While it is likely only a matter of time before contractors working for federal agencies become familiar with the government contract claim issues discussed in Part 4 of our series (e.g., changes, delays, defective specifications, and terminations), it is equally important that contractors are also aware of the less common and often more difficult claim theories recognized by federal courts as well as boards authorized under the Contract Disputes Act (CDA). These claims are less common as they often flow from narrower fact patterns and carry higher evidentiary burdens that are difficult to overcome. Even so, they are critical in cases where common routes for recovery under the Federal Acquisition Regulation (FAR) fail to alleviate ongoing harm or adequately make the contractor whole. This post addresses several uncommon or difficult claim theories, what must be proven to succeed under these theories, and how to maintain an adequate record to do so. Note that this post does not represent an exhaustive list of all uncommon claim theories, and contractors should always seek the advice of legal counsel prior to asserting any claims against federal agencies.
Equitable Estoppel
Equitable estoppel is commonly categorized as a defense in equity seeking to prevent the Government from asserting a right or claiming a defense it otherwise would be entitled to had it not previously misled the contractor. It effectively seeks to force the Government to perform in accordance with its prior representations or conduct when a contractor reasonably relies on such representations or conduct to its detriment. Estoppel is an extremely difficult doctrine to invoke against the Government as compared to private litigants as it requires a contractor to prove not only that the Government (1) made certain representations or conduct inconsistent with its later position, (2) intended its representations or conduct to be acted upon or acted such that the contractor had a right to believe it so intended, and (3) that the contractor reasonably relied on the Government’s representations or conduct to its detriment, but also (4) that the Government’s actions constitute affirmative misconduct intended to defraud the contractor. In other words, it is not enough for the Government’s change in position to have resulted from mere negligence. The Government must act with intention to harm the contractor.
While it is often difficult to prove intent, it can be demonstrated through circumstantial evidence. It is critical that contractors maintain comprehensive, organized records of all written communications from contracting officers or other authorized Government representatives, along with all meeting notes and emails reflecting the Government’s statements and the contractor’s reliance thereon. To the extent possible, contractors should further distinguish and separately track all costs directly flowing from their reliance on Government representations or conduct. Finally, be prepared to demonstrate a contracting officer’s knowledge of representations made by, or conduct perpetrated by, “unauthorized” representatives, and know that the FAR allows for the ratification of unauthorized commitments by Government personnel.
Bad Faith / Breach of the Duty of Good Faith and Fair Dealing
The duty of good faith and fair dealing is implied in all government contracts. The Government breaches this duty when its actions effectively destroy the contractor’s reasonably expected benefits in performing the contract. To succeed under a claim for breach of good faith and fair dealing, a contractor must prove (1) the contract imposed duties or justified expectations consistent with the express terms thereof, and (2) the Government’s actions unreasonably interfered with or destroyed the contractor’s ability to receive its reasonably expected benefits in performing the contract, resulting in harm to the contractor. This theory is applicable where the Government’s actions undermine a contractor’s ability to perform under the express terms of the parties’ contract.
Breach of good faith and fair dealing claims often involve bad faith conduct on the part of the Government. To allege bad faith, a contractor must show practically irrefutable proof of improper motive on the part of the Government. This is a considerably high threshold to meet. That said, it is important to note that the Federal Circuit has distinguished between bad faith Government conduct and breach of the duty of good faith and fair dealing, holding that bad faith is not necessarily required to show a breach of the implied duty.
Records showing the Government’s arbitrary decision-making, including the unreasonable withholding of approvals, rescheduling of targeted inspections, and rejection of completing services, may evidence a breach of good faith and fair dealing and should be diligently maintained by the contractor. It is critical that contractors strive to issue consistent, contemporaneous notices documenting Government interference and any price and/or schedule impact flowing therefrom. Finally, where applicable, contractors should further collect records evidencing the Government’s differential treatment of other similarly situated subcontractors performing under the same contract.
Commercial Impracticability
Commercial impracticability excuses a contractor’s performance or entitles it to an equitable adjustment when unforeseen supervening events fundamentally alter the nature or feasibility of the work, making it commercially senseless to perform as priced and/or specified the contract. To succeed under a theory of commercial impracticability, a contractor must show: (1) the occurrence of a supervening event not reasonably foreseeable at the time of contracting; (2) the nonoccurrence of the event was a basic assumption of the contract; (3) the occurrence of the event was not the contractor’s fault; and (4) the contractor did not assume the risk of occurrence. The doctrine does not excuse mere economic hardship or unprofitability under a fixed price contract but applies only where all means of performance under the contract are commercially senseless. Whether performance would be commercially senseless is a question of fact. Nevertheless, courts and boards rarely award relief under a theory of commercial impracticability, especially where contracts do not contain economic price adjustment or material escalation clauses.
Contractors seeking equitable relief under a theory of commercial impracticability should collect market data showing unprecedented spikes or disruptions within markets relevant to contract performance which are beyond normal volatility. Contractors may further prepare critical path schedules showing the intervening event’s impact on performance feasibility. To the extent possible, contractors should collect information showing failure of prior contractors to perform under the same terms of the subject contract and that the Government knew or should have known that this failure would continue contractor to contractor. Finally, contractors should carefully document all exhaustive efforts taken to mitigate performance issues, such as attempts to find alternative sources of supply.
Superior Knowledge
The superior knowledge doctrine imposes upon the Government an implied duty to disclose to a contractor otherwise unavailable information affecting the contract and is vital to its performance. Under the doctrine, the Government may be liable for damages where it fails to disclose vital information not reasonably available to the contractor and that nondisclosure causes increased costs or delays to contract performance. To prevail under a claim theory of superior knowledge, a contractor must prove: (1) the Government possessed vital, special knowledge concerning performance impacts on the contact; (2) the contractor undertook performance without vital knowledge of a fact affecting performance; (3) the Government was aware the contractor lacked the information that was not otherwise reasonably available to the contractor; (3) the Government failed to provide the relevant information; and (4) the omission misled the contactor and increased performance costs or time.
It is important to note that the Government has no obligation to volunteer information that can reasonably be obtained elsewhere. This includes information that can reasonably be derived from any government-provided specifications or drawings, information collected during a pre-bid site visit, or information that is publicly available and/or easily obtainable within a particular industry. It is, therefore, imperative that contractors maintain detailed records of internal agency reports, prior contract records (to the extent available), and all available site data. Contractors should further maintain all questions and answers or requests for information and responses exchanged prior to contract award to evidence the contractor’s reasonable understanding regarding its anticipated scope of work when preparing its proposal.
Cardinal Change
The cardinal change doctrine applies where the Government effects changes to a contract so drastic that they require the contractor to perform duties materially different from those originally bargained for. Such a blanket conversion constitutes a breach of contract rather than an exercise of the Government’s Changes clause authority. It is rare for factual circumstances to give rise to a cardinal change, as the doctrine requires a showing of Government-directed changes that are so sweeping or drastic that they alter the essential nature of the bargain. To make a plausible cardinal change claim, a contractor must allege: (1) one or more directives cumulatively or singularly changed the overall nature or purpose of the contract; (2) the change could not have been reasonably contemplated under the contract’s Changes clause; and (3) the contractor suffered material cost or schedule impacts as a direct result of the Government’s transformation of the contract.
A contractor seeking relief under a theory of cardinal change should prepare to show clear and substantial differences between the original scope of work upon which it prepared its proposal and the as-performed scope of work, including differences in quantities, technical requirements, and performance outcomes. As with all material changes, contractors should maintain a chronology and correlated records of all Government directives diverging from the intent of the original contract. Finally, contractors should always take caution in reviewing Government-proposed modifications prior to executing the same, as they may include waiver language intended to preclude a contractor’s rights to additional costs or time otherwise permitted under the applicable Changes clause.
Conclusion
Again, while these claim theories can be essential in ensuring that contractors are made whole when performing under federal contracts, their pleading standards are rigorous and intensely fact-driven. Consequently, a contractor’s success under these claim theories often turns on whether it has maintained a comprehensive, real-time record. Contractors should further be familiar with and abide by all applicable notice requirements, confirm directives and field guidance in writing, isolate and track cost and/or schedule impacts, perform critical path analyses when necessary, and always preserve emails, meeting minutes, submittal records, and other written correspondence to the extent possible. By building a detailed record as performance unfolds, contractors put themselves in the best position to mitigate risk and navigate disputes in a quick and equitable manner.
Visit Parts 1, 2, 3, and 4 in our series and visit this link to view our recent webinar recording to learn more about the Fundamentals of Contract Administration Disputes. Should you have questions regarding REAs, claims, appeals, or any other government contract dispute, please contact Lauren Brier, Jon Neri, Ryan Boonstra, or another member of PilieroMazza’s REAs, Claims, and Appeals or Government Contracts practice groups.
