Contract interpretation

Contract interpretation

Last year, two new cases further defined the issue of who should bear the risk when the government drafts its contracts carelessly. When defective drafting results in ambiguities in a contract, both parties may claim that the other side should bear the responsibility for these ambiguities. The ultimate question is whether the ambiguity was patent or latent, because a patent ambiguity creates a duty to inquire.

COFC Reinforces Bad Habits

In J&H Reinforcing & Structural Erectors, Inc. v. United States (J&H Reinforcing), (1) the ambiguity involved whether a Historically Underutilized Business Zone (HUBZone) preference would apply to a contract to rehabilitate a dam in the Wayne National Forest. As this was a commercial item acquisition, section I of the solicitation contained the clause found at Federal Acquisition Regulation (FAR) section 52.212-5. (2) This clause incorporates several other clauses into the contract by reference. (3) The FAR also cross-references two clauses that apply to all commercial item acquisitions. (4)

Another paragraph, however, cross-references twenty-eight clauses that may or may not apply, depending upon the nature of the particular commercial item acquisition. There should be a blank line before each of these twenty-eight clauses, where the contracting officer checks whether the nature of that particular acquisition requires incorporation of that clause. There should also be a note at the beginning of this listing of potentially incorporated clauses, indicating that the “Contracting Officer shall check as appropriate” those clauses that are applicable. (5) Unfortunately, the solicitation in J&H Reinforcing did not contain either this note or the blank lines before each of the listed twenty-eight clauses. (6)

One of the twenty-eight clauses listed in FAR section 52.212-5(b) is FAR section 52.219-3, which sets aside procurements for HUBZone Small Business Concerns. At a pre-bid meeting, in which J&H Reinforcing did not take part, a potential bidder asked whether the rehabilitation project was being set aside for HUBZone businesses. The contracting officer said that it was not being set aside. The contracting officer later amended the solicitation to reflect corrections in the drawings and specifications. In this amendment, the government also included a list of questions and answers raised during the pre-bid meeting. Unfortunately, this listing did not address whether the government was setting aside the acquisition for HUBZone businesses. (7)

Four businesses bid on the dam project. The low bidder was disqualified, and the second-lowest bidder was T-C, Inc., a non-HUBZone business. J&H Reinforcing was the third-lowest bidder. When the government awarded to T-C, Inc., J&H Reinforcing sued in the Court of Federal Claims (COFC), alleging that the government violated statutory and regulatory provisions regarding the HUBZone program by awarding to a non-HUBZone business. (8) The court held in favor of the government, finding an ambiguity in the solicitation but also finding that the ambiguity was patent, which gave J&H Reinforcing a duty to inquire further. The court noted that one of the other clauses listed in FAR section 52.212-5(b) is FAR section 52.219-4, which gives HUBZone businesses an evaluation preference by adding ten percent to the price bid by any non-HUBZone businesses. The court found that FAR sections 52.219-3 and 52.219-4 were mutually inconsistent, resulting in a patent ambiguity. (9)

Had this been the end of the story, it may not have been too difficult to accept the court’s holding that the patent ambiguity created a duty for J&H Reinforcing to inquire further. In this case, however, J&H Reinforcing also alleged that it called the contracting officer to clarify whether the solicitation was, in fact, set aside. J&H also alleged that the contracting officer was unavailable to answer its questions, but that her representative assisted J&H Reinforcing to “bid as a HUBZone contractor.” (10) In response to this argument, the court noted that FAR section 52.214-6 requires prospective bidders who need explanations to submit their inquiries in writing. It then noted that this provision was designed to prevent the exact scenario in which J&H Reinforcing found itself–“reading the tea leaves of recalled utterances to ascertain if the contracting officer or her representatives made a statement that would bind the government.” (11) Because the alleged conversation between J&H Reinforcing and the contracting officer’s representative was verbal, the court ruled against J&H Reinforcing and granted the government’s motion for summary judgment. (12)

This case is also somewhat troubling because it appears that the court could have decided it on other grounds. The court hinted at various times that the contracting officer’s representative had no authority regarding this procurement. (13) At other times, the court implied that this case really involved a failure of proof by the plaintiff. (14) Yet, instead of basing its holding on either of these grounds, the court chose to reach its outcome on the basis that J&H Reinforcing failed to inquire in writing. This was a commercial item acquisition–a procurement in which one should expect less savvy contractors. The actions of government personnel contributed more to J&H Reinforcing’s situation than its telephone inquiry. Hopefully, holdings similar to J&H Reinforcing will not reinforce inattentive behavior by government personnel or discourage smaller contractors from participating in government procurement.

Government Stays with an “Edsall” of an Argument

Last year’s Year in Review reported on Edsall Construction Co., (15) a case in which the Armed Services Board of Contract Appeals (ASBCA) had held against the Army in its attempt to use a disclaimer to shift the responsibility for defective design specifications to a contractor. (16) Edsall involved a Montana National Guard contract for the construction of two aircraft hangars, including steel canopy hangar doors weighing 21,000 pounds each. (17) The solicitation contained detailed drawings depicting the design of the doors, which the board determined to be design specifications. (18) Included in these drawings were three cables with “pick points” on the door, indicating where the cables would attach to support the doors. After the award, a subcontractor determined that the load on the doors would be too heavy for just three cables, so it proposed to use four instead. When Edsall notified the government of this proposed change, the government agreed, believing that the design change would be cost-free for the government. When Edsall later submitted a claim for the additional $70,288.26 in costs, the government denied the claim because a door drawing contained a note that stated:

[c]anopy door details, arrangements, loads,

attachments, supports, brackets, hardware,

etc. must be verified by the contractor prior

to bidding. Any conditions that require

changes from the plans must be communicated

to the architect for his approval prior to

bidding and all costs of those changes must

be included in the bid price. (19)

The board found that this single note buried in fine print on one of the detailed drawings may have been sufficient to require contractors to verify the weight of the door, but it did not adequately put the contractor on notice that the risk of any design deficiencies was being shifted to it. (20) The government appealed this ruling to the Court of Appeals for the Federal Circuit (CAFC). (21) The CAFC was no more sympathetic to the government, specifically pointing out that when the government provides the contractor with design specifications and forces the contractor to build according to those specifications, it is warranting that those specifications are free of any defects. (22) The court then examined the government’s disclaimer and determined that although “the disclaimer at issue requires the contractor to verify supports, attachments, and loads, it does not clearly alert the contractor that the design may contain substantive flaws requiring correction and approval before bidding.” (23)

The government next argued that if the disclaimer was not clear, it still resulted in an ambiguity that was patent, giving Edsall a duty to inquire. The court responded without much elaboration, concluding that this case did not involve a patent ambiguity because “the design flaw was hidden.” (24) The court specifically held open the possibility that the government could shift the risk of defects in design specifications to a contractor; it also stated, however, that the disclaimer must be obvious and unequivocal to shift that risk. (25) In both of the cases discussed here, the government’s attempts to shift the risk for its inartfully drafted solicitations appear somewhat harsh. In assigning responsibility for the risks created by contract ambiguities, it may be appropriate to modify the rule of law to consider the parties’ respective equities. Major Sharp.

(1.) 50 Fed. Cl. 570 (2001).

(2.) GENERAL SERVS. ADMIN. ET AL., FEDERAL ACQUISITION REG. 52.212-5 (July 2002) [hereinafter FAR]

(3.) Id.

(4.) Id. at 52.212-5(a).

(5.) Id. at 52.212-5(b).

(6.) J&H Reinforcing, 50 Fed. Cl. at 572-73.

(7.) Id. at 573.

(8.) Id. at 573-74.

(9.) Id. at 575 (reasoning that setting aside the award to only HUBZone businesses would mean that there would never be a non-HUBZone business that would get ten percent added to their price for evaluation purposes).

(10.) Id. The court did not discuss what authority, if any, this individual had. Id. at 576-77.

(11.) Id. at 577.

(12.) Id.

(13.) Id. at 576. At times, the court refers to her as a clerk.

(14.) Id. at577.

(15.) ASBCA No. 51787, 01-2 BCA [paragraph] 31,425.

(16.) Major John J. Siemietkowski et al., Contract and Fiscal Law Developments of 2001–The Year in Review, ARMY LAW., Jan./Feb. 2002, at 138.

(17.) ASBCA No. 51787, 01-2 BCA [paragraph] 31,425, at 155,176.

(18.) Id. at 155,177.

(19.) Id. at 155,177-79.

(20.) Id. at 155,181.

(21.) White v. Edsall Constr. Co., 296 F. 3d 1081 (2002).

(22.) Id. at 1084 (citing United States v. Spearin, 248 U.S. 132 (1918)).

(23). White, 296 F. 3d at 1084.

(24.) Id. at 1087.

(25.) M. at 1085-87 (holding that the disclaimer must be “express and specific” rather than “general” in nature to shift liability).

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