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

SUM CERTAIN

By now, all contractors are aware that in order for a board of contract appeals or the Court of Federal Claims to have jurisdiction (or for the contracting officer to render a decision on a claim), the contractor must submit the claim in an amount with is definite.  The Armed Services Board of Contract Appeals (ASBCA) recently decided it had jurisdiction in a case involving a claim where the contractor had presented sums certain for two claim options.  The government argued there was no sum certain.  Constellation NewEnergy, Inc., ASBCA No. 62518, December 9, 2020.

The contractor submitted an REA to the contracting officer offering two options for two statements of work.  It then converted the REA to a claim without changing the substance of the REA.  In the meantime, the government decided it did not want to pay the extra price for one of the options.  When the contracting officer wrote the final decision, she noted that the government had rejected the more expensive option and she went on to reject the claim.  On appeal, the board questioned jurisdiction, the government moved to dismiss and the parties briefed the issue.

Judge O'Connell held the board had jurisdiction.  He noted that the Court of Appeals for the Federal Circuit (CAFC) has held that a claim must be submitted in writing and contain a "clear and unequivocal statement that gives the contracting officer adequate notice of the basis and amount of the claim."  Contract Cleaning Maintenance, Inc. v. United States, 811 F.2d 586, 592 (Fed. Cir. 1987).

The sum certain requirement will result in rapid dismissal of an appeal if the amount is approximate.  However, the ASBCA has held that it is enough for jurisdiction that the amount can be calculated.

Keep in mind that a contractor can amend the claim by increasing or decreasing the amount while it is before the contracting officer or when the case is at the board where the claim is decided de novo. Also, the contractor can present alternative amounts based on separate theories of recovery.  Judge O'Connell decided Constellation NewEnergy, Inc.'s two option approach was just such a case although the facts were slightly different in that Constellation was pricing two separate statements of work.

One factor in the decision on jurisdiction is whether the contracting officer understood what had been submitted.  In this case, Judge O'Connell noted that the contracting officer had eliminated one of the options and only one option was open for consideration.

Finally, Judge O'Connell rejected the government's arguments based on distinguishable cases where the contractor estimated the amount of the claim.  (As we have written, estimates to come up with a price are permitted but the price submitted in a claim cannot be an estimated price.)  Beware.  Pick a number violates the sum certain rule.  Offering the government the option to pick a price violates the rule.

bill@spriggslawgroup.com

THE ANSWER IS ADR

Many years ago we wrote a law journal article on the judicial role of the contracting officer.  We can send  you a copy.  We also have written several blog posts pleading contracting officers to recognize that role in deciding issues and disputes.  Use our word search tool to review these posts.  In frustration, we proposed the establishment of a disputes contracting officer (DCO) to the Commission on Government Procurement, circa 1970. 

Guess what?  We have been ignored.  Most contracting officers act as advocates for the government's position and lack the desire to independently exercise a judicial role in handling disputes.  Never mind all the law we quoted in our law journal article.  Case law has made it clear contracting officers must act as judicial officers in handling disputes.

Enter ADR.  Alternative Dispute Resolution is the answer.  At any stage, say disagreements over contract interpretation, the parties may present their positions to an independent neutral real life judge for a binding or non binding decision.  Yes, at any stage of an issue or a possible dispute.  At any stage also means to resolve the REA or the threat to terminate for default.  Any issue, any stage.  The doors of the ASBCA and CBCA are wide open to hear your request to get a real judge involved.

We have seen many cases where the parties should have sought ADR.  Take the hang up over how the contract provisions should be interpreted.  Take the question of whether extra work and cost is truly compensable.  Take questions of concurrent delays and remission of liquidated damages.  All of these issues can be quickly, efficiently and economically resolved  by ADR.

But it takes two to tango.  Both parties must agree to make the request for ADR and they must agree on the procedures for presentation and resolution.  The ASBCA, for example, has instructional guidance for requesting ADR and a sample agreement available at its website. 

One last plea.  Contracting officers have a duty to act judicially, not as advocates for the government's position when a dispute arises.  That won't happen.  The answer is ADR.  Please.

bill@spriggslawgroup.com

RATIFICATION OF UNAUTHORIZED ACTS

What happens when a government employee does or says something costing you money and the contracting officer says you will not be compensated because the act or statement was unauthorized?  Do you have a claim?  Probably yes, for several reasons.

There are compensable constructive changes well recognized in government contract law.  Superior knowledge is where a government employee fails to disclose information vital to performance.  Defective specifications is where a government employee writes drawings or specifications which include errors, conflicts or omissions.  Commercial impracticability is where the specification writer prepares a contract requirement which is commercially impossible or impracticable of performance.  Any government employee's action can be a constructive change if the action breaches the implied by law obligation of the government to cooperate with and not interfere in the contractor's performance.  Constructive acceleration can be compensable based on pressure from government employees.

Then there is ratification.  Ratification is the approval of a previously unauthorized contract action by one or more individuals who possess actual authority to contract (the contracting officer).  Such ratification can only be based on a full knowledge of all the facts upon which the unauthorized action was taken.  Full knowledge may be constructive rather than actual.  Constructive knowledge can exist where an official knew or should have known of a matter and was silent.  Ratification exists by implication from the contracting officer's failure to dissent within a reasonable time after learning what had been done.  Assent can be inferred from silence where one would naturally be expected to speak.

All of the foregoing principles are pronounced eloquently in a recent decision of the Civilian Board of Contract Appeals (CBCA).  The opinion is a veritable text book on the law of ratification.  We recommend that you read the decision.  We'll be happy to send you a copy if you email us.

So, do not be deterred by a contracting officer who tells you that since he did not order or approve the change you have no claim.  Constructive changes do not require his order or approval.  Silence may also be approval in the form of ratification if your situation fits the legal requirements discussed above.

bill@spriggsconsultingservices.                                  bill@spriggslawgroup.com

COVID 19 RELATED CLAIMS UPDATE

The Court of Federal Claims adheres to the time honored doctrine of constructive terminations and it has recognized for some time compensable delays for the convenience of the government under the Suspension of Work clause.  That clause specifically refers to suspensions "for the convenience of the government".  The Court of Federal Claims has held that, despite lack of fault or actions of the government, a contractor "cannot reasonably be expected to bear the risks and costs of the delay". 

The Suspension of Work clause says you do not use the Suspension of Work clause for redress if another clause provides for an equitable adjustment.  That is precisely what is provided for in the Changes clause and all the cases interpreting the recovery of an equitable adjustment for the costs and schedule adjustment occasioned by the delay.

None of the aforementioned cases involves a pandemic.  And, the limits of the Sovereign Act Defense have not been fully tested in procurement law.  The Supreme Court in Winstar did not apply the defense because the government acted in its self interest rather than on behalf of the general public.  The Court of Federal Claims recognizes a no fault suspension.  If the government acts for its convenience, it has acted in its self interest even if also on behalf of the public.  In our opinion, Section 3610 of the CARES Act waives any application of the sovereign act defense.
 

Winstar was not a procurement case.  Congress changed the law adversely affecting savings and loan companies.  An act of Congress is by nature for the public good but the court said it was also an act in the government's self interest.  We think the balance also tips that direction in the case of constructive suspensions for pandemics especially in the case of procurement contracts governed by long standing precedent compensating contractors who in all fairness and equity should not bear the cost of the delay.

bill@spriggsconsultingservices.com                           bill@spriggslawgoup.com

PANDEMIC: A FIRST LOOK AT CLAIMS

This is a reminder that an epidemic or pandemic is an excusable cause for delay of a government contract and a defense to a termination for default.  The fixed price supply and services default termination clause in FAR 52.249-8 and the fixed price construction default termination clause in FAR 52.249-10 list an epidemic as an excusable cause of delay and failure to perform.  But ignoring the contracting officer and hoping for the best is not a good idea.

As with any disruption of performance, documenting events as they occur is of the upmost importance.  Keep good records of delays and disruptions.  Assign separate charge accounts for collection of costs associated with these delays and disruptions.  And put the contracting officer on notice of that you will be seeking relief.  In fact, now is an excellent time to get to know your contracting officer even better.  Often a contracting officer can be a good source of information on the government's view of how to handle the crisis.

What about affirmative relief?  A pandemic is an excuse for delay or non performance and a defense to a termination for default, but can a contractor also recover losses resulting from the pandemic?  The answer is yes under the Suspension of Work and Changes clauses.  The government may suspend performance for its own convenience and the case law holds a contractor should be compensated even though the government is not at fault in ordering the suspension.  The Suspension of Work clause precludes recovery under the clause where provision is made for an equitable adjustment in price and schedule in another clause.  The Changes clause is one such clause.

The sovereign act defense may apply to suspensions and therefore preclude recovery.  However, it has been held that the defense does not apply if the contracting officer orders the suspension of work.  The boards and courts recognize constructive suspensions.  The Suspension of Work clause states the suspension can be for the convenience of the government and the Court of Federal Claims has held that "despite the lack of fault in the actions of the government. . .the contractor cannot reasonably be expected to bear the risk and costs of the delay."

Relief also may be available under Public Law 85-804, FAR Subpart 50.1.  The act, and implementing regulations, permit agencies such as the Department of Defense, the Department of Homeland Security, the General Services Administration, NASA, other agencies listed and any other agency authorized by the President to provide monetary relief.

Relief can take the form of a contract modification without consideration to cover the contractor's loss if there is a finding it will inure to the benefit of national defense.  A request for relief must be submitted to the contracting officer supported by information described in FAR 50.103-3 and 50.103-4.  Agencies also have established Contract Adjustment Boards with authority to approve, authorize, and direct appropriate actions under FAR Subpart 50.1.

bill@spriggsconsultingservices.com              bill@spriggslawgroup.com

EFFECTIVE MEDIATION IN THE PUBLIC SECTOR

The contracting officer says the parties are at an impasse.  The contractor has not submitted a claim nor taken an appeal.  The contracting officer has threatened default termination but not issued a final decision.  The parties are at loggerheads over the interpretation of the contract.  Each side has an interpretation of the contract language but the parties cannot agree the contract is therefore ambiguous and must be construed against the government.  The contractor wishes a court injunction action were available which it is not.  What hope do the parties have that the impasse may be resolved short of litigation?

It is high time to remind ourselves that federal procurement is based on contracts of adhesion.  What are the 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.

But help is close by and affectionately known as free rent a judge. 

Both the Civilian Board of Contract Appeals (CBCA) and the Armed Services Board of Contract Appeals (ASBCA), have procedures for Alternative Dispute Resolution (ADR) which permit the parties to request a judge to act as a neutral to conduct ADR even in advance of a claim, final decision or appeal.  That is, if both parties agree, they may request an independent actual judge hear their positions and mediate a resolution of the impasse.  CBCA Rule 53 says the Board may provide ADR services for "pre-claim and pre-final decision" matters.  A judge can be appointed as an independent neutral.  ADR Procedures at the ASBCA mimic the CBCA procedures.

ADR procedures are tailored to the particular needs and desires of the parties.  The procedures can be simple and pragmatic.  The request to the Board must be in writing, signed by both parties and the parties must agree on a written ADR procedure plan.  The Boards will assist with the preparation and implementation of that plan.  The role of the judge must be clear and the Boards can assist in defining that role.  The parties can actually request that a certain judge be assigned.

The types of ADR procedures available include facilitative mediation, evaluative mediation, mini-trial, non-binding advisory opinion, and summary binding decision.  Facilitative mediation involves informal presentations followed by the judge meeting with the parties separately and together to facilitate the settlement of differences.  Evaluative mediation adds the element of the judge reciting the strengths and weaknesses of the parties' positions.  In a mini-trial, the judge sits with the parties' principals to hear presentations and evaluate evidence.  The judge mediates a settlement or renders and non-binding or binding decision.  If binding, the decision is non-precedential.  The Boards encourage the parties to tailor the ADR procedures to their particular needs. 

So if the parties are truly at an impasse, there is a way out.  It is possible even before the issues arise to the level of a claim or final decision, the parties may get a real judge involved.  That is probably the smartest thing they can do to avoid the trouble, delay and expense of litigation.

bill@spriggsconsultingservices.com            bill@spriggslawgroup.com

ANTICIPATORY REPUDIATION

Contractors often encounter contract interpretations by the contracting officer which seem incorrect and overreaching.  Disputes arise as to the meaning of contract language which place the contractor and the government at odds over what performance is required.  The contractor takes the position that the government's demands are "out of scope" and the government reacts by threatening to terminate for default if the contractor does not follow the contracting officer's directions.  Totally frustrated by the looming possibility of having to invest more time and money in the project, the contractor considers refusing to follow the contracting officer's directions.

While there is old case law supporting the proposition that the contractor "has no right to make a useless thing and charge its customer for it", the contractor must always remember the Changes and Disputes clauses, unique to government contracts, require the contractor to perform the work and seek relief afforded by those and other appropriate clauses in the contract.  The cardinal change doctrine allows a contractor to avoid performance of material changes to the contract, but stopping work under any circumstances most likely will result in termination for default.

For those contractors who are new to government contracts, the government's power to compel continued performance is strange indeed.  Directions to perform work when the contractor disagrees with contract interpretation might well entitle the contractor to refuse to do the work in the commercial setting.  Government contracts are contracts of adhesion in which the government dictates the terms and conditions.  The government requires continuation of the work while the contractor seeks remedies under the Disputes clause. 

Government contractors need especially to be wary of anticipatory repudiation.  If, through words or deeds, the contractor communicates an intention not to perform, the government may immediately terminate for default on the basis of anticipatory repudiation.  The words or deeds must be definite, unconditional and unequivocal, but any suggestion the contractor intends not to perform work directed by the contracting officer may well result in termination for default.  The anticipatory repudiation grounds for termination for default apply even to the most outrageous demands by the government.  Displaying an intent not to perform probably will result in termination for default.

bill@spriggsconsultingservices.com         bill@spriggslawgroup.com

IMPROPER CHANGES

What does a contractor do when the contracting officer directs him to do something and the contractor believes he is not required to do it?  Can he refuse to do it?  One old board case decision says "the contractor has no right to make a useless thing and charge its customer for it."  But not following direction from the contracting officer most likely will be abandonment and an anticipatory breach of the contract resulting in a termination for default.  See also our post on the cardinal change doctrine.

If the contracting officer directs the contractor to do something the contractor believes is not required by the contract, the contractor should immediately engage the contracting officer in an oral and written dialogue about the direction.  Clarify the direction and find out what provisions of the contract the contracting officer thinks support his or her position.  Carefully search the contract to determine all of its requirements.  Was the proposal incorporated in the contract?  If so, with what priority under the Order of Precedence clause?  Try to arrive at a reasonable interpretation of the contract language.

Then apply the rules of contract interpretation.  What is the meaning of the plain language?  Contract terms are given their plain and ordinary meaning.  Contract terms are to be interpreted and read as a whole giving reasonable meaning to all parts.  Proper interpretation does not render a contract provision useless, nonexistent or superfluous.  If the terms support more than one interpretation, the language may be ambiguous.  However, in order for an ambiguity to exist, respective interpretations must fall within what is called the zone of reasonableness.  If an ambiguity exists, and it was not obvious or glaring and therefore waived by the contractor at time of bidding, it will be construed against the government as its drafter.  See our article on contracts of adhesion.

Try to convince the contracting officer of the correct interpretation.  But never say you will not follow his or her direction.  You are obliged under the Changes and Disputes clauses to continue to work.  You may of course, submit your request for equitable adjustment or claim and you should promptly notify the contracting officer of your intention to do so.

bill@spriggsconsultingservices.com                           bill@spriggslawgroup.com