A T FOR C MAY BE A BREACH OF CONTRACT

Judge Nancy B. Firestone, of the U. S. Court of Federal Claims COFC), has just handed down an opinion in which she holds that the government's termination for convenience (T for C) may be a breach of a non-commercial item procurement contract for security services in Iraq and Afghanistan.  The Department of Defense (DOD) awarded two contracts to the plaintiff but then terminated each for its convenience.  After reviewing all the relevant Court of Appeals for the Federal Circuit (CAFC) opinions, she concludes:

The court reads these precedents to include liability for breach of contract based on an improper termination for convenience where the government has engaged in some form of improper self-dealing for its own benefit or to the benefit of another contractor.

Her discussion hinges on the linchpin of the duty of good faith and fair dealing.

She begins her discussion pointing out that the government's right to terminate a contract for convenience without giving rise to a breach of contract claim has its roots in military contracts.  The military needed the clause so as to avoid large, unneeded military procurements upon cessation of war and other hostilities.  She then acknowledges that the CAFC has held a T for C may give rise to a breach claim where there is bad faith or an abuse of discretion.  The CAFC also has recognized  a T for C can be a breach when the government "contracts with a party knowing full well it will not honor the contract."

Importantly, a claim for breach of contract based on breach of the implied duty of good faith and fair dealing is different than a claim for breach based on an improper T for C.  The implied duty of good faith and fair dealing is inherent in every contract.  This duty requires each party "do everything that the contract presupposes should be done by a party to accomplish the contract's purpose."  A party must not destroy the reasonable expectations of the other party.

The breach of the obligation to exercise good faith and fair dealing also includes, as we have written many times, the duty to cooperate, communicate with and not interfere in the other party's performance.  Again, and very importantly, proof of bad faith is not required to show a breach of the implied duty of good faith and fair dealing in most cases.  As Judge Firestone notes:  "Evidence of government intent to harm the contractor is not ordinarily required."

Judge Firestone agrees with the government that breach of the covenant of good faith and fair dealing cannot be the basis for a claim of an improper T for C.  However, animus toward the contractor is not required.  The government can abuse its discretion by not intending for the contract to go forward, by terminating for convenience in order to get a better price for itself and by entering into a contract without intending to allow the contractor to perform.  These are breaches of the duty of good faith and fair dealing and are therefore an abuse of discretion.

Judge Firestone concludes with the language quoted above: the government can breach the contract by some form of "improper self-dealing for its own benefit" such as terminating a contract just so it can award it to another contractor (which was the alleged case before the judge).

Can the government breach this duty of good faith and fair dealing by walking away from an awarded contract just so as to take the work in-house due to sequestration or budget limitations?  Perhaps.  Is it "improper self-dealing" or not? 

bill@spriggsconsultingservices.com                          www.spriggslawgroup.com

From Federal Times: As budgets tighten, contract attorneys expect uptick in bid protests

Two weeks after sequestration began, contract lawyer Bill Spriggs got a call from a vendor client upset that a federal contracting official had just ordered it to cut its price by 10 percent for “sequestration-related cuts” without a change in service levels.

Spriggs declined to name the contractor or agency, but said the dispute involved a non-defense civilian agency and a commercial item contract where changes can’t occur unless by mutual agreement.

“It’s the first time I’ve seen something like that,” said Spriggs, who runs the Spriggs Law Group in Virginia.

While lawyers sort out the dispute, the larger question is whether the incident was just an anomaly or perhaps an early sign that the sequester will bring about more contract disputes and bid protests.
For more, click on the link:

http://www.federaltimes.com/article/20130403/ACQUISITION03/304030007/As-budgets-tighten-contract-attorneys-expect-uptick-bid-protests?odyssey=nav%7Chead

SUE THE CONTRACTING OFFICER?

Occasionally, we've been asked if it is possible to sue the contracting officer personally.  For a lot of reasons, we discourage such an action, not the least of which is the questionable motivation for doing it.  Not too long ago, a contractor terminated for default decided to sue the contracting officer in U.S. District Court and the Court of Appeals for the Second Circuit very recently decided the appeal of that suit.  Let's take a look at the facts and briefly review what the circuit court decided.

The contractor sued the procuring contracting officer (PCO), the Chief of Contracting, the administrative contracting officer (ACO) and the Program Manager for the New York District Corps of Engineers.  The suit alleged that the contractor's contracts were terminated in retaliation for the contractor's criticism of the Corps' mismanagement of construction projects, that the terminations negatively impacted the contractor's business and that, as a result, the contractor was deprived of its constitutionally protected rights to free speech and substantive due process.  The contractor had appealed the terminations of its contracts to the Armed Services Board of Contract Appeals (ASBCA) but those appeals were dismissed (for reasons not germane here) without prejudice.

In a case called Bivens, the U. S. Supreme Court ruled in 1971 that a cause of action existed for victims of unreasonable searches and seizures against the government agents conducting the complained of searches and seizures.  The Court said it would infer a private right of action for monetary damages where no other federal remedy is available based on the principle that for every wrong, there must be a remedy.  Three Justices dissented, saying such "legislating" should be left to Congress.  Thus, there was born what became know as a "Bivens action" in court.  (The Second Circuit was reversed in Bivens.)

In revisiting the issue last month, the Second Circuit considered whether the Contract Disputes Act (CDA) of 1978 precluded the contractor's Bivens action.  It noted that other circuit courts had decided just such a preclusion existed.

The court started its discussion noting that precisely because the Bivens action is a judicially created remedy (not based on statute), federal courts have been reluctant to recognize a broad application of such implied judicial relief.  The remedy is an extraordinary thing that should rarely if ever be applied in new contexts.  If there is an alternative remedy available, the implied relief should not be granted.

The court concluded that in the face of the comprehensive CDA scheme of relief, federal courts should decline to infer new substantive legal liability without legislative aid.  Although the CDA does not allow contractors to bring actions against government employees in their individual capacities for alleged violations of constitutional rights, nevertheless, the CDA affords a meaningful and exclusive remedy against the government.  In effect, the CDA remedy is exclusive for all claims arising out of or related to government contracts.  Therefore, contractors cannot sue the government employees in their individual and personal capacities.

So contractors have an exclusive remedy under the CDA and cannot sue the contracting officer personally.  And if contractors still have retribution on their minds, they also should be wary of alleging bad faith.  Government employees are legally presumed to be acting in good faith and successfully overcoming that presumption requires a showing of well-nigh irrefragable proof.

And the obvious question:  can the contractor sue the PCO and others personally for pre-award actions and inactions?  We're looking for a case but it would seem the Competition in Contracting Act CICA) provides what may be described as a meaningful and exclusive remedy through the bid protest procedures.

bill@spriggslawgroup.com                                     www.spriggsconsultingservices.com

ASBCA APPLIES THE SOVEREIGN ACT DEFENSE

The Armed Services Board of Contract Appeals (ASBCA) has just applied the sovereign act defense in a case involving a contract for improving vehicle armor and upgrading and painting vehicles for the Iraqi National Police under a contract awarded by the government.  The government moved for summary judgment on the contractor's claims asserting among other things the sovereign act defense.  The contract contained the standard commercial items clause.  The contractor claimed there were design problems which were later addressed in contract modifications.

As the contractor performed the contract, it encountered delays throughout the performance period.  In one case, the contractor said it could not pick up its steel truck from the convoy area due to blocked roads by the Iraqi Police Forces and the U.S. Army.  The Iraqi police were not able to deliver vehicles due to security reasons and check point issues.  The contractor claimed unabsorbed overhead based on the delays.  The government argued accord and satisfaction based on the bilateral modifications to the contract.  The ASBCA denied the government's motion, saying the modifications did not cover delay costs.

The ASBCA then addressed the sovereign act defense.  With regard to road blockages and border and gate restrictions imposed by the government, the contractor did not allege that such actions were targeted at the contractor or were taken to achieve some sort of financial advantage in connection with the particular contract.  The Board stated the contractor in effect admitted that the requirements complained of were imposed in connection with general government regulations and operations. 

The Board said:  "Such acts, being of a public and general nature, not targeted at a specific contractor, would constitute sovereign acts.  Actions taken by the United States in its sovereign capacity shield the government from liability for financial claims resulting from those acts, although a contractor is allowed additional time to perform."  The Board's opinion does not include a detailed and in depth discussion of the sovereign act defense.

With regard to the road blockages and border and gate restrictions imposed by the government of Iraq, since the U.S. government was not liable in its contractual capacity (not at fault), it could not be held responsible for the delay costs resulting from security actions undertaken by the government of Iraq.

We've written often about the application of the sovereign act defense to claims arising from actions of the government taken as a result of sequestration.  Although this ASBCA case does not involve sequestration, it signals in a general sense how the ASBCA may address the defense if raised by the government with regard to actions undertaken as a result of sequestration.  In many prospective cases there may be no clear causal nexus between sequestration and the action taken by the government.  Nevertheless, expect the government to assert the sovereign act defense. 

It would appear the ASBCA may look to the general nature sequestration and it may recognize the sovereign act defense by rationalizing that sequestration did not target any particular contract or contractor.  In the broader sense, however, as in the Winstar Supreme Court case, it would appear Congress fully intended that its actions would result in changes, cancellations and terminations of procurement contracts, in which case the defense would not apply.  We'll see.  The Supreme Court probably eventually will have to decide the issue.

bill@spriggslawgroup.com                          www.spriggsconsultingservices.com

LPTA IS FAR PART 14

In our opinion, lowest price technically acceptable (LPTA) is not best value.  It is not part of the best value continuum.  It should be removed from FAR Part 15 along with the misnomer "continuum".  LPTA has become the way in which agencies inveigle contractors into the best value game only to change the rules to LPTA in the source selection process.  What the contractor thought was best value becomes LPTA.  But the contractor thought that innovation in the technical proposal would be to its advantage.  No, sorry, we're going with the lowest price.  Time after time, complaint after complaint, we continue down the LPTA path deluding ourselves into thinking that we are reaching the best value decision.

Best value is a term of art reserved for a special process of cost versus technical superiority tradeoffs.  The agency is asked to look at technical superiority to see if that superiority is worth the price premium.  If, indeed, and in honest reality, the technical proposals are equal, then the best value axiomatically is the lowest price.  But how often does that happen?  Equal.  Hardly.  Evaluators have not done their job, most likely.

What's lost on the contemporary crowd is the history of advertised and negotiated procurement.  It's time for a lesson.  In the old days, there was what was known as advertised procurement and there was negotiated procurement.  In advertised, the government specified exactly and in detail what it wanted the the contractor promised to comply in every respect.  If the contractor demonstrated it would meet the requirements, the contract went to the lowest priced bidder.  (That's where the term bidder came from - advertised procurement involved bidders - not offerors.)  The bids were opened in public in front of anyone who wanted to see them, anyone could look at them and the winning price was chalked up (literally).  There even was a dance called the two step which was a kind of qualifying round where the bidders were thoroughly checked out and pronounced qualified before they even submitted their prices.

FAR Part 14 is the lost part of FAR.  The old advertised procurement is now called sealed bidding.  It used to be all the rage and now you hardly ever hear of it.  (I have not see a sealed bidding procurement in years.)  Well, guess what.  LPTA procurements belong in Part 14 where they can be handled properly just as they were in the old advertised procurement days.

The problem with the way LPTA is administered today is that it is used for performance specifications.  We got away from the detailed specifications the government used in advertised procurements because Senator Chiles went on TV with a 4 inch mousetrap specification in his hands.  Well, the government needs to specify exactly what it wants, in detail, if it is to use the likes of LPTA.  We pretty much agree on that.  If we are looking at whether the technical requirements are met, it seems we ought to specify with particularity what we require.  As soon as you go there, you are in Part 14.

We need to rediscover FAR Part 14 and start using it where the government can specify what it wants.  Follow those rules.  Once the contractor is qualified and we have confidence it can do what we want, we should go to the lowest price.  And, we really ought to consider the old two step as well.  Use of LPTA today is entirely misplaced and misleading.  Too many contractors think they are in a best value procurement when they are not.  Let's call it what it is.  If the government wants a performance specification, do a true best value tradeoff analysis.  If it knows what it wants, use FAR Part 14 to find a qualified contractor with the lowest price. 

Come to think of it, this is just another reason we need to hear from the old timers.  How many of you understand what we just said?  Too few, I fear.  But the old timers are applauding and saying let's rediscover the virtues of FAR Part 14 and rid ourselves of the vices of Part 15.

bill@spriggsconsultingservices.com                         www.spriggslawgroup.blogspot.com 

THE TILTED PLAYING FIELD

Sean Stackley called our acquisition system the most "complex, chaotic, over regulated and overseen process in the world."  We may disagree with him.  We are not so sure about the chaotic part.  But it is time to remind ourselves that the federal procurement system is by design a tilted and uneven playing field.  The government writes the rules.  How many of us participate in any way in the rule making process?  The best we can do is join a trade association.  But how many of us actively participate in the efforts to affect the rules?  And with what result?  What influence does industry really have in how the game is played?  We elect our representatives to Congress.  But how many of us sit with the staff members to suggest less micromanagement or changes to the statutes?

It is high time to remind ourselves that federal procurement is based on contracts of adhesion.  What are contracts of adhesion?  In this context, and in the legal sense, they are contracts in which the government dictates the terms and conditions.  Our mentor, Gil Cuneo, was fond of reminding all of the audiences before which he spoke that one must start with the understanding that when you enter the government marketplace, you must be prepared to deal with contracts of adhesion.  The closest commercial counterpart is the insurance contract, to which we all can relate.  The insurance company dictates the terms and conditions.  How many times has each of us negotiated the terms of our insurance policies?

Yes, government contract terms and conditions are dictated by the government.  And if the term or condition is not written in the contract, chances are it will be read into the contract by operation of law.  See our article on the Christian doctrine.  There are no changes or termination for convenience clauses in the commercial marketplace contracts.  Making changes unilaterally and terminating for convenience would be breaches of contract there.  But, like it or not, the government contract will contain these clauses whether they are written in the contract or not.  (Of course, if the contract is for a "commercial item", the unilateral change is eliminated in government contracts.)  Here, we've picked but two of the hundreds of clauses dictated by the government that will be found in government contracts.  In most every case, the contractor has no control over whether the clause is included or not.  And in many instances, it is there even if you can't see it.

So, what do we make of these contracts of adhesion?  Contractors play on a tilted and even uneven playing field.  Tilted in the sense that the government controls the entire system, from clauses to remedies.  Uneven, in the sense that the professional contract administration staff for the government often does not understand the rules and applies them unevenly and even unfairly.  Is it any wonder that in order to invite contractors into its marketplace the government employs ombudsmen?  That's a warning to let the seller beware.

What's the point of all this?  The government owes its contractors a special duty.  It's known as the duty of good faith and fair dealing.  It's known as the obligation to cooperate, communicate, not interfere and disclose information vital to performance.  We've written about these corollary duties over and over again.  Some accuse us of taking sides.  But put all this in the proper perspective.  The contracting party with this unusual control occupies a position of special trust.  And since it is public contracting, that trust is owed to all citizens, all taxpayers, but including all contractors.  That position of trust brings with it certain obligations.  Our trustees should not be driving unreasonably hard bargains and bullying contractors into submission.  They should be assisting contractors to succeed.

bill@spriggsconsultingservices.com                 www.spriggslawgroup.blogspot.com

UNCONSCIONABLE CENSORSHIP BY THE GOVERNMENT

Yesterday, we published one of our brief articles on Unconscionability in Contracting.  Today, we received a comment from a dear reader who pointed out that the Air Force has blocked access to our blog site with its Bluecoat AFNet firewall.  Apparently, this firewall controls all Air Force Internet links and it denies access to our blog site.  The category that Bluecoat blocks is called Government/Legal; Blogs/Personal Pages.

Perhaps this censorship was an unintended mistake.  Perhaps we were just caught up in an understandable attempt to keep employees from spending time reading personal emails.  Or, perhaps the Air Force purposefully seeks to limit access to what we say.  We'd like the Air Force to come forward and tell us this is not censorship.  And, we'd like the Air Force to recognize our purpose is to educate the public.

Our editorial policy is to protect and preserve the integrity of the procurement system and enlighten its practitioners, both in industry and government, on critical policy and legal issues of current interest.  We do not take sides.  Federal procurement is the most highly regulated marketplace in the world.  Everyone needs to know the rules.  We talk about rules.  They are meant to be followed by government and contractor employees alike.  Let the chips fall where they may. 

We do not take censorship lying down.  To the extent any of you, dear readers, have any influence in making sure our words get out, please help.

Finally, we are humbly grateful for your really astonishingly positive reaction to our blog.  We now have over 40,000 page views in less than one year in publication.  We hope we have made a small difference in improving knowledge of the federal procurement system.  Please let us know what we can do to improve both the content and dissemination of our communications.  Thank you.

bill@spriggsconsultingservices.com     www.spriggslawgroup.blogspot.com

UNCONSCIONABILITY IN CONTRACTING

Yesterday, a contracting officer told a contractor to decrease its price by 10% "for sequestration related cuts, without any changes to contractual services levels."  Yes, believe it or not, one of our government employees, with a warrant, who is supposed to be the conscience of our system, asked a contractor to provide the same level of service for 10% less money.  This is unconscionable behavior.  Sequestration may cause a reduction in services and therefore the price of those services.  But it is strikingly unfair and unjust (the meaning of unconscionable) to require a contractor to provide the same services for less money.  Naturally, the contractor did not agree but offered to provide reduced services for a reduced price.  That sounds reasonable.

Unconscionability doesn't get talked about much.  The Armed Services Board of Contract Appeals (ASBCA) occasionally uses the term to describe egregious government behavior, usually in the context of the failure to cooperate or communicate or where the government seeks to impose drastic contractual penalties.  The Uniform Commercial Code (UCC) uses the term to describe strikingly unfair behavior in the commercial marketplace.

We believe that contracting officers are indeed the conscience of the procurement system.  Or, they should be.  FAR 1.602-2, dealing with the responsibilities of contracting officers, states at sub paragraph (b) that the responsibility of the contracting officer is to "ensure that contractors receive impartial, fair and equitable treatment."  The duty of good faith and fair dealing falls most heavily upon the shoulders of contracting officers and that duty is implied in all phases of government contract activity.

Sequestration is here and budget constraints are here to stay forever.  But Congress did not intend to place the burden on contractors to provide the same services for less money.  That is not sequestration.  That is unconscionable manipulation.  And, if combined with the threat of termination, it is unconscionable extortion.

We expect more from the people to whom we entrust the warrant to act on our behalf in spending our taxpayer money.  Yes, we want them to spend it wisely.  But we do not expect them to drive contractors from the marketplace we depend upon because they are not treated impartially, fairly and equitably.  The point of this piece is that it is not enough to be fair.  Contracting officers are the conscience of the system and must avoid unconscionable behavior, especially in times of severe budget constraints.

bill@spriggslawgroup.com                                   www.spriggslawgroup.com

SEQUESTRATION AND THE ANTIDEFICIENCY ACT

One of the possible consequences of sequestration is that there may well be a greater risk now of violations of the Antideficiency Act.  Unless the meat ax cuts are squarely and precisely made, some obligations and expenditures may be made which exceed the actual amounts obligated and committed to be expended. 

What is the Antideficiency Act?  That Act prohibits making or authorizing  an obligation or expenditure in excess of the amount available under any appropriation, apportionment, administrative subdivision of funds, allowance or allocation of funds unless authorized by law.  It also covers involving the government in any obligation to pay money before funds have been appropriated and it prohibits accepting voluntary services except in cases of emergency involving the safety of human life or the protection of property.  Finally, it prohibits making obligations or expenditures in excess  the amount permitted by agency regulations.

Federal employees who violate the Act can be disciplined administratively, suspended without pay or removed from office.  They may also be subject to criminal penalties and actually be sent to jail.  We are not aware of any public employee who has ever been sentenced to jail time for violation of the Act.

Agency heads are required to report violations to the President and to Congress.  OMB has issued further instructions which can be found in OMB Circular No. A-11 (2012).  That document describes violations as:  "obligations or expenditures in excess of the lower of the amount in the affected account, the amount apportioned, or any administrative subdivision of funds specified in your agency's fund control regulations as being subject to the Antideficiency Act."  It also explains that "obligations and expenditures that exceed allowance and allocations are violations of the Antideficiency Act."

(A friend of ours told the story of a contracting officer saying to the contractor, go ahead and perform the service, we cover it with next year's funding.  Yes, that's a violation.)

As if the job of the contracting officer were not already hard enough, our public servants must now be even more careful to see exactly where the meat ax falls in sequestration.  They must question carefully whether they are making obligations and expenditures which exceed funds which have been chopped off.  And, as Sean Stackley recently said, "We ask our acquisition folks and program managers to navigate the most complex, chaotic, over regulated and overseen process in the world."  And then we ask them to take a 20% pay cut.

bill@spriggslawgroup.com                                                 www.spriggslawgroup.com

TINA: AGENCY MUST SHOW DAMAGES

Judge Peacock of the Armed Services Board of Contract Appeals (ASBCA) has sustained the appeal of Lockheed Martin in a Truth in Negotiations Act (TINA) claim made by the Air Force.  After a thorough discussion of the many faults in the Air Force's argument in favor of its claim, Judge Peacock simply points out that for an agency to prevail on such a claim, it must show damages or prejudice.  Having failed in the attempt, the ASBCA denies the Air Force's claim for $14+ million.

TINA was first passed in 1962 to put the government on an equal footing with contractors in contract negotiations where submission of cost or pricing data is required.  TINA now applies to any negotiated contract expected to exceed $700,000, a modification of a contract exceeding $700,000 and in certain cases a subcontract exceeding that same amount.  Of course, there are exceptions not relevant here.  And there are other arguments a contractor can make in defending the government's defective pricing claim.

In the Lockheed Martin case, the Air Force claimed that Lockheed's failure to disclose date resulted in overstatement of the prices the Air Force paid.  And the Air Force grounded its argument on the rule of law that there is a presumption that the non-disclosure of data resulted in an overstatement of the price.  Fair enough. There is such a rule.  But Judge Peacock pointed out that the ASBCA analyzes the evidence carefully in applying the presumption.  And, he pointed out, the presumption can be rebutted and is not a substitute for specific proof establishing the amount of damages.

The government has the ultimate burden of showing a causal relationship between incomplete or inaccurate data and an overstated contract price.  "In this case, the government not only has failed to prove the amount of any increase, appellant has rebutted the presumption that an overstated CCIP contract price resulted from the alleged nondisclosure of the data in question."  Judge Peacock concluded that it was not necessary for him to address the other issues and defenses raised by Lockheed Martin.  Even whether the data were timely disclosed was something he did not need to address.

"To establish defective pricing, it is axiomatic that the allegedly undisclosed data lead to a higher negotiated price.  Here, the evidence establishes that any nondisclosure of the Bridge prices did not contribute to an overstatement of the CCIP contract prices.  Even if all the other elements of the government's claim were established, its damages are zero."  Repeat, even if all the other elements of the government's claim were established, its damages are zero.

The lesson?  Cut to the chase.  What were the damages, if any.  If none, there is no claim.

bill@spriggslawgroup.com          www.spriggslawgroup.com