United States: A Deal You Can't Refuse: North American Landscaping And Voiding A Signed Release Because Of Duress

As a general rule, when a contractor signs a full settlement and release with respect to a dispute with the Government, the dispute is considered settled, and the Government is released from any further liability for that particular claim. There are, however, exceptions to the rule. One rare exception is when the Government subjects the contractor to duress, which may render the release null and void. In a remarkable decision, the Armed Services Board of Contract Appeals (ASBCA) recently voided a release for precisely this reason and sustained an appeal where there was evidence of a pattern of improper procurement practices, abuse of discretion in the administration of the contract, and a breach of the Government's duty of good faith and fair dealing. The ASBCA also made a point of scolding the procurement and contracting officials who treated a struggling small business in such an appalling manner.

Bid Opening, Pre-Award Protest, and Award

In North American Landscaping, Construction, and Dredging, Co., Inc., ASBCA Nos. 60235 et al., the U.S. Army Corps of Engineers (Agency) solicited sealed bids for maintenance dredging under Federal Acquisition Regulation (FAR) Part 14. After bid opening but prior to award, the Contracting Officer requested that one of the two bidders, North American Landscaping, Construction, and Dredging, Co., Inc. (NALCO), verify its bid because it was so low that the Agency thought there might be a mistake. The same day NALCO verified its bid, the only other bidder filed a pre-award agency-level protest arguing that NALCO's bid was "grossly unbalanced," meaning its mobilization and demobilization price was too high while the prices for the actual dredging work were too low. The Contracting Officer responded to the protest by stating that she determined the bid was mathematically, but not materially, unbalanced and therefore posed no risk of overpayment by the Government. Accordingly, she recommended dismissal of the protest.

While the protest was pending, the Agency informed NALCO that its proposed dredge was too small for the project and told NALCO to propose a larger dredge or else its bid would be rejected. NALCO offered a larger dredge and requested to increase its bid price. The Agency accepted the larger dredge but refused to increase the bid price. The Agency then denied the other bidder's protest and awarded the contract to NALCO.

Constructive Change

The day after contract award, the Agency learned that a neighboring country club would be building a stone revetment (a slanted sea wall to prevent erosion) in the disposal area of the dredging zone. The solicitation made no mention of this revetment work, and the parties did not discuss the revetment at the preconstruction meeting. Although the neighboring revetment work necessarily would adversely impact NALCO's dredging, the Agency directed NALCO to continue work as planned. NALCO kept the Agency apprised of the significant interference experienced as a result of the revetment work.

Dispute over Mobilization Payment

NALCO's bid included a lump-sum priced contract line item number (CLIN) for mobilization and demobilization and the clause at DFARS 252.236-7004. That clause provided that the Government would pay NALCO 60 percent of the mobilization/demobilization lump sum early in the contract for mobilization, and the remaining 40 percent of the lump sum after demobilization was complete at the end of the contract.

Soon after award, however, the Contracting Officer invoked the optional paragraph (b) of DFARS 252.236-7004. This paragraph allows an Agency, in its discretion, to require a contractor to submit cost data to justify the percentages of the CLIN that the contractor's bid asserted correspond to mobilization and demobilization. The Contracting Officer stated that, if NALCO failed to justify its mobilization/demobilization price to her satisfaction, NALCO would receive only actual costs incurred at the completion of mobilization and demobilization, respectively, with the remainder to be paid at the end of the contract. NALCO, however, based its bid on the assumption that, when it entered into the contract, it would receive 60 percent of its mobilization and demobilization lump-sum CLIN price up front, which it would then use to finance performance, including the purchase of necessary equipment. NALCO submitted the requested justification, but the Contracting Officer was not satisfied.

Several weeks after contract award, NALCO submitted an invoice for 60 percent of the contract's mobilization/demobilization CLIN price. The Contracting Officer, however, refused to allow any equipment costs as part of the mobilization payment, resulting in a payment $700,000 lower than what NALCO had invoiced. NALCO informed the Agency that, without up-front payment of its equipment costs, it would suffer severe financial hardship, performance would be endangered, and the company might go bankrupt. The Agency again refused to budge.

NALCO's president attempted to finance performance himself by taking out a personal loan using his home and equipment as collateral, and he borrowed $100,000 from members of his church just to make payroll. He eventually lost his house, equipment, and business to his creditors.

Performance Problems and No-Cost Termination

As NALCO had predicted, it encountered significant schedule and performance impacts due to the neighboring revetment work. NALCO requested relief from the Agency, and the Agency responded with a cure notice. NALCO asked for a two-week extension as a result of delays caused by the revetment work, but the Agency threatened to terminate the contract for default and charge NALCO excess re-procurement costs if it did not finish on time.

In the end, the Agency decided not to continue with the contract, although Agency officials admitted that the work that was performed was of a high quality. NALCO entered into settlement negotiations to try to recoup some of its incurred costs, but the Agency refused to consider any costs for equipment, any costs for labor payroll during the dredging period, or any adjustment for differing site conditions. The Agency offered to pay only $375,000, even though the contractor claimed performance costs in excess of $1 million. Threatened with a termination for default, and given the financial strains endangering its very existence, NALCO had no choice but to agree to the Agency's "take it or leave it" settlement offer. Under protest, NALCO signed the modification, which expressly purported to effect final payment and release the Government from any and all claims associated with the contract.

NALCO eventually filed a certified claim, which the Contracting Officer denied. NALCO then appealed the final decision to the ASBCA.

The ASBCA's Appeal Decision

On appeal, as a preliminary observation, the Board concluded that, in the time between bid opening and award, the Agency had no right to require (or even to allow) NALCO to amend its bid to offer a larger dredge. If the bid was unacceptable as submitted (as the Agency had said), the Contracting Officer lacked the authority to accept it, with or without a "revision." Unlike under FAR Part 15's procedures for negotiated procurements, agencies are not permitted to open discussions and request proposal revisions under FAR Part 14 sealed bid procurements. Further, although the Agency determined that NALCO's bid was not materially unbalanced, the ASBCA found that it was, in fact, "grossly unbalanced." This is not a bid protest article, but these pre award missteps may have been enough for the GAO to have sustained a protest if the other bidder had gone to the GAO after the Agency denied its agency-level protest.

Next, the ASBCA made two relevant findings regarding DFARS 252.236-7004. First, before looking at whether the Contracting Officer abused her discretion in requiring actual cost justification, the ASBCA discerned a latent ambiguity in the language of the DFARS clause. The Agency and NALCO had different, yet reasonable interpretations of what constitutes a reasonable relation to "the cost of work" in the contract. NALCO believed "the cost of work" for "mobilization" included its plant and equipment costs, whereas the Agency interpreted the same language to exclude equipment costs. After examining parole evidence to no avail, the ASBCA interpreted the ambiguity contra proferentemi.e., against the Government as the drafter of the clause – thus giving effect to NALCO's interpretation. The Board also noted that the Contracting Officer knowingly accepted NALCO's "grossly unbalanced bid." This suggested the Government understood exactly what NALCO thought it was agreeing to. Second, the ASBCA determined that the Contracting Officer abused her discretion in requiring actual cost justification per DFARS 252.236-7004(b), which is optional and discretionary, because she could not provide an adequate reason for requiring it while knowing full well how it would harm the contractor and endanger performance.

The ASBCA then considered the implied duty of good faith and fair dealing. This covenant requires both contracting parties to refrain from interfering with the other's performance and "not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract." Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005). In its review of the Agency's behavior, the ASBCA determined that by demanding a larger dredge at no additional cost to the Government, transmitting emails in which Agency officials mocked NALCO's correspondence, coercing NALCO into signing an unfair modification to avoid termination for default, and ignoring suggestions to reopen negotiations, the Agency breached its implied duty of good faith and fair dealing.

Next, the ASBCA found that the unforeseen revetment work on the neighboring golf course, and the Government's direction to carry on with performance anyway, was a constructive change. The Government should have, but did not, equitably adjust the contract's schedule and price to account for this change to the work the contractor was required to perform.

Finally, and most remarkably, the ASBCA determined that the Contracting Officer's threat to terminate the contractor for default if it did not agree to a take-it-or-leave-it settlement offer was improper and, in light of NALCO's debilitated circumstances, amounted to duress. To succeed on a duress claim and render a contract or other agreement unenforceable, a party must establish that "(1) it involuntarily accepted [the other party's] terms, (2) circumstances permitted no other alternative, and (3) such circumstances were the result of [the other party's] coercive acts." Dureiko v. United States, 209 F.3d 1345, 1358 (Fed. Cir. 2000). The ASBCA held that NALCO, which was on the brink of bankruptcy due to the Government's improper administration of this contract, involuntarily accepted the Agency's harsh terms rather than receive no payment at all and face an improper default termination. As a result, the settlement's release became void and unenforceable and not a bar to NALCO's claim. The ASBCA then sustained the majority of the appeal as to entitlement, and remanded the case to the parties to determine quantum.

Conclusions and Caveats

This decision's holdings are not unusual on constructive changes, default, or even abuse of discretion and the duty of good faith and fair dealing. The decision is unusual, though, for a couple of reasons.

First, the Government is not in the habit of awarding contracts to bidders with grossly unbalanced pricing – which means no one is likely to see this fact pattern repeated. Most agencies would be very skeptical of a bid or proposal that priced the lion's share of a construction contract in up-front mobilization CLINs, rather than in the actual construction to be performed, and most would probably reject the offer as representing an unacceptable risk.

Second, contracting parties usually are held to the releases they sign. Negotiating leverage is rarely equal between the parties to a Government contract, and a duress defense almost never works in a contract dispute against the Government. Duress was found in North American Landscaping not only because of the mountain of injustices heaped upon the contractor, but also because the contractor faced an existential threat if it did not accept the Government's demonstrably unfair settlement offer and demand for a release. Extraordinary facts led to an extraordinary decision. Contractors should be very careful before signing a release in reliance on the holdings in North American Landscaping because this case's unusual facts are likely to be present in many settlement negotiations. Indeed, the existence of the signed release probably contributed in large part to the Agency's decision to litigate this appeal rather than settle.

In the end, this decision is a salutary public rebuke of an attitude that contractors are indentured servants rather than valued partners. It is impossible to read the decision without concluding that a little common sense could have avoided most, if not all, of the errors detailed in the decision – producing a win-win outcome for the Government and the contractor alike. The decision emphasizes that dissenting voices of reason within the Agency tried to intercede on the contractor's behalf, but their recommendations went unheeded. NALCO's eventual vindication may be too little, too late for NALCO, but one hopes that procurement and contracting officials will read this decision with care and avoid similar costly mistakes in the future.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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