Who Bears the Risks of War?

DefenseOn the eve of the Vicksburg campaign in October 1862, Abraham Lincoln instructed Ulysses S. Grant, “Follow law, and forms of law, as far as convenient.”  In a war zone, Lincoln seemed to recognize, there may be some uncertainty in the application of the law.  Unfortunately, that uncertainty also seems to apply to contractors’ claims for the increased costs of performance due to war-related risks.  Cases seeking recovery of those costs are, at best, a mixed bag.  In a previous post, we reported on Planate Management Group, LLC v. United States, No. 17-1968C, 2018 U.S. Claims LEXIS 880, at *2 (Fed. Cl. July 27, 2018), and IAP Worldwide Servs., Inc., ASBCA Nos. 59397 et al., 17-1 BCA ¶ 36763 (May 17, 2017).  In the former, the Court of Federal Claims held it had jurisdiction over a contractor’s claim that the costs of arming its personnel when the security situation in Afghanistan deteriorated constituted a cardinal change.  In the latter, the Armed Services Board of Contract Appeals agreed with a contractor’s claim that the government had constructively accelerated performance in the face of excusable delays due to Pakistan’s closure of its borders to military shipments into Afghanistan.  In this post, however, we discuss two recent cases in which contractors have met with less satisfactory results when pursuing costs they incurred as a result of combat zone risks.

First Kuwaiti Trading & Contracting W.L.L., v. Dep’t of State, CBCA 3506, 2018 WL 6423911 (Dec. 3, 2018)

First Kuwaiti Trading & Contracting, W.L.L. (“FKTC”) had a contract with the Department of State (“DoS”) to build a U.S. embassy compound in Baghdad.  The area was an active war zone and saw increasing violence during the period of contract performance.  Ultimately, FKTC submitted approximately 200 claims to DoS to recover the costs it incurred as a result of repeated attacks at the worksite and the heightened security threats in the region.  When DoS denied its claims, FKTC took its case to the Civilian Board of Contract Appeals (“CBCA”).

FKTC’s contract contained a War Risks Clause that stated in relevant part:  “The Government assumes the risk of loss or damage to and/or destruction of, completed or partially completed work performed under this contract, and materials delivered to site, where such loss, damage, and/or destruction occurs by, or as a result of war risks […], and agrees that the Contractor shall not be responsible for such loss, damage and/or destruction.”  First Kuwaiti Trading & Contracting W.L.L., v. Dep’t of State, CBCA 3506, 2018 WL 6423911 (Dec. 3, 2018).  The contract also included security requirements and required the use of watchmen.

DoS moved for summary judgment on thirteen of FKTC’s claims, challenging FKTC’s reliance on the War Risks clause, the superior knowledge doctrine, the Changes clause, and the implied duty of good faith and fair dealing.  DoS also asserted that it should be relieved of any liability because the actions underlying FKTC’s claims were sovereign acts.  The thirteen challenged claims included the following:

  • Duck and Cover Alarms: DoS installed a “duck and cover” alarm system around the compound to warn of impending rocket, mortar, or small arms attacks.  Whenever the alarm sounded, work in the embassy ceased until an “all-clear” signal was given.  The repeated work stoppages caused delays.  This problem was compounded by the fact that the alarm system appears to have been faulty, resulting in numerous “false alarms.”
  • Rocket Attacks: FKTC sought costs attributable to five rocket attacks on the construction site.  DoS challenged FKTC’s entitlement to the costs of lost time attributable to three of the five attacks.
  • Equipment Repositioning: FKTC sought compensation for repositioning equipment, something that DoS personnel agreed was a good practice.  Specifically, FKTC moved construction equipment and supplies to various hiding places so that the material would be safer in case of an attack.  FKTC then retrieved the equipment in the morning.
  • Additional Security Requirements: Under the contract, FKTC was required to provide security for its personnel, equipment, and supplies; however, FKTC was assigned additional security tasks during the contract.
  • Retention Bonuses and Danger Pay: FKTC sought compensation for the retention bonuses and danger pay that it had to pay to recruit and retain its employees due to the increased security threat surrounding the work site.
  • Air Transport: FKTC sought compensation for labor hours included in its air transport claims to transport employees and cargo from Kuwait to Bagdad.
  • Sand and Gravel Handling: Instead of having local vendors bring construction materials to the compound, FKTC picked up materials from another site and transported them to the worksite.  DoS argued that FKTC developed this practice on its own, but FKTC contended that DoS directed FKTC to pick up the materials, rather than have local vendors transport the goods into the compound, to relieve security concerns at the worksite.
  • Truck Convoy Delays and Protection Requirements: FKTC transported construction materials needed for the project from Kuwait to the worksite in Army convoys.  FKTC argued that DoS directed it to travel in Army convoys, but DoS countered that it only facilitated FKTC’s use of the convoys because the contractor had no other safe way to transport materials to the site.  The Army imposed safety requirements on FKTC, including the acquisition of helmets and bullet proof vests for drivers, tow bars for trucks, and convoy vehicle support.
  • Superior Knowledge Claims: Finally, FKTC argued that DoS had superior knowledge about security conditions at the worksite and that the agency knew FKTC had failed to include certain wartime costs in its bid.

War Risks Clause

DoS argued that the War Risks clause did not permit recovery on the thirteen claims outlined above because the clause was limited to claims arising from the “loss or damage to and/or destruction of, completed or partially completed work performed under this contract, and materials delivered to site[.]”  Id.  Therefore, claims for costs such as danger pay to employees or delayed Army convoys were not covered.  DoS also argued that, despite the War Risks clause, FKTC had assumed the risk of working in a combat zone.

FKTC contended that the term “loss” should be read independently from the phrase “completed or partially completed work … and materials delivered to the site” because it was not set off by a comma or modified with the word “of.”  Id.  Therefore, FKTC argued that “loss” was not limited to work or materials and could include other types of losses incurred as a result of war risks.

The Board agreed with DoS and interpreted the clause narrowly to apply only to costs to repair or replace work or materials at the site.  The Board explained that “[i]f the parties had intended DoS to compensate FKTC for all its losses attributable to wartime conditions, that intention would have been clearly stated in the contract rather than implied in the lack of a comma and modifier ‘of’ within the clause.”  Id.  Furthermore, if there were any confusion about what the clause covered, it was a latent ambiguity, and FKTC had a duty to ask the DoS about its interpretation.  The Board stated that the “clause does not encompass all costs that a contractor might incur as the result of performing a contract in a wartime environment” and concluded that the War Risks clause did not provide for recovery on the thirteen challenged claims.  Id.  Therefore, the Board granted the government’s motion for summary judgment regarding the War Risks clause.

Superior Knowledge Doctrine

Second, the Board addressed whether FKTC had provided a sufficient basis for its superior knowledge claim.  FKTC asserted that DoS possessed superior knowledge regarding the deteriorating security conditions at the work site, and FKTC alleged that DoS knew or should have known that FKTC had not accounted for wartime costs in its bid.

A contractor must demonstrate the following four elements to recover under the superior knowledge doctrine: “(1) a contractor undertakes to perform without vital knowledge of a fact that affects performance costs or duration, (2) the government was aware the contractor had no knowledge of and had no reason to obtain such information, (3) any contract specification supplied misled the contractor or did not put it on notice to inquire, and (4) the government failed to provide the relevant information.”  Id.

The Board concluded that FKTC failed to present evidence to support its contention that DoS had superior knowledge regarding security conditions at the work site.  The Board explained that “[e]ven assuming that DoS did possess information about the security situation that FKTC did not have, FKTC has failed to allege what ‘specific and vital’ information DoS learned from the Army about the security situation, a difficult challenge given the wartime environment in which FKTC agreed to perform.”  Id.  Similarly, FKTC did not provide evidence to show that DoS knew or should have known that FKTC had failed to properly account in its bid for the increased costs of performing in a war area.  Therefore, the Board granted DoS’s motion for summary judgment regarding the superior knowledge claim.

Changes Clause

Six of FKTC’s claims sought recovery based on the Changes clause, including claims related to the alarm system, extra security requirements, and sand and gravel handling, as well as three claims relating to the Army convoy requirements.

The Board explained that in order “[t]o demonstrate that the government has constructively changed the terms of a contract, ‘a plaintiff must show (1) that it performed work beyond the contract requirements, and (2) that the additional work was ordered, expressly or impliedly, by the government.’” Id. (quoting Agility Public Warehousing Co. KSCP v. Mattis, 852 F.3d 1370, 1385 (Fed. Cir. 2017)).

The government argued that FKTC could not rely on the Changes clause because it could not establish that the scope of work changed as a result of direction by the DoS, but the Board found that all six claims concerned disputed issues of material fact.  Therefore, the DoS’s motion for summary judgment on these claims was denied.

Sovereign Act Defense

Having concluded that it could not grant the government’s motion for summary judgment challenging FKTC’s claims under the Changes clause, the Board turned to the government’s assertion that it should not be liable for those claims by virtue of the sovereign acts defense.  The sovereign acts doctrine allows the government to dodge liability for contractor’s claims by arguing that the actions underlying the claims are sovereign acts.  The Board explained that “‘the object of the sovereign acts defense is to place the Government as contractor on par with a private contractor in the same circumstances.’”  Id. (quoting United States v. Winstar Corp., 518 U.S. 839, 904 (1996)).  When the sovereign acts defense applies, “‘whatever acts the government may do, be they legislative or executive, so long as they be public and general, cannot be deemed specially to alter, modify, obstruct or violate the particular contracts into which it enters with private persons.’”  Id. (quoting Horowitz v. United States, 267 U.S. 458, 461 (1925)).  However, the defense is not available if the government action is not “public and general” in nature or is targeted at a single contractor or a specific group of contractors.  Here, the Board denied DoS’s motion for summary judgment under the sovereign acts doctrine because DoS failed to demonstrate that “the governmental actions were public and general acts that were merely incidental to the accomplishment of a broader governmental objective.”  Id.

Implied Duty of Good Faith and Fair Dealing

Finally, the Board considered the FKTC’s reliance on the implied duty of good faith and fair dealing to support its claim related to the alarm system.  The Board explained that the duty of good faith and fair dealing is not limited to “avoid[ing] actions that unreasonably cause delay or hindrance to contract performance, but also to do whatever is necessary [within reasonable limitations] to enable the other party to perform.”  Id.  The Board stated that:

if the time lost due to the alarms resulted solely from rocket attacks, and not from DOS’s missteps, the resulting delays could not be used to show a breach of the duty.  […]  But, FKTC has brought forth evidence which indicates that the duck and cover alarm system had failings that may have contributed to its delays in performing the contract.  Given these disputed issues, we deny DOS’s motion for summary judgment on this allegation.

Id.  In sum, the Board denied DoS’s motion for summary judgment regarding the claims based on  the implied duty of good faith and fair dealing because there were disputed issues of fact regarding the reliability of the alarm system causing the delays.

Takeaway

Contractors should look carefully at how contract provisions allocate the risk of additional costs or delays caused by war.  The government may assume some of the risks, but those clauses may be narrowly construed.  Contractors should not assume that they will be compensated for all war-related risks and should seek clarification in advance if the risk-allocation clauses in their contract are ambiguous.

Appeal of ECC International, LLC, ASBCA 60484, 2018 WL 6251069 (Nov. 16, 2018)

This case concerns a contractor’s claims arising out of the government’s closure of a key access route to the contractor’s construction site in Afghanistan.  ECC International (“ECCI”) had a construction contract with the United States Army Corps of Engineers (“USACE”) in Afghanistan.  ECCI had performed previous contracts in the region and had used the Friendship Gate to transport workers and materials.  The contract contained a Security provision providing that “[a] detailed security plan […] shall be approved by the Government before construction notice to proceed.”  Appeal of ECC International, LLC, ASBCA 60484, 2018 WL 6251069 (Nov. 16, 2018).  Before starting performance in 2011, ECCI submitted a Security Plan for the government’s review.  The Security Plan stated ECCI’s intent to use the Friendship Gate for moving workers and materials to the work site.  The government approved ECCI’s plan, and ECCI began performance of the contract, using the Friendship Gate to gain access to the construction site.  But, in December 2012, the U.S. Marine Corps (“USMC”) closed the Friendship Gate to non-military personnel in response to deteriorating security conditions.  As a result, ECCI and its subcontractors had to move workers, concrete, and other materials using longer access routes.

ECCI submitted a request for equitable adjustment (“REA”) to USACE seeking compensation for 28 days of compensable delay for itself and its subcontractors as a result of the closure of the Friendship Gate, at a total cost of $1,652,958.  USACE denied the REA.  ECCI subsequently provided additional documentation in support of its REA, but USACE denied the claim again, explaining that “[t]he closure of [the Friendship Gate] was an act of the USMC/U.S. Government acting in its sovereign capacity.”  Id.  ECCI submitted a certified claim and did not receive a final answer.  ECCI subsequently appealed the deemed denial of its claim and sought summary judgment on its claim for costs arising out of the government’s closure of the Friendship Gate.

There were four related issues before the Board:  (1) whether the contract warranted continued access through the Friendship Gate; (2) whether ECCI’s prior contracts gave rise to an implied warranty of continued access through the Friendship Gate; (3) whether the closure of the Friendship Gate was a constructive change; and (4) whether the sovereign acts doctrine was applicable to the USMC’s closure of the Gate.

The ASBCA held that the contractor bore the risk of changes to base access, the contract did not warrant continued access through the Friendship Gate, the government did not impliedly warrant access through the Friendship Gate (nor did ECCI’s prior contracts in the area create an implied warranty of continued access to the project site through the Friendship Gate), and closure of the Friendship Gate was not a constructive change to the terms of the contract.  The Board did “not reach the government’s affirmative defense that the closure of the Friendship Gate was a sovereign act, because we have concluded that there is no express or implied contractual right of access through the Friendship Gate and that the closure of Friendship Gate was not a constructive change.”  Id.

No Implied Warranty of Continued Access Through Gate

ECCI argued that by requiring ECCI to obtain government approval of its security plan, the government impliedly warranted access through the Friendship Gate.  However, the security plan was not incorporated into the contract.  Furthermore, the contract put ECCI on notice that it was operating in a combat environment and assigned ECCI responsibility for complying with applicable installation access procedures.  Moreover, the contract warned ECCI that access procedures could change at any time.  Therefore, the Board concluded that the government did not create an implied warranty of access through the Friendship Gate

ECCI also claimed that its use of the Friendship Gate in performing prior government contracts in the region gave rise to an implied warranty of continued access through the Gate.  However, the Board found that ECCI failed to establish a prior course of dealing with respect to access through the Gate.

Closure of Friendship Gate Was Not a Constructive Change

ECCI contended that the closure of the Friendship Gate was a constructive change because there was no expectation that its approved security plan would require modification and that the security plan essentially became part of the contract once it was approved by the government.  The government countered that the security plan was not a part of the contract, that the contract put ECCI on notice that access procedures may change in response to changing security threats, and that the language of the contract placed the risk that access procedures may change on ECCI.  The Board concluded that the Gate closure did not change any contractual terms; therefore, the closure of the Gate was not a constructive change to the contract.

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