United States: Cry Havoc And Let Slip The Risks Of War

In last month's post, we considered First Kuwaiti Trading & Contracting W.L.L., v. Dep't of State, CBCA 3506, 2018 WL 6423911 (Dec. 3, 2018), and Appeal of ECC International, LLC, ASBCA 60484, 2018 WL 6251069 (Nov. 16, 2018), to reflect on how the risks of war are allocated between contractors and the government and how the Sovereign Acts doctrine can serve as a defense for the government. Today's post focuses on a recent Armed Services Board of Contract Appeals ("ASBCA" or "Board") decision on a contractor's claim for the costs it incurred as a result of the closure of a military border crossing between Iraq and Kuwait. See Appeal of ANHAM FZCO, LLC, ASBCA 58999, 2018 WL 6588212 (Nov. 13, 2018). Unlike in First Kuwaiti Trading & Contracting and ECC International, the contractor prevailed this time even though its claim stemmed from the U.S. troop reduction in Iraq – a quintessentially sovereign act.

ANHAM FZCO, LLC ("ANHAM") had a contract to supply and deliver perishable goods to military customers in Iraq. The contract required ANHAM to move goods from its warehouses in Kuwait to Iraq in a convoy under military supervision and with military protection. At the time ANHAM entered into the contract, all goods in Kuwait had to move through the Khabari Crossing ("K-Crossing") in order to reach U.S. personnel in Iraq. Shipments for the military were not allowed to use the alternative Safwan commercial crossing. ANHAM's proposal and pricing thus were based on the solicitation's mandated use of U.S. military escorts to enter and return from Iraq through the K-Crossing.

During ANHAM's performance of the contract, the Army began to transition out of Iraq. The withdrawal of troops from the country led to the closure of the K-Crossing. As a result, the Defense Logics Agency ("DLA") directed ANHAM to alter its operations to use the Safwan commercial crossing. However, use of the Safwan commercial crossing required ANHAM to establish a new trucking operation in Iraq and establish new facilities near the Safwan crossing. ANHAM and DLA sought to negotiate a modification for the change in delivery method, but their discussions broke down over pricing. Therefore, ANHAM submitted a claim for the additional costs it incurred as a result of the government's direction to alter its delivery operations.

A prior decision, ANHAM FZCO, LLC, ASBCA 59283, July 20, 2017, 17-1 BCA ¶ 36817, concerned the same contract. In that case, ANHAM alleged that the government misled ANHAM about the number of troops it would need to feed in Iraq. Based on that faulty information, ANHAM maintained unnecessary warehouse space in Kuwait to store food and other goods. After the government withdrew troops from Iraq, ANHAM submitted a claim for the amount it incurred for leasing the warehouse space. Although the government did not challenge ANHAM's allegations that DLA had encouraged the contractor to plan to support significantly higher troop levels in Iraq, the contracting officer nevertheless denied the claim. ANHAM appealed the denial to the ASBCA, alleging that DLA acted in bad faith when it provided misinformation about the determination to withdraw troops from Iraq. In response, DLA asserted that ANHAM's claim was barred by the Sovereign Acts doctrine. The Board concluded that the Sovereign Acts doctrine did not apply to ANHAM's fair dealing claim because the government's liability was based on DLA's failure to disclose vital information to the contractor about the withdrawal of troops from Iraq, rather than on a sovereign act. The Board explained that the Sovereign Acts doctrine shields the government from liability for a contractor's claim arising from a "public and general" sovereign act, and that "[t]he government is excused from performance under the sovereign acts defense only when the sovereign act renders the government's performance impossible." Id. Under these circumstances, however, there was no reason to believe it was impossible for DLA to cooperate with ANHAM. Therefore, DLA's motion for summary judgment was denied.

Government's Direction to Use Commercial Crossing Was a Constructive Change

In the latest appeal, the Board held that "the government changed the terms of the contract by directing ANHAM to enter Iraq through the commercial entry point instead of the contractually-required U.S. military controlled crossing." Appeal of ANHAM FZCO, LLC, ASBCA 58999, 2018 WL 6588212 (Nov. 13, 2018). The contract was for the delivery of food and other goods by a certain method (military escort). Requiring the goods to be delivered by other means changed the contract requirements and forced ANHAM to develop a new and more expensive means of transporting the goods into Iraq. Therefore, the government's direction to discontinue military-supervised crossing at the K-Crossing and to use the Safwan commercial crossing instead was a material change to the scope of work and constituted a constructive change to the contract. The Board concluded that "a change in how ANHAM would meet its contract requirements constitutes a 'change' pursuant to the Changes clause and, therefore, would require the government to make an equitable adjustment to account for the extra costs resulting from the change."

Delivering goods and supplies to war-torn corners of the world involves a great deal of risk. For example, in Zafer Taahut Insaat Ticaret, A.S. v. United States, 120 Fed. Cl. 604 (2015), the government of Pakistan closed the border between Pakistan and Afghanistan, causing the contractor to incur additional costs to transport construction materials to its work site in Afghanistan. The U.S. Court of Federal Claims held that the government was not responsible for transportation delays caused by the Pakistani government's closure of the border route because the contractor's fixed-price contract included an agreement to transport construction materials to its work site "FOB: Destination" (meaning that the contractor was required to deliver the materials to the project site at no charge to the government). The Board distinguished the facts in Zafer from this case, explaining that, unlike the construction contract in Zafer, ANHAM's delivery contract contained specific requirements for how the deliveries had to be made. Therefore, changing ANHAM's delivery method altered the terms of the contract and entitled ANHAM to an equitable adjustment.

Prior Modification Only Compensated ANHAM for Obtaining Private Security Within Iraq

Due to the discontinuance of military-supervised convoys, ANHAM also had to hire private security to protect its deliveries. DLA and ANHAM entered into a bilateral modification to compensate ANHAM for costs related to maintaining private security for its supply convoys when traveling within Iraq. The government argued that this modification fully compensated ANHAM for the change in delivery method. However, the Board found that "[t]he government's modification of the contract to pay the costs of private security escorts once in Iraq did not compensate appellant for the new and additional costs of switching appellant's operations to the commercial crossing location." Id.

The Sovereign Acts Doctrine Did Not Shield the Government From Liability

While the withdrawal of troops from Iraq and the closing of the K-Crossing was a sovereign act, the Board concluded that exceptions to the Sovereign Acts doctrine applied in this case. The Board has recognized two exceptions to the doctrine: (1) when the government has issued instructions to implement the sovereign act which exceed contract requirements and thus amount to a constructive change, and (2) when the government expressly or impliedly agreed to pay the contractor for losses due to the sovereign acts. In this case, both exceptions were satisfied. First, DLA's orders to ANHAM to change its delivery method and use the commercial crossing were constructive contractual changes made in response to the government's sovereign act. Second, the government agreed to compensate ANHAM for the additional costs incurred as a result of the change in operations. While the government and ANHAM were unable to agree on price, "the government contemporaneously acknowledged that the new border crossing was a compensable change to the contract and that it was willing to compensate ANHAM for the additional costs ANHAM incurred." Id. Therefore, both exceptions applied to ANHAM's claim. The Board sustained ANHAM's appeal and directed the parties to resolve quantum.

Takeaway

The Sovereign Acts doctrine is not a complete bar to recovery. When a contract contains specific requirements for how services are to be performed and the government alters those requirements, the contractor is entitled to an equitable adjustment under the Changes Clause. As the Board recognized, an agency cannot hide behind the Sovereign Acts doctrine when it changes the contract's express requirements, even if the change is driven by a sovereign act such as a troop reduction. This is particularly so where the government concedes (at least implicitly) that the contractor is owed compensation for the change. The principle seems, at its core, to follow the same logic as in a termination for convenience: the government, as sovereign, has the right to change its mind about what it requires from a contractor, but it has to pay the costs flowing from that change.

*Victoria Dalcourt Angle is a Law Clerk in our Washington, D.C. office and not admitted to the bar.

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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