Three standard clauses used in virtually all Postal Service surface transportation contracts are now on the chopping block. In an interim ruling, the Court of Federal Claims ordered the Postal Service to show why these three clauses should not be declared unlawful and unenforceable. Tabetha Jennings v. U.S., Fed. Cl. No. 14-132C, May 29, 2016.

The case involves the default termination of a $34,000 contract to provide mail delivery between Leslie and Timbo, Arkansas. Tabetha Jennings, the sole proprietor contractor, had provided service for seven years without any issues. Then, during a heavy volume Christmas season, a postmaster accused her of using a vehicle with insufficient capacity. The postmaster was wrong, but this charge led to other accusations. Eventually, the postmaster accused Jennings of conducting herself “in an unprofessional manner” and disrupting mail processing operations. These accusations, in turn, led the contracting officer to rescind Jennings’s security clearance and her access to postal premises and the mail.

Jennings disputed the accusations against her and presented statements from a different postmaster and from another contractor that backed her up. But the contracting officer was unmoved and did not lift the suspension of her security clearance. When Jennings failed to provide a substitute carrier to continue the service she had been barred from performing herself, the contracting officer terminated her contract for default.

Court’s decision

Jennings appealed the default termination to the Court of Federal Claims. Denying the Postal Service’s motion for summary judgment, the court instead found that several contract clauses were ambiguous, not supported by adequate consideration, and imposed an unreasonable burden on due process.  Given the “great disparity in bargaining power” between the parties, and the contractor’s failure to receive anything in return for her concession, the court found that these clauses create a “contract of adhesion.” The clauses are contained in the Postal Service’s Terms and Conditions for Contract Delivery Service (CDS) contracts, and also appear in similar terms for Highway Contract Route (HCR) contracts.

The first clause the court found unenforceable was section C.2.10, entitled “Usage of Postal Facilities.”  At first blush, the clause seems inapplicable to any issue in the case, because it primarily concerns parking on postal premises. The clause provides that the Postal Service has discretion to withdraw parking privileges and, in such case, the contractor is responsible for any resulting cost impact. The clause then broadly states that the contractor must have “adequate contingency plans in place … should the use of postal facilities be terminated or limited.”  Since the Postal Service withdrew Jennings’s access to postal facilities, this part of the clause was potentially applicable. The court found this language ambiguous because “adequate contingency plans” was not defined, nor were the circumstances under which access to postal facilities could be terminated or limited.

The court particularly objected to language that released the Postal Service from any liability for costs arising from its withdrawal of access to postal premises. This language, in effect, imposed on the contractor for the entire term of the contract all costs resulting from a unilateral USPS decision to terminate or limit a contractor’s access. The court found that this imposes an unreasonable financial burden and is an obligation that is unsupported by consideration.

The court next examined sub-section C.3.4(j) of the “Claims and Disputes” clause. This sub-section requires that the contractor must perform, or provide substitute performance, during the entire period that any “request for relief, claim, appeal, or action arising under the contract is pending.” This language is substantially the same as that used by federal agencies covered by the FAR. The court held that this language, in conjunction with the previous clause, affords the Postal Service the unilateral ability to impose an unreasonable financial obligation on a contractor who elects to exercise its due process rights in court to challenge any aspect of the contract.

The court had similar concerns with section C.3.1(6), “Termination for Default.” This clause requires that the contractor assure the Postal Service that it will bear the entire cost of continued performance or risk termination for default.

The court calculated that these three contract clauses would require Jennings to assume potential liability of approximately $238,000 if she exercised her due process rights to bring an action under the contract or risk being terminated for default. Considering that the annual price of the contract was only $34,000, such gross inadequacy of consideration “shocks the conscience” and is a “badge of fraud.”

The court ordered the Postal Service to explain why the court should not rule against it and determine these clauses are unlawful and unenforceable as a matter of public policy. In addition, the court was concerned that these same terms and conditions may have been invoked in other cases. The court thus also ordered the Postal Service General Counsel to appear at the next hearing, where it would hear argument on whether it should permanently enjoin the Postal Service from enforcing these clauses.

Enforceability of other USPS clauses

Although not mentioned in the decision, the “Usage of Postal Facilities” clause was created by the Postal Service in response to a contractor recovering on a claim arising from the Postal Service’s withdrawal of parking privileges. TNH Enterprises, Inc., PSBCA No. 4044, June 15, 1988, 98-2 BCA ¶ 29,822, 1998 WL 318531. In that case, the PSBCA held that the contractor was entitled to recover both the cost of alternative parking premises and the increased cost of driving to and from that location. Instead of recognizing that it shouldn’t take such action in the future without providing compensation, the Postal Service doubled-down. It drafted a new clause stating such action could be taken without the Postal Service incurring any liability. This was an overreach, and we now see its consequences for the Postal Service.

The court’s rationale goes even farther, though, than the enforceability of these three clauses in the context of default termination. The court’s decision was based on the huge disparity in bargaining power between the Postal Service and the contractor, which created a contract of adhesion and allowed the Postal Service to take unilateral actions without any financial impact. The court thus opened up the possibility that other standard clauses are also unenforceable as against public policy. We will closely follow this case and report on future developments.