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June 11, 2020 - Protests & Litigation, Defense, Compliance

Who Bears the Risks of War? Federal Circuit Affirms ASBCA’s Decision That the Contractor Bore the Risk of Changes to Worksite’s Security

Initial Thoughts on the 2021 NDAA’s Procurement Provisions

We have previously written about the challenges contractors face when pursuing costs incurred because of combat zone risks.  These risks, and the resulting costs, can be unpredictable and are not always compensable.  In ECC Int’l Constructors, LLC, ASBCA No. 59138, 19-1 BCA ¶ 37252 (Jan. 24, 2019), for example, the Armed Services Board of Contract Appeals (“Board”) held that the Army was not liable for the inclusion of a construction site within the secure perimeter of an International Security and Assistance Force (“ISAF”) base because the contract’s discussion of security requirements did not amount to a warranty that ISAF would not change the security procedures for the site.  On appeal, the Federal Circuit affirmed.

ECC International Constructors, LLC (“ECC” or “appellant”) contracted with the U.S. Government to construct a compound outside the ISAF military base in Afghanistan.  The ISAF was a third party, not an agency of the U.S. Government.  The contract provided that “[t]he Compound will be sited … on a dedicated area located outside the perimeter fencing of the existing base.”  ECC Int’l Constructors, LLC, ASBCA No. 59138, 19-1 BCA ¶ 37252 (Jan. 24, 2019).  Because the compound would be outside the base security perimeter, the construction site for that compound was not subject to base security procedures.  Instead, the contract required ECC to erect a temporary security fence around the project and to provide physical security for the compound and all materials, supplies, and equipment.

That arrangement eventually changed.  “Initially, appellant performed its work on the compound outside the base security fence, not subject to base security procedures, and provided the security measures that the contract required, including temporary fencing, necessary to secure the compound; however, in 2012, ISAF (1) completed an expansion of the base security fence that encompassed the contract work site; and (2) exercised its authority to establish, monitor, and enforce all of the strict base security procedures at the contract work site.”  Id.

ECC argued that the imposition of base security procedures amounted to a constructive change to the contract.  ECC filed a motion for summary judgment arguing that ISAF’s actions breached an express warranty that (1) the contract work would take place outside the base perimeter; (2) ECC would control security and access to the contract work site; and (3) ECC would control when the work site would be “tied-in” to the base and thus become subject to base security procedures.  ECC contended that ISAF’s extension of base security procedures to the work site, in violation of these warranties, constituted a constructive change to the contract.  The government cross-moved for summary judgment, arguing that ECC was not entitled to compensation for ISAF’s security procedures.

The key question in the case became “whether, when a third party controlling a military base interfered with access to a compound that the government contracted appellant to build outside the base, an express contract warranty was breached, entitling appellant to recover for a constructive change to the contract.”  Id.

In answer to that question, the Board stated, “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.” Id. (citing Oman-Fischbach International (JV) v. Pirie, 276 F.3d 1380, 1385 (Fed. Cir. 2002)).  “Unless the parties in unmistakable terms agreed to shift the risk of increased costs due to acts by the ISAF, no liability on the part of the government attaches from such acts.”  Id.  Because the parties did not agree in unmistakable terms that the Government would assume the risk of increased costs resulting from acts of ISAF that affected access to the work site, the Board concluded that there was no breach of a contract warranty and no constructive change to the contract.  Therefore, appellant was not entitled to compensation for costs and delays incurred because of ISAF’s base security procedures at the contract work site.  The Board granted the Government’s request for partial summary judgment that “[t]he change to the security posture of the … Compound was not a constructive change to the Contract for which [appellant] is entitled to Compensation.”  Id.

On appeal, the Federal Circuit affirmed the Board’s conclusion that the change in security posture was not a constructive change.  ECC Int’l Constructors, LLC v. Sec’y of the Army, 817 F. App’x 952 (Fed. Cir. 2020).  The Federal Circuit reasoned that ISAF is a third party, and the expansion of the ISAF military base in Afghanistan was the act of that third party, not the U.S. Government.  “[T]he government is not liable under contract for increased costs caused by acts of a third party absent the breach of an unqualified warranty that would amount to a constructive change in the agreed terms.”  Id. at 953.

The Federal Circuit agreed with the ASBCA that there was no meaningful distinction between this case and Oman-Fischbach.  As the Federal Circuit explained, “[i]n Oman‑ Fischbach, the mere fact that the contract depicted several routes to a disposal site on a map did not explicitly assure the contractor of access to any particular route.”  Id. at 954.  Similarly, in ECC’s case, there were no contract provisions warranting that ISAF would not change the security procedures that would apply to the worksite.  “ECC’s contractual responsibility to enforce security procedures on the work site did not unmistakably give it the right to determine the particular security procedures applicable thereto or the timing of when the work site might be brought within the Base perimeter fence and subject to heightened security procedures.”  Id.  The Federal Circuit thus affirmed the ASBCA’s decision that ECC bore the risk of changes to base access, because the changes in security procedures were not a constructive change entitling ECC to compensation.

The Federal Circuit also agreed with the Board that various contemporaneous communications cited by ECC were insufficient to establish that the contract contained an unmistakable warranty.  Id. at 954-55.  As the Court explained, the contract itself was clear on its face, making it unnecessary and inappropriate to resort to parole evidence.  Id.  In addition, the Court pointed out that parole evidence is generally limited to communications occurring before a dispute arises, while the communications cited by ECC in this case came after the security situation had changed.  Id.[1] Perhaps most importantly, the Court also observed that the communications were not as clear as ECC contended.  Id.  ECC’s unsuccessful attempt to rely on parole evidence drives home the importance of focusing on what the contract itself says.

While the results in cases stemming from war zone risks can run the gamut, the Federal Circuit’s affirmation in this case confirms the one point that is clear from all of those cases: contractors should look closely at how contract provisions allocate the risk of additional costs or delays that may arise in a combat environment and should think carefully about how to respond when security, access, or other types of changes occur.

[1] The general preference for pre-dispute evidence seems designed to prevent a party from citing its own posturing as support for its position.  In this case, however, the Board and the Court disregarded post-dispute communications by the Government that arguably were contrary to the Government’s litigation position.  It is not clear whether the preference for pre-dispute communications should bar this type of evidence, which is in essence an admission against interest.