United States: "Mistake" In Government Contracts

Everyone knows that "ignorance of the law is no excuse." But what about ignorance of the facts? In Woodies Holdings, L.L.C. v. United States, the Court of Federal Claims recently rejected a Government defense against a contractor claim and an affirmative counter-claim based on the Government's alleged unilateral mistake of fact. In this post we'll take a look at that decision and discuss the particular challenges posed by an argument that one party's mistaken understanding of facts should lead a court to alter the unambiguous terms of the parties' contract. We'll also note a special procedural hurdle one must clear before being able to raise this argument in an appeal covered by the Contract Disputes Act of 1978 (CDA).

The Facts

The General Services Administration (GSA) leases office space for use by federal agencies. In the 1990s, the GSA initiated a program to create an annual inventory of available properties, with the space available and lease pricing offered to be refreshed by property owners from year to year. This system allowed the GSA rapidly to meet ordering agencies' needs by matching their office space requirements and budget constraints to properties available in the inventory. Because any particular lease might last for several years, the leases provided for price adjustments to account for increases or decreases in the property owner's local property tax assessment: the Government was required to make (or entitled to receive) adjustment payments based upon the percentage of the building's square footage occupied by the Government. The leases provided: "The percent of the building occupied by the Government, for purposes of tax adjustments, will be established during negotiations." The correct Government occupancy percentage in leases with a particular property owner is at the heart of the Government's mistake argument in this case.

In 2000, a property owner, Woodies Holdings, L.L.C. (Woodies), submitted an offer to rent the GSA a property it owned in downtown Washington, D.C. The building had both office space and retail space available. In its offer, Woodies filled in a standard GSA form detailing the building's space as: 316,420 square feet of rentable office space, an additional 163,609 square feet of retail space, and 480,029 total building square feet. No lease resulted from this offer. The following year, Woodies submitted its annual refresher offer to the GSA and provided the year's available general purpose office space and retail space. Again, no lease resulted from the offer.

In 2002, Woodies tried again, offering the same building for lease and filling out the GSA's standard form: 372,990 square feet of available office space, 139,240 square feet of retail space, and 512,230 total building square feet. (The slight variations in building size across these offers was attributable to changing measurements and changes to the space itself.) This time, the GSA chose Woodies for a lease of 48,410 square feet of office space for use by the Environmental Protection Agency. The GSA's negotiator filled out the lease forms to indicate the building (rather than the available office space) measured 372,990 square feet, and the Government occupancy was 12.98% (48,410 divided by 372,990). The GSA negotiator apparently copied the wrong number from Woodies' correct offer documents. Although the GSA had access to "numerous supporting documents originating from Woodies," as well as publicly available real estate records, no one at the GSA reviewed or verified whether the square footage figures used by the GSA were accurate.

By using a smaller denominator in the Government occupancy fraction, the Government's share of responsibility for any tax increases thus was larger than it would have been with a larger denominator. When Woodies' negotiator saw the GSA's use of 372,990 square feet as the denominator for the occupancy percentage, he assumed this was the negotiated occupancy percentage for tax purposes and a fair number, given the differences between office space and retail space, and he did not object.

Over the years, the GSA executed additional leases with Woodies. In each one, the GSA calculated the Government occupancy percentage based on a total building size of 372,990 square feet, which the GSA personnel apparently copied and pasted from the first lease without attempting to verify the figure. In 2009, the GSA changed over to an automated system, which did not allow Woodies to submit copies of documents as it previously had done. When the system asked Woodies for total building size, Woodies' negotiator entered 372,990 square feet based upon the parties' prior practice, and followed up with a phone call to the GSA to explain that he used that figure (rather than total building size) for tax purposes based upon the figures to which the parties had agreed in the previous four leases. The GSA issued a new lease with the usual figure, which Woodies took as confirmation that GSA concurred that was the correct approach. In reality, it appears no one at the GSA attempted to verify any of the numbers and simply used the square footage GSA always had used.

From 2008 to 2012, the GSA made tax adjustment payments to Woodies based upon the Government occupancy percentages incorporated into the leases. In 2014, with Woodies' claims for tax adjustments pending, a new GSA lease specialist noticed the discrepancy between the building square footage listed on the leases and the figure reported in other documents. The specialist took the initiative to request independent real estate records, which confirmed that the building's total size was 504,221 square feet, which he ensured would be reflected in all new leases. Based upon the specialist's calculation that the Government had been paying more than it should have paid for the space it occupied, the GSA denied Woodies' pending tax adjustment claims for lease years after 2012. Woodies took the denied claims to the Court of Federal Claims.

Legal Analysis

The court turned first to Woodies' claims, as the plaintiff bears the burden of establishing its entitlement to damages. The court quickly found that the leases as written unambiguously entitled Woodies to tax adjustment payments at the percentages stated in the leases—approximately $3.5 million, plus interest. The court then considered whether the Government had an affirmative defense capable of defeating Woodies' established claims.

The Government asserted a defense of unilateral mistake of fact, asking the court to reform the contracts—that is, judicially to adjust the occupancy percentage in each lease at issue in Woodies' claims (and thus the quantum of the claims) to the figure the Government argued was the one that should have appeared in the leases, based upon the total building square footage. The Government also asserted a counter-claim based on the same argument, asking the Court to order Woodies to repay what the Government claimed had been past overpayments.

The court noted that contract reformation is an extraordinary remedy, is rarely available when the alleged mistake is unilateral, and must in all events be supported by clear and convincing evidence—a standard substantially more onerous than preponderance of the evidence, which is the usual standard for establishing a defense:

Reformation of a written contract is an extraordinary remedy. It is generally only available on a showing by clear and convincing evidence that the intent of the parties is not expressed by the written instrument, which is to say that the parties both made the same mistake of fact. Reformation will not be granted, unless the proof of mistake be of the clearest and most satisfactory character. Where, as here, the mistake alleged is not mutual, the law requires the unmistaken party to have known, or have had reason to know, of the other party's mistake. Otherwise, reformation on the basis that only one party made a mistake is unavailable.

Thus, defendant must show by clear and convincing evidence that GSA 1) made a mistake, not having borne the risk of that mistake, as to a basic assumption on which it made the contract; 2) that its mistake had a material effect on the agreed exchange of performance; and 3) either the result is unconscionable, or Woodies knew or had reason to know of it.

At *11 (internal citations and quotation marks omitted).

The court found a unilateral mistake of fact (for each lease except the one in which Woodies called the GSA to explain the figure used for total building size). Based upon the testimony of GSA personnel who tried to recall the formation of these leases years before, the GSA did not intend to use a total building space measurement that excluded the building's retail space. And the court agreed this mistake affecting price involved a "basic assumption" of the contract and had a material effect on the agreed exchange of performance.

The court also found, however, that the GSA bore the risk of that mistake. A party may bear the risk of a mistake either because the contract itself places the risk on that party, or because the mistaken party failed to take reasonable steps that would have revealed the mistake before contract formation. The court noted the GSA negotiator's "cavalier and careless approach to his work, compounded by the equally careless oversight of his superiors, which in turn was facilitated by the agency's compartmentalization of tasks regarding lease development and oversight, as well as its constantly evolving forms and terminology." The court expressed irritation at the testimony of numerous agency employees who testified that it "was not in their job description" to verify the accuracy of figures, despite having the means to do so without much effort. The court noted only one employee took the initiative years later to investigate the issue after "easily" spotting the longstanding inconsistency in the building size descriptions. The court found this was "precisely the sort of 'conscious ignorance,' or gross negligence, that the law will not countenance when a party seeks to avoid its contractual obligations by claiming it was mistaken."

Although the Government's mistake defense was already dead, the court then turned to the third and final prong of the test, finding the Government had failed to meet its burden of proving "by clear and convincing evidence" that Woodies knew or should have known of the Government's mistake. Although the court thought the question was a close one, it accepted Woodies' explanation that, although Woodies clearly knew the leases did not reflect the correct total size of its building, it reasonably believed the GSA intended to use the total office space ("the only space the lease was concerned with") as the denominator of the occupancy fraction for tax purposes. The court noted that Woodies had raised precisely that issue with the GSA prior to the execution of two leases—which was further indication that Woodies reasonably thought there had been a meeting of the minds.

Takeaways

The main takeaway from this case is that it is very hard to prevail on any claim or defense of mistake of fact, and prevailing on a theory of unilateral mistake is harder still. That difficulty arises not only from having to meet each of the three prongs of the test for unilateral mistake discussed above, but also from the fact that the standard of proof is "clear and convincing evidence." This is a standard more onerous than the ordinary "preponderance of the evidence" standard that applies to most defenses.

This case is also a good reminder that parties should undertake reasonable due diligence before signing a contract to be sure they understand the facts that are material assumptions of the bargain. If a party fails to do so, it may be found to bear the risk of a mistake (as the GSA did here), and a court will enforce the terms of the contract as written.

Finally, there is another consideration, which the court here did not address but that could further complicate asserting a mistake defense in a Government contract dispute. Under the Federal Circuit's controversial precedent in Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), a party asserting a defense to a contract claim must first assert its defense as a separate CDA claim if the defense essentially seeks "an adjustment of contract terms." 609 F.3d at 1331. This rule applies to the Government as much as to contractors. See Raytheon Co. v. United States, 747 F.3d 1342, 1354-55 (Fed. Cir. 2014) (applying Maropakis to bar a Government defense where the defense sought an adjustment of contract terms but was not previously the subject of a contracting officer's final decision). At least one post-Maropakis decision of the Court of Federal Claims has rejected a mistake defense on jurisdictional grounds because the contractor failed first to submit a CDA claim to the contracting officer, asserting the mistake and seeking reformation of the contract terms. TPL Inc. v. United States, 118 Fed. Cl. 434, 444 (2014) (dismissing mutual-mistake defense for lack of jurisdiction under Maropakis).

Here, it appears the contracting officer's 2015 final decision denying Woodies' tax adjustment claims expressly raised the mistake defense, thus satisfying Maropakis. (It is a separate question whether that assertion was timely under the CDA's six-year statute of limitations in light of the court's finding the Government reasonably should have discovered the mistake as early as the execution of the first lease in 2003.) Absent a prior assertion of the mistake in a contractor claim (if the contractor is alleging a mistake) or a contracting officer's final decision (if the Government is alleging it), however, an affirmative claim or a defense of mistake in the midst of litigation of a CDA-covered contract is vulnerable to dismissal for lack of jurisdiction under Maropakis.

In short, although the doctrine of mistake is alive and well, it is a very challenging argument to make, and invoking it as a defense in a CDA-covered dispute may entail going through the additional procedural hoops imposed by Maropakis.

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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