[00:00:32] Speaker ?:
Okay.

[00:00:54] Speaker 02:
The next case is Hanley Industries versus the Secretary of the Army, 2015-12-58.

[00:01:00] Speaker 02:
Mr. Atkins, good morning.

[00:01:05] Speaker 03:
Good morning.

[00:01:06] Speaker 03:
May it please the Court.

[00:01:08] Speaker 03:
The key issue on the appeal before us this morning

[00:01:11] Speaker 03:
is the nature of the bargain between the government and handling industries under the Critical Characteristics Clause.

[00:01:17] Speaker 01:
So under that clause... You claim that the government terminated you for default for failing to meet the schedule, but I don't think that's true.

[00:01:25] Speaker 01:
I don't think the default notice said that you were being defaulted for failure to meet the deadline, right?

[00:01:33] Speaker 03:
That's why the key issue is the Critical Characteristics Clause, Judge.

[00:01:37] Speaker 03:
I think so.

[00:01:38] Speaker 03:
I think they also mentioned the deadline, though.

[00:01:42] Speaker 03:
The board does mention the deadline.

[00:01:44] Speaker 01:
But the default termination notice didn't mention the deadline, right?

[00:01:52] Speaker 01:
I think you may be right.

[00:01:54] Speaker 01:
So why did we worry about whether there was a waiver of the deadline that wasn't relied on for the default termination?

[00:02:05] Speaker 03:
Well, the board implicitly found

[00:02:08] Speaker 03:
According to our analysis in our brief that there was a waiver.

[00:02:21] Speaker 03:
I'm not so sure she didn't mention in her final decision.

[00:02:24] Speaker 03:
I'd have to review it again, Judge.

[00:02:26] Speaker 03:
But clearly the board found that they had missed the deadline.

[00:02:32] Speaker 03:
There was a stop work order under the critical characteristics clause.

[00:02:41] Speaker 03:
So, but Hanley argues in any event that they clearly, the contracting officer clearly encouraged continued performance after that deadline.

[00:02:52] Speaker 01:
The problem is it doesn't seem to be relevant because that wasn't the ground for the termination.

[00:03:00] Speaker 03:
That's why I was starting off with the critical characteristics laws.

[00:03:04] Speaker 04:
In the blue brief under your argument for

[00:03:10] Speaker 04:
the government breach of its implied duty to cooperate at 49.

[00:03:16] Speaker 04:
You say, perhaps most importantly, the government already knew both the cause of the rupture and where the nonmetallic inclusion and lack of form and assert that its rationale for terminating Hanley because it did not investigate the foundry suggests bad intent on the part of the government.

[00:03:39] Speaker 04:
In fact, the relevant email on the record says, WEPCO did not elaborate on what the non-metallic contaminant was or how it got into the process, and that WEPCO could have performed energy dispersive x-ray spectrography to try to determine what the inclusion might have been.

[00:03:57] Speaker 04:
So where in the record does it show that the government already knew what the contaminant was or how it got into the process?

[00:04:08] Speaker 03:
Well, the WEPCO report goes into detail on that.

[00:04:11] Speaker 03:
It was submitted on May 5th.

[00:04:13] Speaker 03:
And there's an email where the government metallurgist examined the WEPCO report in which he found that it was excellent.

[00:04:24] Speaker 03:
And in fact, he found that the quality of the steel was good.

[00:04:28] Speaker 03:
And I believe that that is found at A2434.

[00:04:38] Speaker 03:
The government itself received the WebCo report and its findings, agreed with those findings, but ended up ignoring the findings, didn't even communicate them back to Hanley, didn't discuss them with Hanley.

[00:04:53] Speaker 03:
It did come up with certain comments about the foundries your honor recognizes, but that was only in the final decision.

[00:05:00] Speaker 03:
They never once requested Hanley to go back to the foundry, whatever good that might have done, before the final decision.

[00:05:07] Speaker 03:
They essentially ignored the findings in the WebCo report and terminated Hanley for failing to come up with a root cause when in actuality they had agreed with the root cause that was in the WebCo report.

[00:05:22] Speaker 04:
In the blue brief a couple of pages earlier, you say that Hanley switched to WebCo during its production of future primers because it would allow for faster production.

[00:05:37] Speaker 04:
In fact, the switch was because the previous supplier had raised its prices.

[00:05:46] Speaker 04:
Isn't that right?

[00:05:47] Speaker 03:
That was one factor.

[00:05:49] Speaker 04:
Yes, Judge.

[00:05:51] Speaker 04:
Well, where in the record does it indicate that faster production was the primary reason for the switch?

[00:05:58] Speaker 03:
You know, I don't have at my fingertips that particular reference.

[00:06:03] Speaker 04:
Pardon me?

[00:06:04] Speaker 04:
Does it exist?

[00:06:05] Speaker 03:
I've seen it somewhere, Judge.

[00:06:12] Speaker 03:
But it was a combination of factors that they decided to go with Webco.

[00:06:18] Speaker 03:
And it was on August 23, the day after the deadline, when they had a big telephone conference, that they all decided, and Hannah believed it was a mutual decision, that they would go with a Webco steal.

[00:06:29] Speaker 03:
Webco still held out the opportunity of using Plymouth,

[00:06:32] Speaker 03:
But it would be a longer lead time.

[00:06:34] Speaker 03:
It was eight weeks at the time they were discussing it.

[00:06:36] Speaker 03:
But they required clear direction from the government as to whether or not it wanted to go back to Plymouth or not, because otherwise the decision was to go forward with Webco, because of price, because of better lead time, because of other issues.

[00:06:48] Speaker 03:
I think the testimony indicates that Plymouth was just very difficult to deal with.

[00:06:53] Speaker 03:
They really didn't appreciate the business, didn't want the business.

[00:06:59] Speaker 03:
So Hanley decided to go with Webco.

[00:07:02] Speaker 03:
And it decided to also use a new process that wasn't even contractually required called centerless grinding, which is a very elaborate process, very accurate process, to make sure that the tubes are very close in terms of their dimensions.

[00:07:16] Speaker 03:
This all relates to the hydrostatic testing, which was intrinsic to the critical characteristics clause, because there was a tube rupture, obviously, and the process at GORMAC, the subcontractor, was temporarily shut down.

[00:07:31] Speaker 03:
And then the CEO criticized the testing procedure because the measurements, not all measurements were taken.

[00:07:40] Speaker 03:
Ten percent of the tubes were measured before the test rather than 100 percent.

[00:07:46] Speaker 03:
But the CEO offered in her April 7th letter an opportunity for Hanley to show that nonetheless the tubes would in essence have passed that test in the form of a statistical analysis.

[00:07:57] Speaker 03:
That was an option she gave to Hanley.

[00:08:00] Speaker 03:
And because of the centralist

[00:08:01] Speaker 03:
grinding procedure, Hanley had a number of measurements of the tubes, outer diameter measurements, that were all very, if you do a scatter diagram, they were very close on point to the 0.763 outer diameter they were trying to reach.

[00:08:19] Speaker 03:
That was because of the centerless grinding process.

[00:08:21] Speaker 03:
And they simply did a statistical analysis to figure out the standard deviation of all of those measurements.

[00:08:28] Speaker 03:
And then they figured out the probability of what it would be for a measure to be on the lower order, the 0.762, such that it might be possible for a tube to expand more than 0.003 inches and trigger the snap gauge that Gormak had set up to determine the maximum point of the test.

[00:08:48] Speaker 03:
And the probability of that happening, Hanley concluded, was one in a million.

[00:08:54] Speaker 03:
And they submitted the documentation, the measurements from Banner, the subcontractor to Gormak, to prove that statistical analysis.

[00:09:01] Speaker 03:
And the government never responded.

[00:09:05] Speaker 03:
The government also didn't respond to several other questions or information that it had received in response to its questions.

[00:09:13] Speaker 03:
There was an issue about the acceptance inspection equipment, the AIE.

[00:09:18] Speaker 03:
Hanley submitted, on May 27, a very copious list of all the equipment

[00:09:23] Speaker 03:
that the government was welcome to inspect at Gormak and pass the AIE clause.

[00:09:30] Speaker 03:
The government never responded to that list, never indicated in any respect how it was erroneous.

[00:09:35] Speaker 04:
But your client was required to conduct certain tests, isn't that right?

[00:09:41] Speaker 04:
Yes, Judge.

[00:09:42] Speaker 04:
Radiographic inspection and x-rays of completed primers.

[00:09:47] Speaker 03:
I don't believe that those were required by the contract.

[00:09:51] Speaker 03:
Some of those were done.

[00:09:52] Speaker 03:
Hanley suggested that some of those could be done.

[00:09:55] Speaker 03:
The main test was a hydrostatic test.

[00:09:57] Speaker 03:
It was a pressure test, which I've already described at length.

[00:10:01] Speaker 03:
And Hanley, we submit, should prove to the satisfaction of the government that, in essence, the requirements were met.

[00:10:10] Speaker 04:
Where in the record was there an explanation of why certain parts of the documentation that was submitted were whited out?

[00:10:21] Speaker 03:
I know those references.

[00:10:27] Speaker 03:
I'm not sure that there are specific areas that further address those, the whiteouts.

[00:10:34] Speaker 03:
And markovers, I think.

[00:10:36] Speaker 04:
For me?

[00:10:36] Speaker 04:
I think they were whiteed out and marked over.

[00:10:40] Speaker 03:
Yeah.

[00:10:40] Speaker 03:
But in my experience, technicians probably should use a new page.

[00:10:46] Speaker 03:
Very often, they make an error in handwriting or something and write over it and rewrite it.

[00:10:51] Speaker 03:
It doesn't necessarily indicate interference.

[00:10:53] Speaker 04:
That's your experience, but there wasn't any explanation in the record, was there?

[00:10:57] Speaker 04:
Not that I recall, Judge.

[00:10:59] Speaker 04:
As I understand it, these are detonators.

[00:11:02] Speaker 03:
Yes.

[00:11:02] Speaker 04:
That's a hand product.

[00:11:03] Speaker 04:
Right.

[00:11:04] Speaker 04:
So people can die if it doesn't work.

[00:11:08] Speaker 03:
Yes, Judge.

[00:11:10] Speaker 03:
Yeah.

[00:11:11] Speaker 03:
And that's why Hanley was so proud of its test, which indicated that they believed

[00:11:16] Speaker 03:
they were submitting a safe product.

[00:11:21] Speaker 03:
So in fact, the hydrostatic test itself is designed to weed out any tubes that have a weakness in them.

[00:11:33] Speaker 03:
Very often, it's kind of confusing.

[00:11:36] Speaker 03:
Some people think that if you get a ruptured tube, you've got to stop production for a long period of time.

[00:11:45] Speaker 03:
in order to determine exactly what's going on.

[00:11:48] Speaker 03:
And that's true to a point.

[00:11:50] Speaker 03:
But as the test reports here show, the WebCo report in particular, if it's not a metallic defect, and these are found to be non-metallic defects, in other words, more likely it was a piece of dust in the foundry that found its way into the molten steel.

[00:12:05] Speaker 03:
And in the cold working process, it resulted in what's called an ID, or inner diameter, lap.

[00:12:12] Speaker 03:
And those are unavoidable.

[00:12:13] Speaker 03:
They always occur.

[00:12:15] Speaker 03:
Dr. Propelix, the contractor beforehandly, saw many instances of it.

[00:12:20] Speaker 03:
So the test is designed to actually destroy those tubes that have the weakness in it so that they can be discarded, and you move on with the production process.

[00:12:29] Speaker 02:
But because... You wanted to save rebuttal time and continue or save it?

[00:12:33] Speaker 03:
A couple more seconds, Judge, and I'll reserve the rest.

[00:12:36] Speaker 03:
So the point was to discard the ones that were defective, continue with the process, do a restart under the critical characteristics clause.

[00:12:44] Speaker 03:
But the government never worked closely, never cooperated with Hanley to reach that goal of restarting the production.

[00:12:51] Speaker 02:
I'll reserve every minute and time for a rebond search.

[00:13:09] Speaker 00:
May I please the court?

[00:13:11] Speaker 01:
I don't understand why you spend

[00:13:13] Speaker 01:
a significant part of your brief defending something which didn't happen here, which is the termination for default for failing to meet the deadline.

[00:13:21] Speaker 01:
It's just not involved in the case.

[00:13:25] Speaker 00:
Your Honor, respectfully, we would disagree.

[00:13:27] Speaker 00:
It is, in fact, a part.

[00:13:29] Speaker 01:
Why is it involved in the case?

[00:13:31] Speaker 01:
It wasn't part of the default termination.

[00:13:33] Speaker 01:
It was not the failure to meet the deadline.

[00:13:35] Speaker 00:
Your Honor, that was one of the bases, only one.

[00:13:38] Speaker 00:
We have multiple bases for defaulting.

[00:13:40] Speaker 01:
Show me where in the default

[00:13:42] Speaker 01:
termination notice there was a mention of the failure to meet the deadline.

[00:13:46] Speaker 00:
Your Honor, under the default clause, Federal Acquisition Regulations Section 52.249-8, which is the default clause in the contract that was incorporated by reference in the contract, and that's page 134.

[00:14:01] Speaker 01:
Where in the default notice is there reference of failure to meet the deadline?

[00:14:06] Speaker 00:
There is none in the default notice that I recall, Your Honor, because none is required because

[00:14:11] Speaker 00:
The default clause itself in the contract only requires a show cause notice in circumstances where endangered performance occurs.

[00:14:22] Speaker 00:
And that's, and I can direct you to 52249-8.

[00:14:25] Speaker 01:
You can default, you can default somebody without giving them notice of the reason.

[00:14:30] Speaker 00:
Correct, your honor.

[00:14:31] Speaker 00:
And this court's precedent and general injectable states that it is a prima facie basis to default the day something comes due.

[00:14:40] Speaker 01:
Does that case hold that you don't have to give them notice?

[00:14:42] Speaker 00:
Correct, Your Honor.

[00:14:43] Speaker 00:
Because that's what the clause says.

[00:14:45] Speaker 01:
The clause says notice is only required when... Was that a case in which there was no notice of the deadline?

[00:14:52] Speaker 01:
I don't recall if there was, but Your Honor, but the due date... Well, you just said there was, but so maybe there isn't.

[00:14:56] Speaker 00:
Well, Your Honor, between general injectables of this court and also Empire Energy, it's a prime officiate case where the due date comes when the due date is there, the date is

[00:15:09] Speaker 00:
always considered a requirement of the contract when there's a due date and the due date comes due.

[00:15:14] Speaker 01:
Well, of course it's a requirement of the contract.

[00:15:15] Speaker 01:
Right.

[00:15:16] Speaker 01:
The question is whether you can default somebody without giving them notice that they failed to meet the due date.

[00:15:22] Speaker 00:
We would respectfully.

[00:15:23] Speaker 01:
And I'm asking for authority that that's permissible.

[00:15:26] Speaker 01:
And so far you haven't cited it.

[00:15:28] Speaker 00:
Well, I think general injectables does support that, Your Honor.

[00:15:31] Speaker 00:
I think also the FAR default clause, in fact, supports it.

[00:15:34] Speaker 01:
Does that decide that you don't have to give them notice?

[00:15:36] Speaker 00:
Well, Your Honor, the default clause itself states that notice is not required.

[00:15:41] Speaker 01:
It's not the same thing.

[00:15:41] Speaker 01:
I asked you whether the case addressed that issue.

[00:15:45] Speaker 00:
I don't recall if it did, Your Honor, but it's not authority.

[00:15:49] Speaker 00:
It didn't address the issue.

[00:15:52] Speaker 00:
The fact that the court stated, and I believe it does state that it's a prima facie basis for default means that you don't actually have to provide notice.

[00:16:00] Speaker 00:
If the due date comes due, then default occurs.

[00:16:04] Speaker 00:
Of course, that's not the only basis for defaulting.

[00:16:07] Speaker 00:
Hanley, as Your Honor Judge Wallach stated, this is a munition.

[00:16:12] Speaker 00:
It's not a flagpole.

[00:16:14] Speaker 00:
Specs are important.

[00:16:16] Speaker 00:
They didn't follow the specs here.

[00:16:19] Speaker 00:
There were many bases to default them that we did include in the show cause clause.

[00:16:24] Speaker 00:
To the extent the court determines that that is a necessity, again, we would respectfully disagree.

[00:16:29] Speaker 00:
But the first article test clause was breached.

[00:16:32] Speaker 00:
The hydrostatic testing was breached.

[00:16:34] Speaker 00:
The Acceptance Inspection Equipment Clause was breached.

[00:16:38] Speaker 00:
The flow down of quality control procedures all breached.

[00:16:41] Speaker 00:
These are all important factors, particularly when you have ammunition.

[00:16:47] Speaker 00:
These are big guns.

[00:16:48] Speaker 00:
They sit on the decks of destroyers and cruisers.

[00:16:51] Speaker 00:
And if something goes wrong, then people will die.

[00:16:54] Speaker 00:
So we believe that the board made strong findings of fact.

[00:17:00] Speaker 00:
And they are factual determinations that this court should uphold.

[00:17:04] Speaker 00:
They're not arbitrary.

[00:17:05] Speaker 00:
They're not capricious.

[00:17:07] Speaker 00:
They are backed up by substantial evidence.

[00:17:09] Speaker 00:
And we believe that the board did a good job in summarizing this case.

[00:17:17] Speaker 00:
And we believe it should be upheld.

[00:17:19] Speaker 00:
And absent further questions from the court, we respectfully request that the court affirm the board's decision, finding that the Army acted reasonably, terminating Hanley Industries.

[00:17:30] Speaker 00:
And we thank you.

[00:17:32] Speaker 03:
Just in response, first of all, to one of the questions, in terms of record evidence of Plymouth taking longer, there was some statements to that effect in Hanley's response to the show cause notice.

[00:18:02] Speaker 03:
Particularly at A1558, where Mr. Gainor Blake of Hanley says that if the government insists, we will order tubing from Plymouth.

[00:18:13] Speaker 03:
The tubing will take many weeks longer to get, cost more, will be subject to rare hydrostatic test failures, and will not be certified by the manufacturer to mill T15119A.

[00:18:23] Speaker 03:
Hanley requests clear direction on this question, et cetera, et cetera.

[00:18:27] Speaker 03:
They never did get that clear direction, and so they did not pursue

[00:18:31] Speaker 03:
using Plymouth, which they would have been more than happy to do if the government were willing to set up a new delivery schedule, which they never got back to Hanley on.

[00:18:39] Speaker 03:
They couldn't set up a new delivery schedule.

[00:18:42] Speaker 03:
So they went with Webco.

[00:18:45] Speaker 03:
So in summary, I mean, the findings of the Webco report and what the government did with them that support the reversal of the board's decision for three reasons.

[00:18:54] Speaker 03:
First, the government's failure to cooperate or even to communicate with Hanley

[00:18:59] Speaker 03:
regarding the government's agreement on the findings in the WebCo report, combined with the fact that the government ultimately ignored the findings of the WebCo report, constitute the government's breach of the duty of good faith and fair dealing, particularly as it relates to the critical characteristics clause.

[00:19:14] Speaker 03:
And this constitutes a material breach, which, as we discussed in our brief, without more, automatically converts the default termination to a termination for convenience.

[00:19:25] Speaker 03:
That's because we're dealing with the duty of good faith and fair deal.

[00:19:28] Speaker 03:
It precludes also any alternative findings supporting the government's termination for default.

[00:19:33] Speaker 03:
Second, the board's failure to acknowledge the Webco report itself as contradictory evidence, tending to prove that Hanley complied with the government's demands and that the government agreed with the Webco report, show that the board's conclusion that the government acted reasonably in terminating Hanley is not supported by substantial evidence.

[00:19:54] Speaker 03:
It's got a look at the whole evidence, including all contradictory evidence, which included the WebCo report, which everyone at this point in time seems to be ignoring.

[00:20:02] Speaker 03:
Third, and finally, the fact that the WebCo report itself is the product of the government's request to Hanley to continue contract performance under the critical characteristics clause, long after the contractual delivery deadline of April 22 had passed, indicates that the government waived the 22 April contractual delivery deadline.

[00:20:20] Speaker 03:
such that any reliance upon that deadline cannot support any finding of termination for cause.

[00:20:25] Speaker 03:
As a consequence, Hanley respectfully submits that this court should reverse the board's decision and convert the government's termination for default into termination for convenience.

[00:20:34] Speaker 03:
Or alternatively, the court should remand this matter back to the board for factual findings reflecting the entire record, including the Webco report,

[00:20:46] Speaker 03:
and all other contradictory evidence, including the submissions that Hanley made constantly to the government, but the government never responded to.

[00:20:57] Speaker 02:
Thank you.