

The A-12 was one of the largest defense-procurement failures in history. The plane, designed to penetrate heavily defended locations, never made it into production.

"The United States is pleased with the court's decision," said Charles Miller, a spokesman for the Justice Department.

The case is McDonnell Douglas v. U.S., 07-5111, -5131, U.S. Court of Appeals for the Federal Circuit (Washington).