Every year or so, the U.S. Postal Service changes the standard Terms and Conditions that apply to its newly awarded Highway Contract Route (HCR) and Contract Delivery Service (CDS) contacts. When this occurs, the new terms only apply to newly awarded contracts–existing contracts are unaffected and retain the same terms as when awarded.

But this year, the Postal Service has sought to apply new Terms and Conditions to existing CDS contracts as well as newly awarded ones. In an email to its CDS contractors, the Postal Service asked them to sign, without any “alterations or additions,” a contract modification that incorporated the new terms. If the contractor did not so, the Postal Service’s email threatened contract termination:

“Because of the Postal Service’s interest in maintaining consistency across its many CDS contracts, please note that a failure to respond to this correspondence … may lead the Postal Service to consider termination of the subject contract.”

After receiving this email, many contractors asked me: “Can the Postal Service really do this?” In my opinion, several legal arguments, if upheld, would make the resulting modification unenforceable. For example, the modification might fail for lack of consideration, because it gave the Postal Service what it wanted without giving anything that contractors valued in return. And it might fail for violation of the implied covenant of good faith and fair dealing, because it seeks to recapture benefits that were foreclosed at the time of contract award. But I think the best argument against its enforceability is based on the legal theory of coercion and duress. Normally, this is a difficult argument to make, but here the elements seem apparent from the Postal Service’s email itself.

Proving duress

To be relieved from a contract modification you signed on the basis of duress or coercion, you need to prove three things. First, you need to show that you involuntarily agreed to the modification. One common way of showing this is writing “under protest” next to your signature. But that was not an option here, because the Postal Service’s email said you must sign with “no alterations or additions” or it would nullify the document. No contractor sought the modification, nor was asked how they viewed it. The Postal Service’s email itself thus establishes involuntary action, as it permitted no response other than the contractor’s signature on an unaltered modification.

Second, you need to show that the circumstances permitted no other alternative than signing the modification. Once again, the Postal Service’s email again establishes this for you. The email says you must sign the modification or you risk having your contract terminated. In these circumstances, you have no other reasonable alternative to signing, because if you do not sign, you will lose the contract.

The Postal Service might argue that the email said a refusal to sign would only “lead the Postal Service to consider termination of the subject contract,” not that it was dead certain to be terminated. But viewed in context of the entire email, there was little reason to believe a non-conforming contract would survive. The Postal Service’s email explained that it was seeking uniformity in contract terms among all of its CDS contracts. If you did not sign the modification, then your contract would run counter to this policy. The email gave no reason to hope that your non-uniform contract would remain in place if you refused to sign the modification.

Third, you need to show that the circumstances you were faced with were the result of the Postal Service’s coercive acts and not a predicament of your own making. Once again, this is established by the Postal Service’s email. Contractors did nothing to place themselves into this predicament.

Gurdak case found similar coercion

A dozen years ago, the Postal Service tried something similar and the resulting modification was found to be coerced and unenforceable. In George P. Gurdak, PSBCA No. 5049, 05-2 BCA ¶ 33,092, the parties had previously agreed to a 10-year facility lease that required the contractor to make some renovations. When it came time for the Postal Service to approve the design of the renovations, the Postal Service balked, but not because of any problems it had with the design. Instead, the Postal Service wanted to pay a lower rent because it had re-measured the usable space and it was smaller than USPS had thought. The contractor strenuously objected to the modification, but the Postal Service said, “Take it or leave it.”  Without USPS’s design approval, the contractor could not proceed with the project, so the contractor signed the modification that reduced the lease rate.

After the building was renovated, the contractor submitted a claim for the original, higher lease rate. The contracting officer denied the claim, contending that the contractor had agreed to the lower rate in the signed modification. The contractor appealed to the Postal Service Board of Contract Appeals, contending the modification was coerced and unenforceable. The PSBCA agreed. Even though the Postal Service had the contractual right to approve the renovations design, its use of that right must still be exercised in good faith. The Board held that the Postal Service could not threaten exercise of a legitimate contract right if the exercise of that contract right would violate notions of fair dealing due to its coercive effect.

Just as in Gurdak, the Postal Service has threatened CDS contractors with exercise of a legitimate contract right (here, termination) in a way that violates notions of fair dealing and is coercive. In both cases, a “take it or leave it” threat was made for the wrongful purpose of forcing the contractor to accept new contract terms.

The Board in Gurdak held that the coerced modification was not binding on the contractor. Did this mean that the contractor could hold the Postal Service to those parts of the modification that it wished to enforce? In its email to CDS contractors, the Postal Service stated that the modification would also remove “outdated supplier obligations.”  If that is indeed true, then under Gurdak, is it possible that the Postal Service would still be bound to those parts of the modification?

What’s next?

In most cases, the modification will likely have little impact on performance, but it does increase the risk of disputes arising from the modification’s new obligations and approval requirements. Should USPS seek to enforce one of these new obligations, you may need to assert that such directive constitutes a constructive change because it arises from a coercive and unenforceable modification. If a mutually agreeable solution cannot be reached, you may need to bring a claim for the cost impact of the new directive under the Claims and Disputes clause of the contract.

Cover page - Nov 2014 postal seminarEvery Postal Service contractor should know the answer to certain fundamental questions: What procurement rules apply to the Postal Service and how do they differ from other agencies? What contract provisions are most likely to cause problems during performance? How do I identify and respond to changes and changed conditions? What recourse do I have when disputes arise?

That’s why our firm is presenting a full-day seminar on “Postal Service Contracting: What Every Contractor Should Know,” at the Westin Tysons Corner hotel on Thursday, November 6, 2014.

We start with the basics

We start with a primer on the creation, structure, and current management of the Postal Service. We provide vital background and statistical information that all postal contractors should know. We explore the pressing issues confronting the Postal Service today, its plans for the future, and how these issues will impact contractors. We conclude the session by setting out the 23 most important “culture pointers” encountered in the unique Postal Service contracting environment.

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Christiansted Post Office - St. Croix - Virgin Islands.jpgContractors are entitled to recover consultant and attorney costs reasonably incurred in preparing, pricing, and negotiating a change order under federal government contracts, including U.S. Postal Service contracts. That’s the holding in Tip Top Constr., Inc. v. Donahoe, 695 F.3d 1276 (Fed. Cir. 2012). The court overturned a Postal Service Board of Contract Appeals decision that had erroneously limited the contractor’s recovery of these costs. End result: if an agency changes your contract (whether by unilateral direction or constructive change), your request for an equitable price adjustment may include reasonable consultant and attorney costs.

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Contractors beware: the U.S. Postal Service Office of Inspector General (OIG) thinks that $1 out of every $20 spent by USPS on its contractors is fraudulent, and OIG is itching to find it. According to a July 18, 2011 OIG blog article, “conservative business estimates project up to 5 percent of contracted dollars are lost to fraud, meaning $1.45 billion of Postal Service funds are potentially at risk.” While these numbers are fanciful, there is no doubt that the OIG is taking this seriously. Read on for more details.

Continue Reading Postal Service OIG steps up contract fraud investigations