Federal Contractors Need a New Leading Case on Releases

Let's talk about releases and, in particular, the leading Federal Circuit case regarding releases that involve delay and cumulative impact.

Bell BCI v. United States, 570 F.3d 1337 (Fed. Cir. 2009), involved the construction of a new, five-story building on the National Institutes of Health ("NIH") campus in Bethesda, Maryland. Construction began on April 1, 1998, and proceeded on schedule until December 1998, at which time the Government realized it had a budget surplus and decided to add a new floor. To govern the changes, the parties entered into "Mod 93" in October 2000. It stated that the modification will:

increase the contract amount by $2,296,963 ... as full and equitable adjustment for the remaining direct and indirect costs of the Floor 4 Fit-out (EWO 240–R1) and full and equitable adjustment for all delays resulting from any and all Government changes transmitted to the Contractor on or before August 31, 2000.

Paragraph 8 of Mod 93 read:

The modification agreed to herein is a fair and equitable adjustment for the Contractor's direct and indirect costs. This modification provides full compensation for the changed work, including both Contract cost and Contract time. The Contractor hereby releases the Government from any and all liability under the Contract for further equitable adjustment attributable to the Modification.

After the parties adopted Mod 93, the Contracting Officer's Technical Representative ("COTR") informed NIH personnel that NIH should refrain from making additional changes to the project. Nevertheless, NIH issued 113 additional modifications, which incorporated 2016 extra work orders that were never incorporated into any modifications. Perhaps not surprisingly, Bell missed 13 of 14 milestone dates. Shortly after Bell completed construction, Bell submitted a Request for Equitable Adjustment ("REA"). The Contracting Officer ("CO") denied the REA and asserted claims against Bell for liquidated damages, credits due the Government, the costs of retests, and estimated costs for "outstanding major deficiencies."

Bell filed suit in the Court of Federal Claims. After a trial, the court found in favor of Bell, awarding approximately $6.2 million. This sum included approximately $2 million in labor inefficiency attributable to cumulative impact of the changes; $1.6 million for delays of remaining on the project; profit on delay and labor inefficiency costs; unpaid contract balance; and $1.6 million for unresolved changes that were never incorporated into any modification. The court also rejected NIH's claim for liquidated damages.

The Government appealed, which resulted in the Federal Circuit decision that undoubtedly made its way into countless compliance training sessions as the proverbial "scary story" regarding what can happen if one signs a general release. The Federal Circuit did not question that Bell suffered cumulative impact – but that was not the issue. Instead, the Federal Circuit framed the issue as whether Bell released the Government from liability.

Federal Circuit's Decision

After reviewing the factors regarding accord and satisfaction and rules regarding contract interpretation, the Federal Circuit held that the language of paragraph 8 was "unambiguous," and the Court of Federal Claims "clearly erred in holding that Bell did not release its cumulative impact claims attributable to that modification." Based on the modification's "absence of ambiguity" regarding its plain meaning and intent, the Federal Circuit then declined to examine any extrinsic evidence – and essentially and summarily concluded its review.

Judge Pauline Newman wrote a spirited dissent criticizing the majority that captured the frustration of every contractor faced with an onslaught of changes from a Government client – contractors who must balance the desire to provide service to their Government clients while also remaining financially secure: "This case is a compelling illustration of why appellate tribunals should give due weight to the attributes and benefits of the processes of trial, for such processes enable the trial judge to dig deeply into the events, to figure out what was intended, and to reach a just result." Judge Newman pointed out that her colleagues responsible for the majority opinion had "ignored the trial court's unchallenged findings of contractual intent and mutual understanding as modifications were agreed," and then "made their own findings" to conclude that Mod 93 released the Government from liability for Bell's delay claims.

Among this evidence, seven days after Mod 93 was executed, the Government's project officer and Construction Quality Management ("CQM") wrote to NIH's architectural design contractor that Mod 93 "does not incorporate changes after August 31, 2000, and it is therefore incumbent on the Government's team to minimize change." Additional evidence showed that requests for restraint regarding changes were ignored throughout the project. A "lessons learned" document indicated that Mod 93 was intended to end the period of work changes, and yet, after construction was underway, "there were 279 extra work orders and 113 contract modifications issued after August 30, 2000, while NIH project personnel were maintaining that no further changes would be issued." Bell's primary witness testified that release from possible claim from cumulative impact "was never known or even considered at the time of contracting or entering into Mod 93." He said Mod 93 "says just what it says: Attributed to the impact of the change orders in that modification, which would be the direct cost of the work, the cost of materials, subcontract cost, cost of G&A." The Government offered no opposing evidence, and did not even call the Contracting Officer as a witness.

Punctuating her dissent, Judge Newman stated:

Bell testified that the cumulative impact and inefficiency problems did not arise right away, but burgeoned as changes continued to be required. Contractual intent is viewed in the situation that existed at the time of contracting. The trial court did not err in holding that the release terms in Mod 93 did not bar compensation for future events, for it is not disputed that Bell was told that no more than 4-6 Extra Work Orders should be expected, and that the 279 Extra Work Orders caused cumulative disruption, delay, and inefficiencies. The principles that underlie government contracting preclude the government from taking unfair advantage of changed circumstances during performance.

I find the decision to be decidedly unfair. In retrospect, the decision imposed upon Bell a legal doctrine without regard for the foundational purpose that the doctrine was intended to serve. Here, that doctrine was the "parol evidence" rule, which basically states that, if the disputed language in a contract is clear and unambiguous, then the Court should not, and cannot, look to other, "inferior" evidence to ascertain the language's meaning. It operates to exclude relevant evidence on the ground that if considered, it would obscure and complicate the parties' intent. Thus, once the majority decided that the language of Mod 93 was clear and unambiguous, its inquiry ended, and the majority excused itself from considering what was in this case meaningful and relevant evidence, either before or after Mod 93's execution. This included evidence establishing that the parties, including the Government, understood that Bell did not intend Mod 93 to release its cumulative impact claims.

Takeaways

Bell BCI was decided in 2009 and is still the law. It has been cited in 21 court cases and 59 administrative decisions. It was most recently cited in a Civilian Board of Contract Appeals ("CBCA") decision less than two weeks ago, for the proposition that "[b]ecause a release is contractual in nature, it is interpreted in the same manner as any other contract term or provision." Honeywell International Inc. v. General Services Administration, CBA 7465, 2024 WL 1953705. As long as it remains one, if not the controlling, Federal Circuit case on releases regarding delay and cumulative impact, contractors should remain attentive and vigilant regarding any release language that appears in a draft bilateral modification, regardless of whether it is presented by the Government as "standard" or "just boilerplate" or "mutual" or otherwise harmless.

At the same time, courts and boards and, in particular, the Federal Circuit should welcome the opportunity to right the wrongs of Bell BCI and clarify and narrow its application and influence. Contractors, as well as the Government, need a new leading case on releases. I suspect if one were to poll 100 Government contract attorneys – DOJ attorneys, Agency counsel, and attorneys who represent contractors – regarding the facts and outcome of Bell BCI, a healthy majority would side with Judge Newman, and also conclude that paragraph 8 of Mod 93 was not so clear and so unambiguous that the Court was correct to ignore evidence of the parties' intent that squarely contradicted the Court's interpretation of that language. Related to all of this is the practical fallout of Bell BCI, which includes at least two negative consequences for the Government. First, contractors must factor into their proposal pricing the inherent but very real risk that courts will strictly and perhaps unfairly apply Bell BCI, which means that the Government will continue to pay more than might otherwise be the case. Second, the time, cost, and effort necessary to negotiate and litigate modifications that contain any release has undoubtedly, needlessly, and steadily increased since Bell BCI became the law.

Please contact DWT's government contracts team with questions or comments.