Westinghouse Electric Corp. v. Garrett Corp.

United States Court of Appeals for the Fourth Circuit · Contracts

Contractsbreach of contractdefault terminationtermination for conveniencemutual faultmutual defaultdelaygovernment contract clauses

Facts

Westinghouse had a contract with the Air Force to supply ECM pods and subcontracted with Garrett to provide cooling systems, under a contract making time of the essence and containing default and convenience termination clauses. Garrett fell behind in design and production, and after correspondence and meetings, Westinghouse issued a show-cause notice and then terminated Garrett for default. The district court found that Westinghouse substantially contributed to delay by failing to timely provide final source control drawings and by later furnishing drawings containing numerous errors. The district court also found that Garrett contributed to delay by abandoning UAP's ASHX design without permission, causing a four-week delay.

Issue

When a buyer's default termination is improper because the buyer substantially caused the delay, must that termination automatically be converted into a termination for convenience, or may the court deny recovery to both sides when the seller also materially contributed to the delay? A related issue is whether Westinghouse met its burden to show Garrett alone was responsible for the default.

Rule

A party seeking to justify a default termination bears the burden of showing the other party was responsible for the default. If the terminating party's own breach substantially contributed to the delay, the default termination is improper; but an improper default termination is not automatically converted into a termination for convenience where the terminated party was also in default and contributed to the delay. In proper circumstances, where both parties are at fault or in mutual default, a court may refuse recovery to either party.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakeview Systems in Baltimore subcontracted with Redwood Thermal in Columbus to build cooling modules for a defense project. The contract made time of the essence and included default and convenience termination clauses. When Redwood fell behind, Lakeview terminated for default, but trial evidence showed Lakeview had itself failed to deliver required interface specifications for several weeks, while Redwood was also slow in staffing the project.

If Lakeview sues for excess completion costs after the termination, who bears the burden on whether the default termination was justified?

Explanation. A party seeking to sustain a default termination bears the burden of showing the other party was responsible for the default. Making time of the essence does not shift that burden. If the terminating party's own breach substantially contributed to delay, it cannot carry its burden to justify default termination. (Derived from Westinghouse Electric Corp. v. Garrett Corp. (n.d.).)