2 Defense Firms Plan $3-Billion Suit Over Pact : Aerospace: General Dynamics and McDonnell Douglas claim the Navy stuck them with an illegal contract in the A-12 attack jet program, which has been scrapped.

General Dynamics and McDonnell Douglas, the nation’s two largest defense contractors, will sue the federal government as early as Friday for $3 billion, alleging that the Navy saddled the firms with an illegal contract on the now-canceled A-12 attack jet program, The Times has learned.

The two contractors will argue that the Navy knew that the $4.3-billion contract to develop the A-12 would be less than the anticipated cost, meaning that the two firms would sustain a significant loss, according to well-informed sources.

Although such fixed-price contracts--common during the 1980s--have evolved into a major financial burden for the defense industry, the A-12 suit will be the first effort to prove that such arrangements were inherently illegal.

The massive lawsuit, to be filed in the U.S. Claims Court, would also represent the largest case ever brought by an arms firm against the government. Historically, few defense contractors have sued the government, though many have filed claims.

The suit is also expected to highlight the controversial involvement of former Navy Secretary John F. Lehman Jr. and his deputy, Melvyn R. Paisley, in setting the Navy’s policy of using fixed-price contracts to develop new-generation weapons.

The ill-fated A-12 development program was more than a year behind schedule and billions of dollars over its cost ceiling when the Navy canceled it last January under punitive terms known as “default.� After the termination, the two firms laid off 9,000 workers across the country.

At the time, the Navy demanded repayment of $1.34 billion from the two firms, but the demand was deferred after concern arose that enforcing it could bankrupt General Dynamics and McDonnell Douglas during the Persian Gulf War, according to congressional testimony by Pentagon officials.

The suit will attempt to overturn the terms of the cancellation, thereby negating the repayment demand, and to recover additional funds that the firms spent prior to the termination.

The firms have already briefed senior Pentagon attorneys on the suit.

Spokesmen for General Dynamics and McDonnell Douglas, both based in St. Louis, declined to comment. Navy General Counsel Craig King also declined to comment.

The suit will allege that the contract was illegal from its inception and therefore never existed as a legal instrument, according to industry sources.

It will also assert that the Navy erred in signing a fixed-price contract without having the full $4.3-billion obligated to the program. The Navy had planned to use annual appropriations to fund the full award, a mechanism that the two firms will contend is legally flawed.

Since the A-12 contract was awarded in the mid-1980s, the Pentagon has turned away from issuing fixed-price contracts to develop new-technology weapons. In March, Eleanor Spector, director of defense procurement, said in a speech that past policies of using such contracts had “proven to be mistaken.�

Critics have said the use of fixed-price contracts to develop technology--a policy championed by the outspoken Lehman and Paisley--backfired on the Pentagon. In a number of cases, most notably the A-12, defense firms were unable to complete programs when the costs exceeded contract ceilings.

BACKGROUND The January cancellation of the A-12 attack jet program by Defense Secretary Dick Cheney has inflicted significant damage to naval aviation. The stealthy jet was the centerpiece of the Navy’s plan to modernize its air fleet. The service has established a new AX program for the same purpose, but it will be more than a decade before that plane is ready to enter production, assuming Congress will fund it.