Claims and Disputes

Subcontracting is often the best way to complete a complex project. A subcontractor may have technical expertise, equipment, or human resources that are unavailable to the prime contractor. But assigning work to one or more lower-tier parties carries with it a certain amount of risk. One of the challenges is allocating liability for changes in the scope of work, delays, and other inefficiencies that increase a subcontractor’s cost or time for performance. Today we look at how the allocation of this risk is affected by the Severin doctrine.

The Severin doctrine takes its name from the decision in Severin v. United States, 99 Ct. Cl. 435 (1943). Severin employed a subcontractor on a contract to build a post office in Rochester, New York. As a result of construction delays, Severin sought to recover $702 on behalf of its subcontractor.

The Court of Claims (now the Court of Federal Claims) gave two reasons for rejecting the claim. First, the court held that the subcontractor could not sue on its own because it had no contract directly with the government. The government had waived its sovereign immunity only for its direct contractual agreements.

Second, the court held that Severin could not pursue a claim on the subcontractor’s behalf because Severin itself could not be held liable for the same damages under its subcontract agreement.

A strict application of the Severin doctrine would increase risks for both prime contractors and subcontractors and would hamper the efficient resolution of claims. It would restrict the use of no-damage-for-delay clauses and other risk-shifting clauses that have widely been seen as effective. But in practice, the Severin doctrine has not been strictly enforced.

You’ve heard by now that the Supreme Court’s decision in Atlantic Marine Constr. Co. v. United States District Court, No. 12-929 (U.S. Dec. 3, 2013) is a strong endorsement of a contractor’s right to choose the forum that will resolve disputes with subcontractors. We discuss the Court’s decision in an earlier post.

So you know that you can have a forum selection clause. But Atlantic Marine doesn’t answer the hard question, which is this—

How do you write a forum selection clause that will be reliably and economically enforced—without an expensive trip through the court system, perhaps even all the way to the Supreme Court?

Here are some basic points on drafting a forum selection clause, drawn from some of the dozens of reported court cases addressing them—

The Contract Disputes Act gives prime contractors a straightforward procedure for resolving claims against the federal government. But there is no mandatory approach to resolving disputes between contractors and subcontractors. Private parties may agree to arbitrate their disputes or designate a specific court to hear them. They may identify the applicable law, provide for the recovery of attorney’s fees, and prescribe any number of other details.

The Supreme Court’s decision in Atlantic Marine Constr. Co. v. United States District Court for Western District of Texas, No. 12-929 (U.S. Dec. 3, 2013), holds that forum selection clauses in subcontracts on federal projects are enforceable. In this first blog post of a two-part series, we discuss the decision in Atlantic Marine and the limits of the Supreme Court’s analysis. In the subsequent one, we will discuss the use of subcontract dispute resolution clauses more broadly.

Contractors have the constitutional right to rebut past performance evaluations before they are stigmatized by the government’s assessments in the future. See Old Dominion Dairy Products, Inc. v. Secretary of Defense, 631 F.2d 953 (D.C. Cir. 1980). But full exercise of this right has the potential to conflict with the practical interest in efficient government procurement. The final revisions to the rules governing the process for reporting and appealing past performance evaluations demonstrate that the two ideals are not easily balanced. The Federal Register notice announcing the final revision to FAR 42.1503 can be found at 78 Fed. Reg. 46783 (Aug. 1, 2013) [pdf].

Helpful rules revisions

First the good news. The August 2013 final revisions to the rules requiring the government to evaluate past performance retain the existing requirement to allow contactor rebuttal and appeal. Commenters to the government’s proposal were unanimously against scrapping or substantially modifying the process. As summarized in the discussion of the final rule, commenters insisted that the appeals process “ensures that individual Government rater bias or lack of understanding of the complete program, not just contracting issues, can be brought out and addressed.” According to one commenter, at least 30 percent of past performance evaluation appeals result in substantive changes. The final rule maintains verbatim the language of former FAR 42.1503(b), now located at FAR 42.1503(d).

Metcalf Construction Company and the Navy argued their positions today in the appeal of Metcalf’s $27-million claim on its contract to design and build military housing in Kaneohe Bay, Hawaii. The appeal focuses on the December 9, 2011 decision by Judge Susan G. Braden of the United States Court of Federal Claims, which addresses the liability issues presented by Metcalf’s claim. See Metcalf Constr. Co. v. United States, 102 Fed. Cl. 334 (2011) (Metcalf I). A second decision issued on December 10, 2012 addresses the damages issues presented in the case. Metcalf Constr. Co. v. United States, 107 Fed. Cl. 786 (2012) (Metcalf II). Regardless of how the Federal Circuit resolves the appeal, the case is bad for federal construction contracting.

Duty of good faith and fair dealing

In Metcalf I, the court found that Metcalf could not establish its claim that the Navy breached its duty of good faith and fair dealing. This conclusion is based entirely on the Court’s interpretation of the applicable standard for proving such a claim. In Judge Braden’s view, “a breach of the duty of good faith and fair dealing claim against the Government can only be established by a showing that [the Government] ‘specifically designed to reappropriate the benefits [that] the other party expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract.’” Metcalf I § C.1.b (quoting Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 829 (Fed. Cir. 2010)).

The Contract Disputes Act imposes a six-year statute of limitations on all claims, whether they are asserted by the contractor or by the Government. See 41 U.S.C. § 7103(a)(4)(A). The limitations period begins to run upon accrual of a claim, which is “the date when all events . . . that fix the alleged liability of either the Government or the contractor and permit assertion of the claim . . . were known or should have been known.” FAR 33.201. Because six years must pass before the claim expires, the precise date of accrual is often little more than an academic question. Indeed, there have been relatively few cases applying the CDA limitations period to Government claims. But accrual has recently become a real and sometimes insurmountable obstacle to Government claims. Here is a short summary of the basic concepts that have emerged from the decisions that have addressed the issue.

1.         The government has the burden of proving timeliness. 

The CDA limitations period is “jurisdictional.” When the government asserts a claim against a contractor, the government has the burden of proving jurisdiction. To do so, the government must establish that the claim was timely asserted. If the government cannot show that the claim was asserted within six years of accrual, the Board or the Court lacks jurisdiction to hear the claim. Raytheon Missile Systems, ASBCA No. 58011 (Jan. 28, 2013) [pdf].

Let’s put the politics of the 2013 government shutdown aside and look at the practical questions. Like the government employees that are affected, contractors want to know if they should come to work. And if they do come to work, will they get paid? Will the options be exercised? Will their contract be terminated for…

Flight delays resulting from the furloughs of air traffic controllers are certainly not the only impact of sequestration. All federal contractors and grant recipients will have to adapt to reduced federal spending. According to the OMB report to Congress on sequestration reductions for FY 2014, $109 billion will be cut from the federal budget next year with equal reductions of approximately $54.7 billion in the defense and non-defense categories. Discretionary defense spending will see a $53.9 billion reduction, while direct defense spending will be reduced by $749 million. Non-defense discretionary spending will decrease by $37.2 billion, and non-defense direct spending will shrink by $17.5 billion, $11.2 billion of which will come from reductions in Medicare spending.

As agencies struggle with these mandatory budget cuts imposed by sequestration, incrementally funded contracts are particularly vulnerable. Despite the apparent need for their goods or services and the high caliber of their work, contractors holding incrementally funded contracts may find that funds are simply not available. Here are three strategies contractors can take to limit the risk of performing without compensation:

The government often blames construction contractors for shortcomings in its own design and unanticipated difficulties encountered at the site. “You’re supposed to be the expert!”  “You should have known what to expect because of the magic language on page 97 of the geotechnical report.” “You’re the design-builder!”

At first glance, these arguments seem persuasive. But when they are presented to a judge at the Court of Federal Claims or a Board of Contract Appeals, their limitations become apparent. Contractors are not ordinarily expected to have the expertise of a designer or geotechnical engineer. And even when contractors have design-build responsibilities, they are entitled to rely on the design components that the government has furnished to them. And that single reference on page 97 of the geotechnical report?  It doesn’t override the interpretation that a reasonable contractor may draw from the boring logs and the geotechnical report as a whole.

Contributed by Husch Blackwell Associate Thomas J. Rath

It makes sense to require contractors seeking reimbursement of costs they incur in the performance of a government contract to show that the costs were reasonable. According to the latest decision addressing KBR’s effort to recoup costs incurred to support the United States military in Iraq, the rule is no different for work performed in a warzone. Without additional proof of reasonableness, the Court of Federal Claims concluded that $37 million may be too much for a dining facility needed to feed and protect 6,000 American soldiers. See Kellogg Brown & Root Services, Inc. v. United States, Nos. 09-428C & 09-578C (Fed. Cl. Sept. 27, 2012).

The decision arises from KBR’s claims for costs incurred to construct and operate a reinforced concrete dining facility needed to feed and protect 6,000 soldiers in Mosul, Iraq. Though KBR’s contract was awarded on a cost-reimbursement basis, KBR awarded a fixed-price subcontract for the work to ABC International Group. Army representatives urged KBR to begin work on the new facility quickly, citing the need for “force protection.” Responding to this pressure, KBR accepted a proposal from ABC that doubled the expected monthly cost of labor without seeking competing bids. KBR concluded the increase was reasonable because the work would be conducted amid “violence and the beheading of hostages by terrorists [which] caused a drastic increase in the cost of labor and a severe shortage of available staff.” By the end of the contract, the government asserted that KBR had paid over $12 million more to ABC for labor than it should have.