THINK TWICE BEFORE HEDGING A POSITION OR DEFENSE ON A SPECULATIVE EVENT OR OCCURRENCE

Sometimes, hedging a position on a potential occurrence is not prudent.  Stated differently, hedging a position on a contingent event is not the right course of action.  The reason being is that a potential occurrence or contingent event is SPECULATIVE.   The occurrence or event may not take place and, even if it does take place, the impact is unknown.

An example of hedging a defense on such a potential occurrence or contingent event can be found in a construction dispute involving a federal project out of the Eastern District of Virginia,  U.S. f/u/b/o Champco, Inc. v. Arch Insurance Co., 2020 WL 1644565 (E.D.Va. 2020). In this case, the prime contractor hired a subcontractor to perform electrical work, under one subcontract, and install a security system, under a separate subcontract.  The subcontractor claimed it was owed money under the two subcontracts and instituted a lawsuit against the prime contractor’s Miller Act payment bond.  The prime contractor had issued the subcontractor an approximate $71,000 back-charge for delays.  While the subcontractor did not accept the back-charge, it moved for summary judgment claiming that the liability for the back-charge can be resolved at trial as there is still over $300,000 in contract balance that should be paid to it.  The prime contractor countered that the delays caused by the subcontractor could be greater than $71,000 based on a negative evaluation in the Contractor Performance Assessment Reporting System (“CPARS”).   A negative CPARS rating by the federal government due to the delays caused by the subcontractor would result in a (potential) loss of business with the federal government (i.e., lost profit) to the prime contractor.   The main problem for the prime contractor:  a negative CPARs rating was entirely speculative as there had not been a negative CPARs rating and, even if there was, the impact a negative rating would have on the prime contractor’s future business with the federal government was unknown.   To this point, the district court stated:

In this case, [prime contractor’s] claim for damages is wholly speculative.  [Prime contractor] has not produced any evidence that its stated condition precedent—a negative CPARS rating—will actually occur and will have a negative impact on its future federal contracting endeavors. Specifically, [prime contractor] has not identified any facts that indicate that it will be subject to a negative CPARS rating or any indication of the Navy’s dissatisfaction with its work as the prime contractor on the Project… Further, a CPARS rating is only one aspect taken into consideration when federal contracts are awarded.  In sum, there is no evidence of the following: (1) a negative CPARS rating issued to [prime contractor]; (2) [prime contractor’s] hypothetical negative rating will be the result of the delay [prime contractor] alleges was caused by [subcontractor]; or (3) [prime contractor’s] hypothetical negative CPARS rating will result in future lost profits.

U.S. f/u/b/o Champco, Inc., supra, at *2 (internal citation omitted).

The prime contractor hedged its defense on the potentiality that it would receive a negative CPARs rating and, if it did, it would lose business with the federal government.  Based on this, the prime contractor decided to withhold more than $300,000 in contract balance over and above the $71,000 in delay damages it could prove.  The district court saw right through this argument by finding it wholly speculative and granting summary judgment in favor of the subcontractor for the subcontract balance over and above the $71,000 that the prime contractor did not have an objective basis to withhold.

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.

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