April 9, 2020 - Coronavirus

Limits on a Contractor’s Ability to Recover for Unforeseen Risks in the Age of COVID-19

FCACommunities across the country and around the world are fighting a war against COVID‑19.  This is also true – maybe even especially true – for government contractors.  Responding to COVID-19 raises wartime contracting issues on the home front and abroad.  As we previously observed in Contracting in the Fog of War, contractors providing goods and services in war-torn corners of the world are exposed to increased performance risks, such as border closures and restrictions on access to military installations.  Responding to COVID-19 raises many of the same types of issues.  Without a crystal ball, no one can know exactly how COVID-19 will impact government contractors, but understanding the law that has developed around war risks allows for some informed predictions about the kinds of delays and incurred costs that are likely to be compensable.  Adding to the case law we covered in our Fog of War article, a recent decision from the Armed Services Board of Contract Appeals (“ASBCA”), Korea Engineering Consultants Corp., ASBCA 61724, further illuminates the limits of a contractor’s ability to recover for unforeseen risks.

Korea Engineering Consultants Corporation (“KECC”) contracted with the 411th Contracting Support Brigade, Korea, for gravel delivery and equipment lease.  The contract required KECC to deliver equipment to the construction site and provided for a 30-day lease.  At the end of the lease, KECC was required to pick up the leased equipment from the construction site.  KECC delivered the equipment, but at the end of the lease, local national Korean protesters blocked KECC from accessing the installation to pick up the equipment.  KECC subsequently brought a claim for breach of contract due to delays caused by the protesters blocking access to the installation.  The ASBCA denied KECC’s claims because the delay and resulting costs were caused by the protesters, not the U.S. Government.  Nothing in the contract assigned the risk of lost access to the installation and the equipment to the Government; therefore, the contractor bore the costs caused by the protesters alone.

Facts

Delivery of the gravel and leased equipment was initially scheduled for August 25, 2017, but the U.S. Government suddenly canceled the scheduled delivery and rescheduled it for a later date.  KECC delivered the required materials to the installation on September 7, 2017.

On October 2, 2017, the government informed KECC that it had finished using the leased equipment, and KECC communicated its intent to pick up the equipment from the installation on October 11, 2017.  However, on October 11, local national Korean protesters prevented KECC from gaining access to the installation.

KECC informed the contracting officer (“CO”) via email that it had incurred additional costs in attempting to retrieve the equipment.  The email also stated that the contracting officer’s representative (“COR”) had acknowledged the problem and promised that the government would be responsible for any additional costs incurred as a result of the failed attempt to pick up the equipment.

The CO, COR, and KECC exchanged several communications regarding a new pick-up date between October 2017 and January 2018.  The parties discussed KECC removing the equipment on December 21, 2017, but then pick up on this date was canceled due to protester activity.  During this time, KECC emailed the CO, requesting additional costs incurred as a result of the sudden cancellation on August 25, 2017, and the failed attempt to retrieve the equipment on October 11, 2017, as well as additional equipment rental fees covering the extended lease period.  On January 16, 2018, the CO informed KECC that the government was not hindering the company’s access to the equipment and that the contractor must retrieve its equipment.  A later email stated that the contract did not require the U.S. Government or the Republic of Korea to provide an escort onto the installation and that it was KECC’s responsibility to retrieve its equipment.

On April 25, 2018, about six months after the end of the original lease period, KECC’s vehicles joined an Army convoy entering the installation, allowing KECC to retrieve its equipment from the site.

KECC submitted a breach of contract claim seeking costs incurred (1) on August 25, 2017, when the government canceled the scheduled delivery, (2) on October 11, 2017, when KECC was unable to retrieve the equipment from the installation, and (3) for an extension of the equipment lease from the end of the lease period until the date it was retrieved from the installation on April 25, 2018.  The CO issued a final decision sustaining KECC’s request for costs incurred on August 25, 2017, but denying KECC’s other claims.

KECC brought a claim for breach of contract, seeking compensation for the extended equipment lease and costs incurred in attempting to retrieve the equipment on October 11, 2017.

Compensation for Extended Equipment Lease

The ASBCA found that KECC offered insufficient legal support for its argument that the government was at fault for KECC’s inability to timely remove the equipment at the end of the lease.  KECC had the burden of proof as the party asserting a claim for breach of contract.  Under the terms of the contract, KECC was responsible for picking up its equipment after the lease expired.  When the lease expired, the government informed KECC that it was finished with the equipment and instructed KECC to pick up the equipment.

The ASBCA found that KECC was unable to retrieve its equipment “not because of government action or inaction, but because local national Korean protesters blocked access to the installation.”  The Board stated, “[i]t is well established that ‘absent fault or negligence or an unqualified warranty on the part of its representatives, the Government is not liable for damages resulting from the action of third parties.’”

The ASBCA noted, “[i]n essence, appellant alleges a constructive change”; however, a constructive change only “occurs when a contractor performs work beyond the contract requirements, without a formal order under the Changes clause, due either to an express or implied informal order from an authorized government official or to government fault.’”

The ASBCA rejected the constructive change theory because KECC’s inability to remove its equipment was not the fault of the U.S. Government, but rather was caused by the protesters.  Furthermore, the contract’s Commercial Items Changes clause, FAR 52.212-4(c), required that changes in the terms and conditions of the contract be made by written agreement of the parties.  Because KECC could not cite a formal order, or an express or implied formal order, from an authorized government official agreeing to extend the lease payments, the constructive change doctrine could not apply.

Costs Incurred on October 11, 2017

Similarly, the ASBCA found that KECC’s alleged costs incurred on October 11, 2017, when it was prevented from accessing the installation to retrieve its equipment, were caused by local national Korean protesters, not the U.S. Government.  While the COR allegedly offered to reimburse appellant for its costs, the COR lacked authority to make such an agreement or commit the government to the payment of funds.  Therefore, even if the constructive change doctrine applied, KECC could not establish entitlement to reimbursement by the government for costs incurred on October 11, 2017, because it could not point to a formal order, or express or implied formal order, from an authorized government official agreeing to reimburse its costs incurred on October 11, 2017.

Takeaway

First, pay careful attention to how risks and obligations are allocated.  In this case, the contractor was responsible for picking up the equipment at the end of the lease and bore the risk of lost access to the installation and the equipment.  The contract contained no warranty of access.  The government did not assume the risk of increased costs resulting from the actions of third parties, such as local national Korean protesters, and the fact that protesters inhibited access to the installation did not create a contractual obligation on the government to deliver the equipment to KECC.  While the contract provided for use of a convoy to bring equipment onto the post, it did not provide for use of a convoy to remove the equipment at the end of the lease period.

Second, know who you are dealing with.  A fundamental rule in government contracts is that only government personnel with the requisite authority are able to legally bind the government to contracts or contract modifications.  One of the underlying issues in this case was KECC’s reliance on the COR’s statement that the government would reimburse it for its costs.  In this case, as is true in most cases, the COR did not have authority to bind the government.  When a government employee directs contractors to change contract performance, the contractor must ascertain whether the government employee is acting within his or her contractual authority.  This point is particularly important in times of crisis, when changes may be made rapidly.

Third, stay attuned to whether the government is acting affirmatively or merely remaining passive.  This case likely would have turned out differently if, for example, KECC had been unable to deliver the equipment to the installation in the first place due to the protests, and yet the government had demanded timely performance or had simply refused to grant an extension.  In that instance, KECC would have been able to assert a valid claim for constructive acceleration.  As it turned out, however, the government could merely sit back and wash its hands of the problem, leaving it up to the contractor to figure out how to recover its equipment.