STOPPING WORK ON A FEDERAL GOVERNMENT CONTRACT

The changes and disputes clauses in federal government contracts require the contractor to perform pending resolution of changes claims and all disputes arising under or related to the contracts.  But there is an exception in the caselaw for material breaches of the contract by the government.  Some fly under the banner of cardinal changes.  But the definition of the exception to the duty to perform is a material breach.  What is a material breach?

A material breach is a matter of vital importance or that goes to the essence of the contract.  Gilbert v. Department of Justice, 334 F.3d 1065, 1071 (Fed Cir. 2003).  That is the best way to define a cardinal change.  A matter of vital important or that goes to the essence of the contract  The five factors considered by the court and boards are set out as follows:

1. the extent to which the contractor will be deprived of the benefit reasonably expected under the contract;
2. the extent to which the contractor can be compensated adequately for the benefit of which the contractor will be deprived;
3. the extent to which the government will suffer forfeiture;
4. the likelihood that government will cure its failure to perform; and
5. the extent to which the government's behavior comports with the duty of good faith and fair dealing.

The Court of Appeals for the Federal Circuit has held "[u]pon material breach of a contract the non-breaching party has the right to discontinue performance of the contract."  Stone Forest Industries, Inc. v. United States, 973 F.2d 1548, 1550 (Fec. Cir. 1992).

In fact, if the contractor encounters a material breach by the government and nevertheless continues to perform, without protest, the contractor waives the breach and will be held to complete the contract.  In effect, in the face of a material breach by the government, the contractor is obliged to stop work or at the very least complain.  The best remedy in the circumstance is to seek declaratory relief.  See our blog post this date on declaratory relief.

Stopping work is risky business.  The contracting officer may well disagree with the contractor's assertion of a material breach, order continued performance, and then terminate for default if the contractor fails to comply.  Although the contractor may seek declaratory relief, the court and boards do not have injunctive relief power in the administration of contracts.  Prudence and principles of equity, however, strongly suggest that the parties await the outcome of litigation of the dispute.  The situation cries out for Alternative Dispute Resolution but it takes two to tango and to reach a compromise.

bill@spriggslawgroup.com 

DECLARATORY RELIEF DURING PERFORMANCE OF A FEDERAL GOVERNMENT CONTRACT

What if during performance of a federal government contract, you encounter a problem resulting in a dispute and you need judicial relief?  The disputes clause requires you to continue to perform. The answer to the question is that you can seek declaratory relief either in the Court of Federal Claims (COFC), the Armed Services Board of Contract Appeals (ASBCA), or the Civilian Board of Contract Appeals (CBCA).

The Court of Appeals for the Federal Circuit (CAFC) has concluded that the COFC, ASBCA, and the CBCA have broad discretion to issue declaratory relief during performance of a contract, including the adjustment or interpretation of contract terms, or other relief arising under or relation to the contract.  Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1270-71 (Fed. Cir. 1999).  For example, declaratory relief is appropriate in situations involving questions of contract interpretation, or a special need for early resolution of a legal issue.

To pursue this remedy, you must file a nonmonetary claim with the contracting officer and appeal his or her decision.  You can file your complaint with the notice of appeal, and then promptly file a motion for summary judgment on the legal issues involved.  You do not have to certify a nonmonetary claim when submitted to the contracting officer.

The Alliant decision contains three criteria for a court or board to evaluate in its determination of the propriety of granting declaratory relief: (1) whether the claim involves a live dispute between the parties, (2) whether a declaration will resolve the dispute, and (3) whether the legal remedies available to the parties would be adequate to protect the parties' interests.  

The live dispute requirement is not hard to prove.  The record must show the parties have engaged on the issue and are at an impasse.  The second prong requires the contractor prove it has a special need for early resolution of the issue.  The best example is where the contractor has been directed to perform what amounts to cardinal changes.  More on that in our next blog post.  Even if not every detail of the dispute will be resolved, the contractor must show declaratory relief would at least provide a fundamental framework to analyze any remaining issues.

The last prong may be the most problematic.  A contractor may have relief available through a contract clause such as a claim under the changes clause.  That remedy, however, may well be inadequate if a cardinal change is involved.  As Alliant informs, to hold the contractor has an obligation to perform until it receives a ruling on interpretation of the contract does not mean the contractor must postpone seeking such a ruling from the court or board until it has performed in full and filed its monetary claim.

bill@spriggslawgroup.com