[00:00:54] Speaker 00:
OK, the next case is number 17, 1045, Precision Standard Incorporated against the United States Defense Logistics Agency.

[00:01:04] Speaker 00:
Mr. Cox.

[00:01:06] Speaker 01:
Good morning, Judge Newman.

[00:01:10] Speaker 01:
May I please record?

[00:01:10] Speaker 01:
This appeal comes before the court from the ASPCA.

[00:01:15] Speaker 01:
And there were two cases that the ASPCA heard, the first of which is the termination for default.

[00:01:22] Speaker 01:
That's the one that we're here on appeal.

[00:01:24] Speaker 01:
And the second was for some breach of warranty claims that have since been settled.

[00:01:30] Speaker 01:
So we're left with just the termination for default matter.

[00:01:33] Speaker 01:
And as we set forth in our brief argument is that the ASPCA got that decision wrong.

[00:01:40] Speaker 01:
They should not have granted summary judgment for the government because the termination for default decision was erroneous.

[00:01:48] Speaker 04:
Is the termination for default decision by the CEO

[00:01:54] Speaker 04:
Do I have it correct that the way that's reviewed by the board below is for an abuse of discretion?

[00:02:01] Speaker 01:
It would be contrary to law or arbitrary and capricious.

[00:02:07] Speaker 01:
Those are the things that they look at.

[00:02:08] Speaker 01:
And our position was that since the wrong standard was used to reject our parts, there was absolutely no evidence.

[00:02:17] Speaker 01:
It was arbitrary and capricious and violated the contract.

[00:02:20] Speaker 04:
And so I think what the board was saying was that

[00:02:25] Speaker 04:
As a matter of law, there is no material question of fact.

[00:02:29] Speaker 04:
And so granted summary judgment that there is no abuse of discretion in this CFO's determination.

[00:02:37] Speaker 01:
Correct.

[00:02:37] Speaker 01:
And where we respectfully disagree with the board is that the board seemed to be focused on the dispute.

[00:02:43] Speaker 03:
Could I just ask a procedural question?

[00:02:45] Speaker 03:
Because I'm not familiar with these proceedings very well.

[00:02:49] Speaker 03:
If the board had determined there is a genuine issue of fact here,

[00:02:55] Speaker 03:
would have denied the summary judgment motion and then had a trial?

[00:03:01] Speaker 01:
Yes, there would have been an evidentiary hearing or trial as you referred to it.

[00:03:05] Speaker 03:
So the way we have to look at it is whether there's a genuine issue of material fact that you raised.

[00:03:14] Speaker 01:
That's correct.

[00:03:14] Speaker 03:
For you to possibly go forward on a claim that it was the government that materially breached this contract.

[00:03:21] Speaker 03:
That's correct.

[00:03:22] Speaker 03:
It's not a question of well,

[00:03:24] Speaker 03:
the board made some fact findings and we have to review that under a clearly erroneous standard or something like that.

[00:03:30] Speaker 03:
Correct.

[00:03:31] Speaker 03:
Okay.

[00:03:32] Speaker 00:
Would you comment to get to the merits on the applicability of that FAR provision where the contractor is required, is supposed to continue performance when there's a dispute?

[00:03:46] Speaker 00:
along the way.

[00:03:47] Speaker 01:
Yes, certainly, Ron.

[00:03:48] Speaker 01:
And that is across the board's decision.

[00:03:50] Speaker 01:
They decided in favor of the government on that basis that they said, well, regardless of whether or not the correct standard was used to inspect and reject your parts under the warranty clause, you still, under the disputes clause that you referred to, you still had to keep going.

[00:04:05] Speaker 01:
You still had to keep performing.

[00:04:06] Speaker 01:
You could have filed a claim and asked for money to right your wrong.

[00:04:11] Speaker 01:
But our position was that

[00:04:14] Speaker 01:
that's contrary to our services for a country to be as well as most of the circuit law and specifically i would prefer that the contractor did not continue is that correct that's correct uh... when modification p three was issued uh... the contractor i think within a week settle out of the contract not just saying you know no no sorry we're we're done with the shipping more parts on the theory on what theory on the theory that the the uh... process the manufacturing process that was used

[00:04:43] Speaker 00:
was correct or could not produce an unobjectionable product, or that is, that performance would have been fruitless?

[00:04:53] Speaker 01:
Well, their position, we'd have to look at the letter.

[00:04:56] Speaker 01:
I could cite the board to that.

[00:05:00] Speaker 01:
In the record, it said appendix 1,018,

[00:05:10] Speaker 01:
The letter is not very specific as to why.

[00:05:13] Speaker 01:
It just basically objects to the issuance and modification P3.

[00:05:17] Speaker 01:
But basically, their position was, look, we produce these parts in Michigan.

[00:05:23] Speaker 01:
We inspected them.

[00:05:25] Speaker 01:
We certified them to the spec that we did, which was 6858.

[00:05:31] Speaker 01:
The DCMA, the local DCMA, tested the parts.

[00:05:35] Speaker 01:
And they said, yeah, they're fine.

[00:05:36] Speaker 01:
We recommend you pass them first article.

[00:05:39] Speaker 01:
They're shipped to Utah.

[00:05:40] Speaker 01:
to the Hill Air Force Base.

[00:05:41] Speaker 01:
The Hill Air Force Base folks look at them and say, yes, we're going to grant you conditional approval.

[00:05:46] Speaker 03:
Where does this letter say that they object to the modification?

[00:05:51] Speaker 01:
Is that Appendix 1018, Your Honor?

[00:05:53] Speaker 03:
Yeah.

[00:05:54] Speaker 00:
But it doesn't say that.

[00:05:55] Speaker 01:
Yeah, it's not very clear.

[00:05:56] Speaker 01:
But that letter was in response to the government's breach of warranty letter that could be found at Appendix 1014.

[00:06:04] Speaker 04:
But I think the question was, when did you tell the CO that you didn't agree

[00:06:10] Speaker 04:
with the modification or with the standards, and where's that communication?

[00:06:14] Speaker 04:
I think you referred us to A1018, but I just, like Judge Chen, I don't see it there.

[00:06:20] Speaker 01:
Yeah, there's nothing in the record other than that letter and then the one that followed it, appendix 1019, where PSI specifically said, you know, we're objecting to modification P3 because... Oh, where did they say that?

[00:06:32] Speaker 01:
No, I'm saying there's no document in the record that says that.

[00:06:36] Speaker 04:
So there's nothing in the summary judgment record?

[00:06:38] Speaker 01:
There's nothing in the summary judgment record that specifically says that.

[00:06:42] Speaker 01:
However, again, this is, never mind, a legal question because if we look at the Federal Circuit's decision, for instance, an Alliant tax system, they specifically state that it's a material breach for the government.

[00:06:54] Speaker 01:
If there's a material breach for the government, it has the effect of

[00:06:56] Speaker 04:
But you didn't tell the CEO that you thought that there was a material breach, right?

[00:07:01] Speaker 04:
Or your client didn't?

[00:07:03] Speaker 01:
No, they did not specifically use those words in those letters to say that.

[00:07:08] Speaker 03:
Alliant, that opinion, I'm trying to remember, isn't the standard something like if the government elects to make a cardinal change through a modification to the terms of the contract?

[00:07:24] Speaker 03:
then under those kinds of severe changes, then the contractor does have some freedom to elect not to follow such a severe change.

[00:07:36] Speaker 03:
But otherwise, the contractor is required to keep on chugging along in light of any modification made that's less than some kind of a cardinal change.

[00:07:51] Speaker 01:
That's correct, Your Honor.

[00:07:52] Speaker 03:
It does talk about a cardinal change being, again, something that is... So then that guess then boils down to whether what we have here was something so severe that it rises to the level of a cardinal change to the terms of the contract.

[00:08:07] Speaker 01:
Correct.

[00:08:07] Speaker 01:
And our position is obviously, look, it goes to the very heart of the contract.

[00:08:11] Speaker 01:
We're making parts and they're inspected to a certain spec.

[00:08:15] Speaker 01:
And that's the one we can contractually agree to.

[00:08:17] Speaker 01:
That's the one you approved.

[00:08:19] Speaker 01:
You can't come along, change that spec, reject our parts, and then say, well, you're going to have to ship us some more.

[00:08:25] Speaker 03:
Well, there was a problem with the parts that they received, right?

[00:08:28] Speaker 03:
Or at least they reported parts that they received that were so defective that you wouldn't want to install them, right?

[00:08:37] Speaker 01:
No.

[00:08:37] Speaker 01:
There was some issue of fact that they received these parts at Hill Air Force Base.

[00:08:43] Speaker 01:
The government had possession of them for a few weeks or almost a month.

[00:08:47] Speaker 01:
They were unpackaged.

[00:08:49] Speaker 01:
They were put in a truck.

[00:08:50] Speaker 01:
They were driven across the base.

[00:08:52] Speaker 01:
So there was some visible damage to some of the spot welds.

[00:08:56] Speaker 01:
Now, there's a dispute in the record as to what they saw.

[00:08:59] Speaker 01:
On one account, we heard from a government official saying, well, the welds were pulled through.

[00:09:03] Speaker 01:
Another person said, well, there were visible cracks.

[00:09:06] Speaker 01:
So there was an issue of fact as to what was the problem to begin with that made the government put them under the x-ray machine and look at them that closely.

[00:09:14] Speaker 01:
So it was then, when they did that, when they looked at the parts under the expert machine, that's when they changed the spec.

[00:09:22] Speaker 01:
This is contrary to the contract.

[00:09:25] Speaker 01:
Contrary to what they approved our parts, the spec that our parts were supposed to meet, they employed this new spec, D17.2, which was a higher standard.

[00:09:36] Speaker 01:
And not only did they use the wrong spec, and one spec that we didn't agree to, but they used a portion of that spec to deal with test items.

[00:09:44] Speaker 01:
These weren't test items, these were production parts.

[00:09:46] Speaker 01:
These were 16 of the 70 parts that we had shipped to Hill Air Force Base that had been accepted, half of which, we're not sure, but we think were on airplanes.

[00:09:57] Speaker 01:
So these were production parts.

[00:09:59] Speaker 01:
And the spec that was supposed to be used, if you're gonna look at them under an X-ray machine, is 6858.

[00:10:04] Speaker 01:
And that's a lower standard than the ones they used to reject our parts.

[00:10:13] Speaker 00:
Hard to understand here.

[00:10:15] Speaker 00:
Are you saying that the Mod 3, the new spec, was impossible of compliance?

[00:10:21] Speaker 01:
You're on a Modification Pooh 3.

[00:10:22] Speaker 01:
The only thing that did was say, look, we've issued a breach of warranty letter.

[00:10:28] Speaker 01:
We want you to ship us two additional parts so we can look at them.

[00:10:31] Speaker 01:
And we said, no, we're not going to do that.

[00:10:33] Speaker 01:
We're not going to ship you two additional parts on a Modification P3.

[00:10:37] Speaker 01:
Because the parts that we shipped to you were accepted by the government, were inspected, they're fine.

[00:10:43] Speaker 01:
So that's what P3 did.

[00:10:45] Speaker 03:
Well maybe that's your view that you delivered them, you didn't hear an objection for a while, and then you deemed them to be fine.

[00:10:54] Speaker 03:
But now the government was telling you for several months that there were safety problems, there were defects with the initial batch you delivered, and they needed to ensure that these skins were

[00:11:11] Speaker 03:
would work for their and be safe for their intended purpose.

[00:11:14] Speaker 03:
So I guess, am I right in recalling that what it felt like to me was the contracting officer was trying to get in touch with someone from PSI and was having a hard time of getting PSI to engage with the CEO during this time where there were all these concerns about what PSI was delivering.

[00:11:37] Speaker 03:
And then ultimately

[00:11:40] Speaker 03:
made a modification and during the course of a few months PSI never said that modification is a cardinal change to the contract.

[00:11:52] Speaker 03:
I'm not going to operate under this severe alteration to the contract.

[00:11:58] Speaker 03:
Am I understanding the story correctly and then ultimately because you finally said we're not going to follow these modifications, that's when

[00:12:09] Speaker 03:
the CEO felt like, OK, this situation is broken and terminated the contract.

[00:12:17] Speaker 01:
That's right, Your Honor.

[00:12:18] Speaker 01:
It all started with the breach of warranty letter that was issued at appendix 1014.

[00:12:24] Speaker 01:
That's when the contract officer first notified us, said, hey, we've found some problems with some of your production parts, allegedly.

[00:12:31] Speaker 03:
That was the first time?

[00:12:33] Speaker 03:
October?

[00:12:34] Speaker 01:
That was the first time they notified us.

[00:12:36] Speaker 01:
That was the breach of warranty letter.

[00:12:38] Speaker 01:
And this is, again, after our parts had been, they passed first article, they passed DCMA inspection, Hill Air Force fields looked at them, they said they're fine, and we started producing.

[00:12:50] Speaker 01:
And we shipped 70 parts, production parts.

[00:12:52] Speaker 01:
And then all of a sudden we get this letter in October saying, hey, we've got some issues, we see some problems with some of these skins.

[00:13:00] Speaker 04:
Going back to Judge Chen's question,

[00:13:05] Speaker 04:
board's decision at appendix page 15.

[00:13:09] Speaker 04:
There are a number of places where the board notes that there was a failure to respond to that October 12, 2000 letter by the CO and that then the CO asked again for a response, but then PSI failed to respond again.

[00:13:27] Speaker 04:
Ultimately, I think then

[00:13:33] Speaker 04:
You know, is there anything where you think there's a genuine issue of fact with respect to the facts, what seems to be the undisputed facts that are listed here on Appendix Page 15?

[00:13:45] Speaker 01:
I don't dispute that.

[00:13:46] Speaker 01:
As I pointed out to the panel, the letter that PSI sent on October 12 at Appendix 1018, that was their letter objecting to this breach of warranty claim and the modification that was issued, directing them to shift them to additional test records.

[00:14:01] Speaker 01:
They did object to it.

[00:14:02] Speaker 01:
They didn't specifically state, we think this is a cardinal change, et cetera, et cetera.

[00:14:07] Speaker 01:
But that was their letter objecting to it, basically telling the contracting officer that that's it.

[00:14:11] Speaker 01:
We're not going to comply with that.

[00:14:13] Speaker 00:
Are you telling us that this was an unreasonable position?

[00:14:17] Speaker 00:
What is the relief that you're requesting?

[00:14:21] Speaker 01:
Well, we think that the determination for the fault was improper.

[00:14:24] Speaker 01:
It should have been converted to determination for convenience,

[00:14:27] Speaker 01:
You can't have a material breached by the government, which we're alleging here, that the government changed the warranty spec, rejected our parts without telling us.

[00:14:39] Speaker 01:
It wasn't in our contract.

[00:14:41] Speaker 03:
They can't hold us to a higher... What do you mean they didn't tell you?

[00:14:44] Speaker 03:
I thought they were telling you through the late summer and into the fall the problems they were having.

[00:14:49] Speaker 01:
Your Honor, we entered into a contract with them and incorporated a certain spec that said,

[00:14:54] Speaker 01:
This is the spec you're going to be governed by.

[00:14:56] Speaker 01:
That is the spec we certified to.

[00:14:59] Speaker 03:
Right, but you're not saying that there's no ability for them to make modifications to a contract, are you?

[00:15:04] Speaker 01:
So they certainly could, but they never did.

[00:15:05] Speaker 01:
They never added the reference to this new spec that they used to reject our parts.

[00:15:10] Speaker 01:
They never added the reference to the drawing until after they had accepted our parts, and after all that had occurred.

[00:15:16] Speaker 01:
So we never were contractually bound to follow that spec that they used.

[00:15:20] Speaker 01:
But for whatever reason, they chose to use it.

[00:15:23] Speaker 01:
It was a higher bar.

[00:15:24] Speaker 03:
What's the evidence you have in the record that can give us some feeling that the other welding standard is so dramatically different that it amounts to a cardinal change?

[00:15:37] Speaker 01:
Well, Your Honor, I would direct your attention to appendix 855.

[00:15:40] Speaker 01:
855 sets forth the relevant excerpt from the spec that we're objecting to, the D17-2.

[00:15:50] Speaker 01:
And at paragraph 4.7.2,

[00:15:54] Speaker 01:
It talks about all class A test welds.

[00:15:57] Speaker 01:
This was a production part.

[00:15:59] Speaker 01:
Again, so this is the wrong standard to be applying.

[00:16:02] Speaker 01:
This is a test spec that's applied to maybe a first article.

[00:16:06] Speaker 01:
But these are production parts.

[00:16:07] Speaker 01:
So not only are they using the wrong spec, but they're applying the test weld section.

[00:16:12] Speaker 01:
And here it says all welds should be free of cracks and expulsion.

[00:16:16] Speaker 01:
Now that's black and white.

[00:16:18] Speaker 01:
There's cracks.

[00:16:19] Speaker 01:
We have to reject it under the spec.

[00:16:21] Speaker 04:
I think the board kind of

[00:16:23] Speaker 04:
didn't rely on this discrepancy in its decision, right?

[00:16:27] Speaker 04:
Instead, it said the record reflects the government's imposition of AWS D17.2 was done in good faith belief that it was the correct standard.

[00:16:36] Speaker 04:
And there's no evidence in the record that PSI raised this issue of breach by the government at the time that Mod 3 was issued.

[00:16:44] Speaker 04:
So that was the basis upon which the board reached its decision in granting summary judgment and saying that the CO didn't abuse its discretion, right?

[00:16:52] Speaker 01:
That's right, Your Honor.

[00:16:53] Speaker 04:
So isn't this kind of a sideshow?

[00:16:55] Speaker 01:
Well, it's absolutely not a sideshow because the board, where we disagree, they said, well, under the Disputes Clause, you've got to keep going.

[00:17:01] Speaker 01:
It doesn't matter if the government makes up a spec and rejects your parts that we've already approved.

[00:17:07] Speaker 01:
It doesn't matter.

[00:17:08] Speaker 01:
You've got to just keep going.

[00:17:09] Speaker 04:
But doesn't there have to be some communication to the CEO so there can be a determination as to whether there is an abuse of discretion by the CEO in terminating the contract?

[00:17:19] Speaker 01:
Well, the issue that we disagree with, we're saying that there's a prior material breach for the government by imposing a spec that we weren't contractually obligated to follow, rejecting our parts, and then issuing them out telling them we've got to issue new test specimens for them to look at.

[00:17:35] Speaker 01:
That's a prior material breach.

[00:17:37] Speaker 01:
And that excused us of all future performance, including under the Disputes Clause, which this Federal Circuit and the Alliance Tech System specifically stated.

[00:17:46] Speaker 01:
They said that once there's a prior material breach for the government,

[00:17:49] Speaker 01:
excuses performance, and even the disputes clause, which is what the ASPCA judge hung her hat on in terms of granting summary judgment for the government.

[00:17:59] Speaker 04:
I was a little confused by your reliance on the board's denial of summary judgment for the government's claim.

[00:18:08] Speaker 04:
So the government claimed that your client breached the contract, the warranty provisions.

[00:18:16] Speaker 04:
And you say that somehow that precludes summary judgment

[00:18:19] Speaker 04:
on this issue where we're looking at whether the CEO abused his discretion in terminating.

[00:18:26] Speaker 04:
I don't see how those two relate when it's the government's breach of warranty claim.

[00:18:31] Speaker 04:
Not your breach of warranty or your breach of contract argument.

[00:18:35] Speaker 04:
It's the government's breach of warranty argument that was denied.

[00:18:40] Speaker 01:
The government's breach of warranty claim, it was based on a rejection of our parts utilizing the spec that I pointed out that we never agreed to.

[00:18:47] Speaker 01:
We were not obligated to follow.

[00:18:49] Speaker 01:
So our point is, I guess you've got to look backwards.

[00:18:51] Speaker 01:
The judge said that the termination was proper because the contracting officer looked at it and said the parts didn't meet spec, therefore I'm going to terminate for the fall.

[00:19:02] Speaker 01:
Well, sure they didn't meet the spec.

[00:19:04] Speaker 01:
That wasn't the proper spec that they were using.

[00:19:06] Speaker 01:
That's the whole argument.

[00:19:08] Speaker 01:
That's the disconnect.

[00:19:09] Speaker 04:
Well, there's a genuine issue of material fact as to, I guess, whether it was the right standard or whether there was such a difference in the standard that it would be a breach of contract.

[00:19:19] Speaker 01:
And the judge even pointed out, as to the second ASPCA Appeal Number 58205, she said, well, I can't grant summary judgment on that issue because there's an issue of fact as to whether the government used the right spec or the wrong spec or what spec they were supposed to be using.

[00:19:33] Speaker 01:
But yet she went ahead and said, it's OK.

[00:19:36] Speaker 01:
What the government did terminating for the fall was okay.

[00:19:39] Speaker 01:
It doesn't matter whether they used it or not.

[00:19:40] Speaker 04:
I think what she was saying was that the CO did not abuse his discretion or his discretion in terminating the contract where there was just no communication at all.

[00:19:51] Speaker 04:
That was at least one of the grounds.

[00:19:52] Speaker 01:
Well, again, I guess we've been over that.

[00:19:57] Speaker 01:
All I can say is they objected to it in writing and they said they weren't going to comply with it.

[00:20:02] Speaker 00:
So where does this stand?

[00:20:03] Speaker 00:
Was there a re-procurement?

[00:20:05] Speaker 00:
Is there still an argument?

[00:20:08] Speaker 00:
Or as a result of the board's decision, this was a loss that your client has borne so far?

[00:20:15] Speaker 01:
Yes, this is a loss they've borne.

[00:20:17] Speaker 01:
And we feel like we'd like to have it converted to determination for convenience so we can get paid our costs back.

[00:20:23] Speaker 01:
We settled the second appeal, as I said.

[00:20:26] Speaker 01:
So that's no longer there.

[00:20:27] Speaker 01:
But this one here, we feel should be converted to determination for convenience.

[00:20:31] Speaker 00:
OK.

[00:20:32] Speaker 00:
Thank you, Mr. Cobb.

[00:20:33] Speaker 01:
Thank you very much.

[00:20:41] Speaker 00:
Mr. Peretti.

[00:20:44] Speaker 02:
Good morning.

[00:20:45] Speaker 02:
May it please the court.

[00:20:49] Speaker 02:
PSI's contract here for A-10 aircraft cowling skins was terminated for default after all 16 of the parts that were on hand at the Hill Air Force Base were inspected and were determined to have numerous visible cracks that were apparent on the surface of the parts.

[00:21:05] Speaker 02:
Flogged spot welds in these type of parts could result, as the undisputed records show,

[00:21:11] Speaker 02:
in pieces of the metal shearing off during use, being sucked into the airplane engines causing the loss of the aircraft and loss of life.

[00:21:18] Speaker 02:
Did they comply with the old welding standard but not comply with the new welding standard?

[00:21:25] Speaker 02:
No, Your Honor.

[00:21:26] Speaker 02:
In fact, as we cited in our brief and as the Defense Logistics Agency relied upon in the context of the termination for default, we've cited three different specifications that

[00:21:39] Speaker 02:
the government contends these parts fail to comply with because of the defective spot wells.

[00:21:45] Speaker 02:
PSI and its council have argued that one of those provisions that we relied upon, the radiographic testing provision, they've said well that applies for test specimens and these were actually production parts.

[00:21:58] Speaker 02:
We don't think their reading of the provision is correct but it really makes no difference because it's undisputed as the ASBCA found that

[00:22:07] Speaker 02:
The other standard that we relied upon plainly states on its face it applies for production parts.

[00:22:12] Speaker 02:
And the table that's appended to that specification is entitled visible external imperfections for production parts.

[00:22:19] Speaker 02:
These were production parts.

[00:22:21] Speaker 02:
And that standard under all three of the iterations of the specifications, from the one that was referenced originally in the contract to the middle one that PSI relies upon to the final version that DLA cited,

[00:22:35] Speaker 02:
All three of those have the exact same language and say that Class A welds, which these were, have a 0% acceptance factor for cracks open to the surface.

[00:22:45] Speaker 00:
Go ahead.

[00:22:47] Speaker 00:
The product was inspected and it was accepted and they were told to proceed with the full production and not faulting or saying that there was any error, that further inspection perhaps

[00:23:05] Speaker 00:
found flaws in the product.

[00:23:07] Speaker 00:
But here there was this entire operation and then the specifications were changed and Mod 3 was unilaterally adopted.

[00:23:18] Speaker 00:
It isn't as if this was irrational behavior on the part of the producer whose product, first the prototype and then larger scale, were accepted on inspection.

[00:23:31] Speaker 02:
Your Honor, the evidence that was in the record before the ASBCA was that when these parts were shipped, when they were received at the supply depot, they were kept in their original box.

[00:23:43] Speaker 00:
But let's accept that they turned out they were flawed.

[00:23:47] Speaker 00:
Yes.

[00:23:48] Speaker 00:
On that premise, nonetheless, there were certain events that led this producer, this manufacturer, forward up to a certain commitment, at least.

[00:24:01] Speaker 00:
whether or not it was correct in saying, I'm going to argue with you rather than continue to produce product that you say is unacceptable.

[00:24:14] Speaker 02:
Yes, Your Honor.

[00:24:14] Speaker 02:
The record before the ASVCA showed that when the production parts were shipped in, they were kept in their original boxes.

[00:24:22] Speaker 02:
So they weren't actually opened.

[00:24:24] Speaker 02:
Other than one item was opened to visibly glance at it and see if it was, in fact, appeared to be what was supposed to be in the box.

[00:24:31] Speaker 02:
The rest were kept in their original boxes until they were shipped to Hill Air Force Base and at that point they were inspected and the flaws were observed.

[00:24:40] Speaker 02:
So the flaws weren't detected immediately upon receipt of the boxes.

[00:24:45] Speaker 02:
But it's also important to note here that PSI was actually paid for its production parts.

[00:24:52] Speaker 02:
So to the extent it's claiming any loss, it would only be because it didn't get to produce the remainder of the parts that were actually behind schedule and that were due

[00:25:00] Speaker 02:
Previously, it had never shipped in, but it was actually paid for these defective parts that the government had to eventually scrap and couldn't even use.

[00:25:09] Speaker 02:
And again, PSI, as counsel acknowledged before the court this morning, at no time prior to the termination for default ever raised the issue of whether the correct welding standard was being applied or not.

[00:25:23] Speaker 02:
We don't think it makes any difference because, as I noted, all versions of the standard had the same language saying you can't have

[00:25:30] Speaker 02:
any cracks open to the surface.

[00:25:32] Speaker 03:
When you say all versions of the standard, my understanding is we are talking about two standards.

[00:25:38] Speaker 03:
There was the original standard in the contract and then there was the election by the CEO to have a different welding standard that the skins would have to meet.

[00:25:48] Speaker 03:
So are you saying that both those standards have essentially the same requirements of no cracks?

[00:25:58] Speaker 02:
Yes, Your Honor.

[00:25:59] Speaker 02:
And if you'd like, I can walk through briefly the chronology.

[00:26:02] Speaker 02:
The contract itself contained a specification or a reference to a drawing 160D411002.

[00:26:11] Speaker 02:
And the contract itself also contained a reference to a specification AF401.

[00:26:19] Speaker 02:
And the drawing that I referenced also referenced that AF401 drawing.

[00:26:24] Speaker 02:
If you go to the AF401 drawing,

[00:26:26] Speaker 02:
Section 3.3.5 states that all the welds must be performed in accordance with a standard that was known as a military standard, MILW6858.

[00:26:38] Speaker 02:
If you go to that standard, the military standard was then replaced by a private sector standard, the AMS standard, and that is the standard that PSI cites, even though that standard was not referenced in the contract in any way.

[00:26:55] Speaker 02:
So PSI accepts

[00:26:56] Speaker 02:
that the evolution from the original military standard to the civilian private sector standard, even though not referenced in the contract, binds PSI.

[00:27:06] Speaker 02:
Then that AMS private sector standard eventually was amended and replaced with the AWS standard that was cited eventually in the termination for default by DLA.

[00:27:19] Speaker 02:
But all three of those versions of the standard contain the same language.

[00:27:24] Speaker 02:
And they're referenced in our brief in a table at pages 7 to 8.

[00:27:29] Speaker 02:
And they're in the appendix found at pages 705 to 706, 1273 to 1274, and 853 to 854.

[00:27:38] Speaker 02:
And all three of those different iterations of the same standard contain the language saying that class A welds can have a 0% acceptance factor for cracks visible to the surface.

[00:27:51] Speaker 02:
Regardless of which standard applies, even if you look at the standard that PSI claims DLA should have been referencing, that version itself says you can have 0% acceptance for cracks visible to the surface.

[00:28:05] Speaker 02:
And the undisputed record here before the board is that every one of these 16 parts that were on hand at Hill Air Force Base that were inspected contained visible, you know, visibly apparent cracks to the surface.

[00:28:17] Speaker 02:
The issue that PSI has raised about x-ray testing that the government also did, and whether that was the right standard or not, makes no difference.

[00:28:26] Speaker 02:
Again, because that was additional testing that confirmed that there was cracking beneath the surface.

[00:28:31] Speaker 03:
But again... I guess they're arguing, or among their arguments, is not only the change in welding standard is some kind of significant, significant change, but so are all these testing requirements.

[00:28:43] Speaker 03:
those changes were so significant that it amounted to a material breach by the government, thereby relieving them of moving forward.

[00:28:55] Speaker 02:
Your Honor, that appears to be what they're arguing now as counsel acknowledged.

[00:28:59] Speaker 02:
That's not something that they ever pointed out to the Defense Logistics Agency at the time.

[00:29:03] Speaker 02:
That was not raised until in the midst of the summary judgment briefing before the ASBCA that this material breach concept was first raised.

[00:29:11] Speaker 03:
Are you saying that somehow they're precluded from raising that argument at the board?

[00:29:16] Speaker 02:
Well, Your Honor, if you go down the material breach path, to the extent it applies at all, and it applies, we acknowledge this court's case law recognizes that it can apply in certain limited circumstances.

[00:29:29] Speaker 02:
In those cases where it even can apply, where there actually has been a material breach by the government, the case law makes clear that the contractor

[00:29:38] Speaker 02:
has to make that known to the government at the time, and it has to elect, essentially, to alert the government, there's been a material breach we are not going to perform.

[00:29:47] Speaker 02:
That is not something that occurred here.

[00:29:51] Speaker 02:
Council pointed to certain letters in the record as the court noted through its questions.

[00:29:57] Speaker 02:
None of those actually say that PSI was alleging that the government was changing the standard or imposing obligations beyond the contract that would amount to a material breach.

[00:30:07] Speaker 02:
But the final communication from PSI before the termination for default was a letter that's found at appendix 1032 in which PSI finally responded to the second cure notice and said that basically it deemed modification three that imposed the requirement that they submit new test articles to be

[00:30:33] Speaker 02:
void and that they intended to go ahead and just send in the production parts that were still owed.

[00:30:38] Speaker 02:
Well, that is not in any way a clear statement by PSI that it contended the government had committed a material breach that absolved it of having to comply with anything else under the contract.

[00:30:49] Speaker 02:
On the contrary, what it seems to have been saying was we're going to pick and choose which parts of the contract we're going to comply with.

[00:30:56] Speaker 02:
We're not going to comply with your requirement that we submit two new test articles, but we're going to go ahead and send in the other production parts that are

[00:31:03] Speaker 02:
behind schedule that we want to send in and get paid for.

[00:31:07] Speaker 02:
Well, there's nothing in any material breach case law that would support that notion that a contractor can pick and choose, even if there has been a material breach.

[00:31:15] Speaker 02:
And of course, we do not agree that there was any material breach here because, as I pointed out, even if one were to accept the conclusion that the agency was applying a different standard on welding, all the standards have the same language.

[00:31:30] Speaker 02:
And so it can't have been a material breach

[00:31:33] Speaker 02:
to cite one version rather than another if they say the same thing.

[00:31:37] Speaker 04:
Unless you want to wrap up, I want to ask you a question about some statements in your brief.

[00:31:43] Speaker 04:
But I don't want to interrupt you from answering Judge Chen's question.

[00:31:48] Speaker 03:
Why did the contracting officer change from welding standard one to welding standard two if they say, as you put it, essentially the same thing?

[00:31:56] Speaker 02:
Your Honor, it wasn't that the contracting officer changed one welding standard to another.

[00:32:01] Speaker 02:
These are industry-wide standards.

[00:32:04] Speaker 02:
The original one was referenced in the contract.

[00:32:07] Speaker 02:
And the industry-wide standards, the ultimate one that is published by SAE International, that body changed or amended the standard, replaced it with the newer version that, again, in this particular said the same thing.

[00:32:23] Speaker 02:
So it wasn't that the contracting officer was changing the specifications.

[00:32:27] Speaker 02:
It's that the industry body that

[00:32:30] Speaker 02:
publishes the specification was updating them over time.

[00:32:35] Speaker 00:
So to fill in, so what happened between this letter of January 30th saying we'll provide all of the production items and then the termination for default a few months later?

[00:32:49] Speaker 02:
Your Honor, I don't believe the record... Well, within... Something must have happened.

[00:32:53] Speaker 00:
They weren't delivered.

[00:32:55] Speaker 02:
No, that's right.

[00:32:55] Speaker 02:
The parts were not delivered and internally

[00:32:58] Speaker 02:
The Defense Logistics Agency was analyzing the situation and prepared a termination memo recommending and then approving a termination for default, which was then issued.

[00:33:07] Speaker 02:
But no, PSI did not submit any additional parts after that point in time.

[00:33:13] Speaker 04:
In your brief, you have a few statements about that the government or that the board made factual findings and that there are factual determinations that we should review.

[00:33:27] Speaker 04:
for substantial evidence.

[00:33:30] Speaker 04:
I don't understand really how that would operate in a summary judgment proceeding.

[00:33:36] Speaker 04:
For example, on page 37 of your brief and page 38 and 39.

[00:33:41] Speaker 04:
But are you trying to say that there is no genuine issues of material fact?

[00:33:48] Speaker 04:
I really wasn't sure how to take this part of the brief.

[00:33:51] Speaker 02:
Yes, Your Honor.

[00:33:52] Speaker 02:
I apologize.

[00:33:53] Speaker 02:
That may have been inartfully worded.

[00:33:54] Speaker 02:
But it is correct that the board

[00:33:57] Speaker 02:
was addressing this on a summary judgment standard.

[00:34:00] Speaker 02:
And so the board made findings essentially that there were no disputed questions of material fact on the various points that it addressed.

[00:34:13] Speaker 02:
And so it's correct there was no hearing here with fact finding by the board.

[00:34:18] Speaker 02:
It was

[00:34:19] Speaker 02:
factual determinations made based on the undisputed.

[00:34:23] Speaker 04:
Undisputed record, limited record on summary judgment, and then those were the undisputed facts.

[00:34:28] Speaker 02:
Correct.

[00:34:29] Speaker 04:
Okay.

[00:34:29] Speaker 04:
Thank you.

[00:34:37] Speaker 02:
Your honor, we would request that the court firm the board's decisions.

[00:34:43] Speaker 00:
Okay.

[00:34:43] Speaker 00:
Thank you.

[00:34:44] Speaker 00:
And Mr. Cox, you didn't request rebuttal time.

[00:34:47] Speaker 00:
Do you need one or two minutes?

[00:34:51] Speaker 01:
Can I just one point?

[00:34:53] Speaker 01:
May I?

[00:34:53] Speaker 00:
OK.

[00:34:53] Speaker 01:
Thank you very much.

[00:34:55] Speaker 01:
I appreciate it.

[00:34:56] Speaker 01:
I just wanted to address the chart to which Mr. Perala referred in his brief at page seven and eight.

[00:35:03] Speaker 01:
In the chart, it's a comparison of the three specs that we've been discussing.

[00:35:07] Speaker 01:
And as you know, it talks about visible criteria for test specimens, visible criteria for production parts, and then radiographic acceptance for test specimens.

[00:35:17] Speaker 01:
Notably absent from that chart is the fourth item, which is really the crux of our argument, radiographic acceptance criteria for production parts.

[00:35:26] Speaker 01:
And that is at the heart of the issue because the government's breach of warranty letter when they issued it, it was based on D-17-2 radiographic for production parts.

[00:35:37] Speaker 01:
They're saying we violated that, and that's why they were rejecting under the warranty clause.

[00:35:42] Speaker 01:
the court to their letter where they specifically state that.

[00:35:58] Speaker 01:
That would be appendix 1014 and appendix 1015.

[00:36:03] Speaker 01:
And as the court will know in that letter,

[00:36:09] Speaker 01:
which attaches the August inspection report, or excuse me, the September inspection report from Hill, I believe.

[00:36:19] Speaker 01:
It talks about D-17, I'm looking right now at appendix page 1013.

[00:36:25] Speaker 01:
This was the Hill Air Force Base report that was attached to the government's breach of warranty letter.

[00:36:30] Speaker 01:
And in that letter, in the conclusion, it says, accept reject criteria established in AWS D-17-2 paragraph

[00:36:38] Speaker 01:
4721 states all wells should be free of cracks and expulsion.

[00:36:43] Speaker 01:
Now that reference to D17-2 can be found at appendix 855.

[00:36:49] Speaker 01:
And again, this is the section we looked at, radiographic acceptance criteria of test wells, free of cracks and expulsions.

[00:36:57] Speaker 01:
So that's the basis on which they reject it.

[00:36:59] Speaker 01:
So this chart that the government first bought, visible deformities or cracks,

[00:37:06] Speaker 01:
and whether the test or production parts is irrelevant because the rejection was based on the radiographic criteria.

[00:37:12] Speaker 01:
They used the wrong criteria.

[00:37:13] Speaker 01:
The correct criteria that we agreed to was 68-58.

[00:37:16] Speaker 01:
That was the spec.

[00:37:18] Speaker 01:
And that was not a high standard.

[00:37:21] Speaker 01:
It was free from cracks and expulsions.

[00:37:24] Speaker 01:
It had certain measurements you had to take.

[00:37:26] Speaker 01:
You know, cracks and expulsions are okay as long as they don't meet a certain measurement level or, you know, are so big.

[00:37:33] Speaker 01:
And so that's really the heart of the issue here.

[00:37:37] Speaker 01:
They rejected it based on a higher standard, and they had no contractual or legal right to do that.

[00:37:42] Speaker 01:
Thank you.

[00:37:43] Speaker 00:
Okay.

[00:37:44] Speaker 00:
Thank you.

[00:37:44] Speaker 00:
Thank you both.

[00:37:45] Speaker 00:
This case is taken on your submission.

[00:37:48] Speaker 00:
That concludes our argued cases for this morning.