FIVE ISSUES TO CONSIDER IN GOVERNMENT CONTRACTING (OR ANY CONTRACTING!)

Posted on July 20, 2024July 20, 2024 by David Adelstein

The appeal of Appeals of – Konecranes Nuclear Equipment & Services, LLC, ASBCA 62797, 2024 WL 2698011 (May 7, 2024) raises interesting, but important, issues that should be considered. In this case, the government (in a supply contract) procured four portal cranes from the claimant. After an initial test of one of the cranes failed, the government refused to accept delivery even after the issue was addressed by the claimant. The government did not accept the manner in which the claimant addressed the issue and would only accept cranes if the claimant employed “an unnecessary alternative solution [that] caused further delay and increased [claimant’s] costs.” On appeal, it was determined the government’s decision to delay delivery based on its demand for the alternative solution was not justified, i.e., constituted a breach of contract. Below are five issues of consideration in government contracting, or, for that matter, any contracting.

Issue #1- Patently Ambiguous Specifications

The government argued that the specifications were patently ambiguous and because the claimant failed to inquire regarding the ambiguous specifications prior to performance, its interpretation of the ambiguous specifications should govern. The contractor countered that the specifications were unambiguous and it met the specifications.

“Contract interpretation begins with the language of the written agreement.” If unambiguous, the plain meaning of a contract controls. “A contract term is unambiguous if there is only one reasonable interpretation.” However, “[w]hen a contract is susceptible to more than one reasonable interpretation, it contains an ambiguity.” “‘To show an ambiguity it is not enough that the parties differ in their respective interpretations of a contract term,’ rather, both interpretations must be reasonable.” To show a patent ambiguity, which we construe against the non-drafting party, the drafting party must show an ““obvious, gross, [or] glaring” ambiguity so substantial as to impose a “duty to inquire” before contract formation.

Appeals of – Konecranes, supra (internal citations omitted).

Here, it was determined “there was no ambiguity, much less an obvious, gross, or sufficiently glaring ambiguity that would trigger [claimant’s] duty to inquire before contract formation.” Id.

Issue #2 – Rejection of Work Based on Specifications

The government rejected the cranes for not complying with the specifications.

“When the Government rejects work as being not in compliance with its specifications, the Boards of Contract Appeals have held that the burden is upon the Government to demonstrate that fact.” We have explained this anomaly of the government bearing the burden for a contractor claim “as a variation of the implied warranty of specifications seen in impossibility and defective specifications cases and characterized it as the government ‘putting in issue the sufficiency of its own specifications.”’ In assessing these ““inspection and rejection cases,” we focus on whether the evidence demonstrates that a product fails “to meet contract requirements.”

Appeals of – Konecranes, supra (internal citations omitted).

Here, it was determined, “[r]egardless of which party bears the burden of proof, [claimant] proved by a preponderance of the evidence that the luffing drums [in the cranes] complied with the Contract’s specifications after changing the wire rope and should not have been found defective with the new rope.” Id.

Issue #3 – Delay

The claimant argued the government had no basis to reject delivery of a crane because it complied to the specifications after the claimant addressed the initial issue. To this point, the claimant argued the government’s refusal to allow it to ship cranes unless it employed the unnecessary alternative solution resulted in delays.

“A contractor seeking to prove the government’s liability for a delay must establish the extent of the delay, the contractor’s harm resulting from the delay, and the causal link between the government’s wrongful acts and the delay.” As to causation, “a contractor has the burden of demonstrating that the specific delays were due to government-responsible causes, that the overall completion was delayed as a result, and that any government-cause[d] delays were not concurrent with delays within the contractor’s control.”

Appeals of – Konecranes, supra (internal citations omitted).

Here, it was determined the government’s refusal to accept delivery when the cranes met the specifications resulted in compensable delay.

Issue #4 – Implied Duty Not to Interfere

Yes, there is an implied duty of good faith and fair dealing that exists in government contracts:

In the absence of a contract provision allowing the government to unilaterally stop or delay a contractor’s performance, any government caused delay constitutes a breach of the government’s implied duty not to interfere with a contractor’s performance.The implied duty not to interfere derives from the implied duty of good faith and fair dealing, assuring that one party cannot destroy the other party’s reasonable expectations regarding the fruits of a contract. “An implied duty of good faith and fair dealing exists in government contracts and applies to the government just as it does to private parties.”

Any implied duty derives from the explicit terms of a government contract. Here, as we concluded above, the [government] unreasonably inspected [claimant’s] cranes pursuant to the inspection provisions of the Contract Terms and Conditions — Commercial Items clause and Contract’s specifications. The [government’s] unreasonable inspection and ensuing delays resulted in a breach of the implied duty not to interfere.

Appeals of – Konecranes, supra.

Issue # 5 – Christian Doctrine

This was a supply contract so it did not incorporate a provision that allowed the government to stop or suspend work where it was determined such provision did not need to be incorporated:

However, the Contract does not include a Stop-Work Order, Government Delay of Work, or Suspension of Work clause. Instead, because we cannot incorporate these clauses by operation of law in a commercial items contract, we find that the Navy breached its implied duty not to interfere by unreasonably inspecting the cranes. There can be no “constructive” suspension or stop-work order if there is no clause to base it on. It becomes a breach.

For our Board “to incorporate a clause into a contract under the Christian doctrine, it generally must find (1) that the clause is mandatory; and (2) that it expresses a significant or deeply ingrained strand of public procurement policy.” Here, the Suspension of Work, Government Delay of Work, and the Stop-Work Order clauses are not mandatory for commercial items contracts and, thus, we will not incorporate any of these clauses into the contract by operation of law.

In particular, the Contract does not incorporate a Suspension of Work, Government Delay of Work, or Stop-Work Order clause. … Notably, the FAR implements the congressional requirement that commercial items contracts “shall, to the maximum extent practicable, include only those clauses” required by law or “consistent with customary commercial practice.” So, given the policy preference to limit the number of standard FAR contract clauses in a commercial items contract, we should not be surprised that there is no explicit suspension, delay, or stop-work provision to hang the parties’ “constructive” hat on.

Instead, we must assess whether any of these clauses is mandatory and must be incorporated by operation of law under the Christian doctrine. Only fixed-price construction or architect-engineer contracts, not commercial items contracts, require the Suspension of Work clause. The Government Delay of Work clause would permit similar suspension of work for a fixed-price supply contract. FAR However, the Government Delay of Work clause is “optional,” not required, for commercial supply contracts such as this one.

Appeals of – Konecranes, supra (internal citations omitted).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

RULING DEALING WITH CONSTRUCTIVE CHANGES, CONSTRUCTIVE SUSPENSION, AND THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

Posted on January 14, 2024January 14, 2024 by David Adelstein

A dispute pending in the Armed Services Board of Contract Appeals (ASBCA) dealt with interesting legal issues on a motion to dismiss. See Appeals of McCarthy Hitt-Next NGA West JV, ASBCA No. 63571, 2023 WL 9179193 (ASBCA 2023). The dispute involves a contractor passing through subcontractor claims due to impacts caused by the COVID-19 pandemic and the government’s response to the pandemic. More particularly, the claim centers on the premise that the government “failed to work with [the contractor] in good faith to develop a collaborative and cooperative approach to manage and mitigate the impacts and delays arising from the COVID-19 pandemic.” See Appeals of McCarthy Hitt.

The contractor (again, submitting pass through claims from subcontractors) claimed: (a) constructive changes to the contract entitling it to an equitable adjustment under the Changes clause of Federal Acquisition Regulation (F.A.R.) 52.243-4; (b) construction suspensions of the contractor’s work entitling it to an equitable adjustment under the Suspensions of Work clause of F.A.R. 52-242-14; and (c) the government breached the implied covenant of good faith and fair dealing. Each of these legal issues and theories will be discussed below because they are need-to-know legal issues. Keep these legal issues in mind, and the ASBCA’s ruling on the motion to dismiss as its analysis may demonstrate fruitful in other applications.

(a) Constructive Changes

“To prevail upon a constructive change theory, a contractor must show (1) that it performed work beyond the contract requirements, and (2) that the added work was ordered, expressly or impliedly, by the government.” See Appeals of McCarthy Hit.

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a constructive change theory. The ASBCA disagreed and found sufficient facts were pled to allege the government required the contractor (and subcontractors) to perform beyond the contract requirements.

For example, [the contractor] alleges that the [government] required it to comply with government guidance on COVID-19 and implement COVID-19 exposure control procedures; perform additional job safety analyses and task-specific analyses; create new health and safety signage; provide additional training; develop contact tracing, testing, and quarantine programs; impose quarantines and enforce return-to-work protocols; impose tool and shared surface disinfection and cleaning requirements; comply with social distancing requirements; provide and utilize additional personal protection equipment; add air filtration systems; require temperature checks and daily health checks; permit additional breaks; provide for additional break areas; change office, break, and trailer spaces and configurations; change site logistics; and change crew compositions and work plans.

See Appeals of McCarthy Hit.

(b) Suspension of Work

To recover under the Suspension of Work clause, the contractor must show (1) that the contracting officer suspended the work; and (2) that the resulting delay was unreasonable. A constructive suspension occurs when, absent an express order by the contracting officer, the work is stopped for an unreasonable amount of time and the government is found to be responsible for the work stoppage. “A constructive suspension has the same effect and consequences as an actual suspension, and relief should be granted as if an actual suspension order had been issued.

See Appeals of McCarthy Hit (internal citation omitted).

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a constructive suspension theory. The ASBCA disagreed and found sufficient facts were pled to support a constructive suspension. For example, the contractor alleges:

[The government’s] actions and inactions in administering the Contract once the pandemic struck had the effect of unreasonably disrupting, delaying or hindering the work on the Project. For example, the complaint alleges that the government refused to work with [the contractor] to develop a collaborative and cooperative approach to manage the impacts caused by the pandemic, instead simply insisting that the work proceed on schedule, which had the effect of hindering and delaying the work unreasonably. The complaint also alleges that [the contractor] informed [the government] of the impacts of its action and inactions, but that [the government] refused to acknowledge that the work was being delayed.

See Appeals of McCarthy Hit.

(c) Implied Covenant of Good Faith and Fair Dealing

Like every contract, the Contract here contained an implied duty on each party to perform with good faith and fair dealing. The implied duty “prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprivethe other party of the contemplated value.” A breach occurs when a party violates its obligation “‘not to interfere with the other party’s performanceand not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract.”’ The implied duty “‘cannot expanda party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.”’

See Appeals of McCarthy Hit (internal citations omitted).

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a breach of an implied covenant and good faith and fair dealing claim. The ASBCA disagreed and found sufficient facts were pled to support this claim. For example, the complaint alleges:

“[A]fter the pandemic struck, the government declined to cooperate with it in managing or addressing the impacts, which were severe andunexpected. Rather, it is alleged, the government insisted that [the contractor] and the Subcontractors continue to perform as though nothing ofconsequence was occurring, used the DO-C2 rating as a means of exerting pressure to maintain the schedule at all costs, and was non-responsiveto requests for help in complying with all the new and changing requirements placed upon [the contractor] and the Subcontractors. Theseallegations suggest that the government essentially left [the contractor] “twisting in the wind” by insisting on uninterrupted performance in the faceof extraordinary circumstances and are sufficient to make out a plausible claim for a breach of the duty of good faith and fair dealing.

See Appeals of McCarthy Hit (internal citations omitted).

IMPLIED COVENANT OF GOOD FAITH & FAIR DEALING ATTACHES TO EVERY CONTRACT

Posted on December 5, 2015December 5, 2015 by Edward Garber

There is an implied covenant of good faith and fair dealing in every contract. Meruelo v. Mark Andrews of Palm Beach, Ltd., 12 So.3d 247, 251 (Fla. 4^th DCA 2009). “Its purpose is to protect the reasonable expectations of the contract parties.” Snow v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 896 So.2d 787, 791 (Fla. 2d DCA 2005).

A breach of this implied covenant of good faith and fair dealing is not really an independent cause of action. This is because the implied covenant of good faith and fair dealing attaches to the performance of a contractual provision. Snow, 896 So.2d at 791. Thus, if a contractual provision has not been breached, there has not been a breach of the implied covenant of good faith and fair dealing. Id. The implied covenant of good faith and fair dealing cannot override the express terms the parties agreed to in a contract. Id.

For example, in Avatar Development Corp. v. De Pani Const., Inc., 834 So.2d 873 (Fla. 4^th DCA 2002), a developer terminated a stucco subcontractor. The subcontractor sued the developer. The trial court held that the developer violated the implied covenant of good faith and fair dealing by terminating the subcontractor. The Fourth District reversed because the implied covenant is not a tool to override the agreement of the parties:

The trial judge found that Avatar[developer] violated the implied covenant of good faith and fair dealing in terminating the contract pursuant to Article 67. However, the covenant of good faith cannot be used to create a breach of contract on Avatar’s part, where there was no breach of any express term of the contract. As this Court explained in Indian Harbor Citrus, Inc. v. Poppell, 658 So.2d 605 (Fla. 4th DCA 1995), an implied covenant of good faith cannot be used to vary the unambiguous terms of a written contract and when parties negotiate “a fully specified, unambiguous contract, this court is not at liberty to change their bargain.” Id. at 607. The “duty of good faith must relate to the performance of an express term of the contract and is not an abstract and independent term of a contract which may be asserted as a source of breach when all other terms have been performed pursuant to the contract requirements.” Hosp. Corp. of Am. v. Fla. Med. Ctr., Inc., 710 So.2d 573, 574 (Fla. 4th DCA 1998). The language of Article 67 was plain and unambiguous: Avatar could terminate the contract at any time for any reason. It was a valid contract with an enforceable termination clause.

Avatar, 834 So.2d at 875.

Typically, the implied covenant of good faith and fair dealing comes into play “when a question is not resolved by the terms of the contract or when one party has the power to make a discretionary decision without defined standards.” Speedway SuperAmerica, LLC v. Tropic Enterprises, Inc., 966 So.2d 1, 3 (Fla. 2d DCA 2007) quoting Publix Super Markets, Inc. v. Wilder Corp. of Del., 876 So.2d 652, 654 (Fla. 2d DCA 2004).

For example, in Speedway SuperAmerica, a landlord refused to give its tenant consent to assign a commercial lease. The lease provided that the tenant could not assign the lease without the prior written consent of the landlord and that any assignment without the landlord’s consent would be void allowing the landlord, at its discretion, to terminate the lease. Here, the tenant assigned the lease even after the landlord refused to provide its written consent to the assignment. The trial court ruled that the landlord had the unfettered right to refuse to provide its written consent and the tenant’s assignment constituted a material breach of the lease entitling the landlord to retake possession of the leased space. The Second District reversed because the discretion the landlord had in providing its written consent (without any defined standards as to when the landlord would or would not provide such consent) was subject to the implied covenant of good faith and fair dealing to protect the contracting parties reasonable commercial expectations.

The bottom line is that a claim that a party violated the implied covenant of good faith and fair dealing will fail without proving that the party actually violated an express contractual provision. This claim, however, is not a vehicle to rewrite contractual performance obligations and will not be used to supersede what the parties agreed to. It can be used when the contract gives a party a discretionary obligation (such as to act reasonably, or gives the party the power to do something at its option) that has no defined standards. In such circumstance, a party can argue the other party breached the contract by breaching the implied covenant of good faith and fair dealing by not exercising or exercising such discretionary obligation in good faith, thereby impacting the reasonable expectations of the contracting parties.