YES, YOU CAN RECOVER ATTORNEY FEES

 The Court of Appeals for the Federal Circuit (CAFC) has ruled that the government must not only pay the contract administration costs of preparing a request for equitable adjustment (REA) under the changes clause, it also must pay reasonable costs, including attorneys' fees, of negotiating a settlement even if negotiation eventually fails and a Contract Disputes Act (CDA) claim is later submitted.

The government argued that the negotiation costs were not recoverable because the contractor was just trying to "maximize monetary recovery."  As such, the costs were not true costs of contract administration.  The Postal Services Board agreed and so found.  On appeal, the CAFC reversed and remanded, directing the Board to grant the contractor's appeal in its entirety.  The CAFC went on to say "this means" the contractor is entitled to recover its costs, attorney fees, plus interest under the CDA.

The CAFC had been to this dance before.  In a 1995 case called Bill Strong Enterprises, the CAFC had held that REA preparation and negotiation costs were allowable as contract administration costs.  In examining the issue again, the court defined the issue as whether the costs are classified as general contract administration costs or claim preparation costs.  The former are allowable and the latter, not.  (The CAFC, for all practical purposes, is the highest court to hear procurement cases.  The U.S. Supreme Court very rarely gets involved.)

The CAFC said:

Although there is sometimes an air of adversity in the relationship between the CO and the contractor,their efforts to resolve their differences amicably reflect a mutual desire to achieve a result acceptable to both.

The CAFC went on to opine that the courts should examine the objective reason why the contractor incurred the cost.  If a contractor incurred the cost to further negotiation, the cost is allowable.  If, however, the contractor's underlying purpose is "to promote the prosecution of a CDA claim" then the cost is unallowable.  And the court made clear the allowability rule prevails even if negotiation eventually fails and a CDA claim is later submitted.

So, this is as reminder that REA preparation and negotiation costs are recoverable. The bright line distinction is when the contractor converts the REA to a CDA claim. From that date forward, claim costs are not recoverable under FAR 31.205-33.

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EFFECT OF CHANGES ON UNCHANGED WORK

Since the Changes clause includes the effect of the change on the unchanged work ("whether or not changed" in the changes clause), it is appropriate to examine what is commonly called the "ripple effect". In many cases, the cumulative effect of a number of changes when viewed collectively can produce an unforeseeable impact on the unchanged work.  The changes create a synergistic disruptive result. The contractor no longer can proceed with the original work as planned.

The ripple effect, however, can result from a single major change or government caused delay.  It is not limited to cases involving numerous changes.  A single change can produce the same causal chain leading to loss of productivity, diminished efficiency and even further delay.

Here is where proof of causation and effective price and schedule impact come into play.  Proof of causation is essential.  The contractor must draw a straight line connection between the government acts or omissions and the price and schedule impact.  In our experience, it is essential to engage a forensic expert to conduct the analysis.  We recommend John Wolf of Peritia Partners, LLC.  John is a quick study, puts together an excellent report and is particularly adept at explaining his findings and conclusions.  He can calculate delay damages, lost productivity, reduced efficiency, extended overhead, and under absorbed overhead.

One Board case summarizes impact costs as follows:

Impact costs are additional costs occurring as a result of the loss of productivity; loss of productivity is also termed inefficiency.  Thus, impact costs are simply increased labor costs that stem from the disruption to labor productivity resulting from a change in working conditions cause by a contract change.  Productivity is inversely proportional to the man-hours necessary to produce a given unit of product. As is self-evident, if productivity declines, the number of man-hours of labor to produce a given task will increase.

Identifying the increased costs is not the difficult task.  Explaining why and how they are caused by the change is the challenge.

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DEFAULT? SUBMIT A T FOR C PROPOSAL AND CHANGES CLAIM

Contractors are permitted to file a termination for convenience (T for C) proposal while a termination for default (T for D) is pending, even when the T for D is in litigation.  All Federal Acquisition Regulation (FAR) default clauses provide that improper T for D's will be converted to T for C's.  The government contract judicial tribunals have recognized that prior to the time the default is overturned, the contractor can submit its T for C settlement proposal and that proposal can be treated as a claim under the Contract Disputes Act (CDA) since the demand for T for C costs creates the dispute necessary to convert the proposal into a claim.  An appeal of the T for C claim, however, probably will be dismissed as premature without prejudice to reinstatement when the T for D is converted.

The reason contractors submit T for C proposals when they are terminated for default is that the conversion, when it happens, is deemed by law to have occurred at the time of termination for default. That is, the T for C relates back to the time of T for D.  This means that legally, the contract was the subject of a T for C all along. This in turn means that settlement expenses incurred in connection with the T for C can be recovered from the time the contract was terminated for default.

Settlement expenses include contractor in house costs and outside consultant and attorney fees.  If the costs relate to and are properly allocable to the T for C settlement proposal, they can be recovered.  Thus, during the pending negotiation and litigation of the T for D, if the contractor engages in attempts to settle the case based on its T for C settlement proposal, the costs properly can be included in the T for C settlement proposal.  The contractor, consultants and attorneys keep separate accounts for litigation of the T for D and attempts to settle the case based on the T for C proposal.

As a practical matter, the smart contractor immediately prepares its T for C proposal when it appeals its T for D.  It allocates litigation costs to the T for D litigation account.  It also sets up a separate account for the preparation and negotiation of the T for C settlement.  As it engages the government in discussions on the conversion of the T for D to a T for C and payment of its T for C proposal, it charges its costs for that effort to the T for C settlement account.

As we've pointed out before, contractors may also include an equitable adjustment in contract price as part of their T for C settlement proposal.  The costs of this contract administration effort also are recoverable.  Each compensable change is an excusable cause of delay or nonperformance and equitable adjustments through the changes clause can avoid the application of the adjustment for loss formula and any limitation on recovery imposed by the original contract price ceiling. If, however, the contractor wishes to include the T for C proposal and the REA in the litigation, they must be converted to a claim, state a sum certain, certify if required and the contractor must request the contracting officer's final decision. 

It is important to note that the contractor must formally submit the changes claim in order to assure that the changes can without question be used in defenses to the default termination.

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MISUNDERSTANDING PRICE REALISM

A protester once argued that the agency's evaluation of its proposal and best value tradeoff determination was unreasonable because the evaluators performed a realism analysis of proposed pricing, finding the protester's price to be so low as to call into question its understanding of the solicitation requirements and its ability to perform successfully.  GAO agreed because price realism was not included in the evaluation factors.

The agency argued it did not conduct a price realism analysis because it did not adjust prices to determine probable cost.  GAO said poppycock. The agency misunderstood price realism as it does not involved adjusting prices.  The agency cannot adjust prices for evaluation of award of a fixed price contract.  Rather, of course, a price realism evaluation involves an assessment of an offeror's low fixed price to see whether the low price reflects a lack of understanding of contract requirements or performance risk.  The agency did that.  So what's the problem?

The problem in the protest was that bidders must be given reasonable notice that a business decision to submit low pricing will be considered as reflecting on their understanding of the requirements or the risk associated with their proposals.  (If there are no evaluation criteria on price realism, a low ball price reflects instead on the contractor's ability and capacity to perform, a matter of responsibility.)

The evaluation factors may only refer to "reasonableness" of the pricing which goes to whether it is too high.  "Because below cost prices are not inherently improper, when offerors are competing for award of a fixed-price contract . . . they must be given reasonable notice that their business decision to submit a low-priced proposal can be considered in assessing their understanding or the risk associated with their proposal."  Thus, consideration of price realism must be announced in the evaluation factors.  

Now to the "when".  We believe that price realism should be included in all lowest price, technically acceptable (LPTA) procurements.  There, perhaps more than anywhere else, the government risks awarding to contractors who may not know what they are doing or don't understand the risks.

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GOOD FAITH AND FAIR DEALING NOT BAD FAITH

The Civilian Board of Contract Appeals (CBCA) has reiterated the rule that proving the lack of good faith does not require the claimant contractor to allege and prove bad faith. The contractor alleged that the government breached its implied duty of good faith and fair dealing by refusing to respond to the contractor's many requests for the government to discharge its contractual duties. The Board denied the motion to dismiss and noted that it was premature for the contractor to claim its attorney fees and costs incurred in responding to the government's motion.

"The covenant of good faith and fair dealing is inherent in every contract," the Board wrote.  Further, "[a] claim that HUD breached the implied covenant of good faith does not require a showing of bad faith."  As we've pointed out before in these articles, a claim that the government breached its duty of good faith and fair dealing is not the same as a claim the government acted in bad faith.  Bad faith involves motivation by malice.

The obligation of good faith and fair dealing is written into every contract by operation of law.  It is implied.  The duty of good faith and fair dealing can be breached by lack of diligence, negligence, or a failure to cooperate. As we have often repeated, the government has a duty to cooperate with the contractor or as the Armed Services Board of Contract Appeals (ASBCA) says, the government has a "duty to do whatever is reasonably necessary to enable the contractor to perform."

The government often takes far too lightly a number of implied obligations it has in every contract.  It has the duty to provide specifications free from errors, conflicts and omissions which are commercially practicable to perform.  It has the duty to cooperate with the contractor and not interfere in the contractor's performance. It has the duty to communicate with the contractor.  Yes, the duty to communicate. And it has the duty to disclose information it has which is vital to the contractor's performance.  This latter obligation exists even if the parties are equally ignorant of the information but the government is in a better position to know it.

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WHAT IS A CARDINAL CHANGE AND WHAT TO DO ABOUT IT

Two types of facts are implicated.  The first is when a contractor on an awarded contract complains the change is beyond the scope of the contract.  The other is when a competitor complains that the change is beyond the scope of the original contract and therefore should, under the Competition in Contracting Act (CICA), be open for competition.  In either case the central question is whether the contract, as modified, calls for essentially the same performance.

The rule has always been that modifications of an existing contract are permissible as long as the modification is within the scope of the original competitive procurement.  (The same rule applies to the scope of the changes clause.)  Since the Federal Acquisition Regulation (FAR) is no help here, the judicial tribunals have relied on the "cardinal change" doctrine to test whether the modification or change is in-scope on an awarded contract or violates the competition requirements of CICA on the award of a new contract.  The cardinal change doctrine addresses whether a change or modification exceeds the scope of the contract changes clause. 

What is a cardinal change?  A cardinal change occurs when the government alters the work so drastically that it effectively requires the contractor to perform duties materially different from those originally required. The cardinal change doctrine prohibits an agency from compelling a contractor to perform beyond the scope of the original bargain.  The contractor can stop work.  In fact the contractor my risks not getting paid if he continues and being terminated for default if stops.

What is "materially different"?  Lack of resemblance to the original work. Substantial changes in the type of work, performance period and cost of the work. It's a question of fact for which there is no mechanical or arithmetical answer.  The courts and boards look to changes to the quantity of work, an increase in the cost of the work, the sheer number of changes, the cumulative effect of the changes to the work, change in the nature of the work, and changes to the time and place of the work.

So, what do you do if you think the change is so drastic it might be cardinal?  You don't have to perform such a change.  It's a breach of the contract.  But if you don't, you may be terminated for default.  The risk that you won't get paid if you continue is minimal.  Just hire a professional and put together a claim.  If continuing is impossible or practically so, you may be forced to stop work but you should have several defenses to a termination for default,

bill@sprigglawgroup.com

Friday, 

 

CONTRACT INTERPRETATION QUOTE FROM THE ASBCA: THE BEST TREATISE AVAILABLE

The issue before us is one of contract interpretation. “Contract interpretation begins with the language of the written agreement.” NOAA Maryland, LLC v. Adm’r of Gen. Servs. Admin., 997 F.3d 1159, 1165-66 (Fed. Cir. 2021) (quoting NVT Techs., Inc. v. United States, 370 F.3d 1153, 1159 (Fed. Cir. 2004)). The plain and unambiguous meaning of a written agreement controls. Id. We must give the contract “that meaning that would be derived from the contract by a reasonably intelligent person acquainted with the contemporaneous circumstances.” TEG-Paradigm Env’t, Inc. v. United States, 465 F.3d 1329, 1338 (Fed. Cir. 2006) (quoting Metric Constructors, Inc. v. Nat’l Aeronautics & Space Admin., 169 F.3d 747, 752 (Fed.Cir.1999)). We interpret contracts “‘in a manner that gives meaning to all of its provisions and makes sense,’” NOAA Maryland, 997 F.3d at 1166 (quoting Langkamp v. United States, 943 F.3d 1346, 1353 (Fed. Cir. 2019)), and we seek to “‘avoid[ ] conflict or surplusage of [the contract’s] provisions,’” Id. (quoting United Int’l Investigative Servs. v. United States, 109 F.3d 734, 737 (Fed. Cir. 1997)).

When the contract language is unambiguous, we give it its “plain and ordinary” meaning and may not look to extrinsic evidence to interpret it. TEG-Paradigm, 465 F.3d at 1338. Although extrinsic evidence may not be used to interpret an unambiguous contract provision, it may be considered for the purpose of confirming that the parties intended for the term to have its plain and ordinary meaning. Id. When a provision in a contract is susceptible to more than one reasonable interpretation, it is ambiguous, and we may consider extrinsic evidence to resolve the ambiguity. Id.; Jemison & Partners, Inc., ASBCA No. 62928, 23-1 BCA ¶ 38,249 at 185,737. The purpose of resorting to extrinsic evidence is to arrive at an interpretation that effectuates the parties’ intent at the time of contracting. TEG-Paradigm, 465 F.3d at 1338. Appropriate extrinsic evidence may include such things as the parties’ negotiating history, their pre-dispute conduct, the circumstances under which they executed the contract and trade practice and custom. Gardiner, Kamya & Assocs., P.C. v. Jackson, 467 F.3d 1348, 1354 (Fed. Cir. 2006); TEG-Paradigm, 465 F.3d at 1338; Metropolitan Area Transit, Inc. v. Nicholson, 463 F.3d 1256, 1260 (Fed. Cir. 2006).

 If the ambiguity is not resolved by consideration of the contract as a whole and extrinsic evidence, then the doctrine of contra proferentem comes into play. Gardiner, 467 F.3d at 1352. Under that doctrine, we resolve ambiguities against the party that drafted the contract. Id. Contra proferentem is a “rule of last resort” that “is applied only where there is a genuine ambiguity and where, after examining the entire contract, the relation of the parties and the circumstances under which they executed the contract, the ambiguity remains unresolved.” Id. (quoting Lewis v. United States, 1982 WL 36718, at *7 (recommended decision adopted as the judgment of the Court of Claims in 231 Ct. Cl. 799, 800 (1982))). The doctrine is inapplicable if the intention of the parties can otherwise be discerned. HPI/GSA 3C, LLC v. Perry, 364 F.3d 1327, 1334 (Fed. Cir. 2004).

 Finally, an exception to contra proferentem applies if the ambiguity is patent, rather than latent. States Roofing Corp. v. Winter, 587 F.3d 1364, 1372 (Fed. Cir. 2009). A “patent ambiguity” is one that is “obvious, gross, glaring, so that plaintiff contractor had a duty to inquire about it at the start.” Id. (quoting H & M Moving, Inc. v. United States, 499 F.2d 660, 671 (Ct. Cl. 1974). Where the ambiguity is patent, the non-drafting party has a duty to inquire and a failure to do so will result in the ambiguity being resolved against it. Id. Where the ambiguity is not glaring or obvious, no patent ambiguity exists. Id. The bar to proving patent ambiguity is necessarily high. Metro Mach. DBA Gen. Dynamics Nassco-Norfolk, ASBCA No. 61817, 20-1 BCA. ¶ 37,633 at 182,717 (quoting LAI Services, Inc. v. Gates, 573 F.3d 1306, 1315-16 (Fed. Cir. 2009). Contractors are not required to seek clarification of “any and all ambiguities, doubts, or possible differences in interpretation.” States Roofing Corp. v. Winter, 587 F.3d 1364,1372 (quoting WPC Enters., Inc. v. United States, 323 F.2d 874, 877 (Ct. Cl. 1963)). Contractors “are not expected to exercise clairvoyance in spotting hidden ambiguities in the bid documents, and they are protected if they innocently construe in their own favor an ambiguity equally susceptible to another construction . . . .” Blount Bros. Const. Co. v. United States, 346 F.2d 962, 973 (Ct. Cl. 1965). “[T]he basic precept is that ambiguities in contracts drawn by the Government are construed against the drafter.” Id. 

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