Principles of Contract Interpretation

Contract interpretation begins with the plain language of the contract. Gould, Inc. v. United States, 935 F.2d 1271, 1274 (Fed. Cir. 1991); accord Hol-Gar Mfg. Corp. v. United States, 169 Ct. Cl. 384, 390 (1965). A court should first employ a “plain meaning” analysis in any contract dispute. Aleman Food Services, Inc. v. United States, 994 F.2d 819, 822 (Fed. Cir. 1993).

The intention of the parties to a contract controls its interpretation. Firestone Tire & Rubber Co. v. United States, 444 F.2d 547, 551 (Ct. Cl. 1971). In construing the terms of a contract, however, the parties’ intent must be gathered from the instrument as a whole in an attempt to glean the meaning of terms within the contract’s intended context. Kenneth Reed Constr. Corp. v. United States, 475 F.2d 583, 586 (Ct. Cl. 1973); Tilley Constructors v. United States, 15 Cl. Ct. 559, 562 (1988). Contract interpretation requires examination first of the four corners of the written instrument to determine the intent of the parties. Hol-Gar Mfg. Corp. v. United States, 351 F.2d 972 (Ct. Cl. 1965). An interpretation will be rejected if it leaves portions of the contract language useless, inexplicable, inoperative, meaningless, or superfluous. Ball State Univ. v. United States, 488 F.2d 1014 (Ct. Cl. 1973); Blake Constr. Co. Inc. v. United States, 987 F.2d 743, 746-47 (Fed. Cir. 1993).

Ambiguities

A contract term is ambiguous “[i]f more than one meaning is reasonably consistent with the contract language.” Grumman Data Sys. Corp. v. Dalton, 88 F.3d 990, 997 (Fed. Cir. 1996). Ambiguity may be either patent or latent.

A patent ambiguity is “glaring”; it is so obvious from the face of the contract that it would place a reasonable contractor on notice of a discrepancy. Metric Constructors, Inc. v. NASA, 169 F.3d 747, 751 (Fed. Cir. 1999). Patent ambiguities raise an exception to the general rule of contra proferentem, which courts use to construe ambiguities against the drafter: a contractor is under a duty to attempt to resolve a patent ambiguity prior to bidding if the contractor subsequently wishes to rely upon the provision. See e.g., id., Blue & Gold Fleet, L.P. v. United States, 492 F.3d 1308, 1313 (Fed. Cir. 2007).

A latent ambiguity, by contrast, exists where a contract is reasonably, but not obviously, susceptible of more than one interpretation. In the case of a latent ambiguity, the rule of contra proferentem applies to construe the ambiguity against the drafter if the nondrafter’s interpretation is reasonable, and the nondrafter relied upon that interpretation. See Turner Const. Co., Inc. v. United States, 367 F.3d 1319, 1321 (Fed. Cir. 2004); Metric Constructors, 169 F.3d at 751. The reasonableness of an interpretation is determined by ordinary principles of contract construction.

Liquidated Damages Provisions

The parties to a contract may specify in the contract itself the amount of damages to be paid in the event of a breach; these contractually defined damages are known as “liquidated damages.” See generally Restatement (Second) of Contracts § 356. Contractual provisions specifying such damages are enforced if “they are fair and reasonable attempts to fix just compensation for anticipated loss caused by breach of contract.” Priebe & Sons v. United States, 332 U.S. 407, 412 (1947). A liquidated damages clause is particularly appropriate “[w]hen damages are uncertain or difficult to measure,” and the clause will be enforced in such a scenario “as long as ‘the amount stipulated for is not so extravagant, or disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or as to imply fraud, mistake, circumvention, or oppression.'” DF Mfg. Corp. v. United States, 86 F.3d 1130, 1134 (Fed. Cir. 1996) (quoting Wise v. United States, 249 U.S. 361, 365 (1919)).

The challenging party bears the “exacting” burden of demonstrating the unenforceability of a liquidated damages clause. DF Mfg. Corp., 86 F.3d at 1134. Liquidated damages may be recovered even if actual damages are not proved. United States v. Bethlehem Steel Co., supra. Where actual damages are proved, the fact that they may be less, or more, than the amount specified in the liquidated damages clause is insufficient, standing alone, to prove the clause unenforceable. See Printing & Publishing Ass’n v. Moore, 183 U.S. 642 (1902).

Claims Of Mistakes In Bids

If the government knew or should have known of a mistake in a contractor’s bid, and failed to request adequate verification of the bid price before award, the bidder may obtain reformation or rescission of the contract. See Geisler v. United States, 232 F.3d 864, 869 (Fed. Cir. 2000) (citing United States v. Hamilton Enterprises, Inc., 711 F.2d 1038 (Fed. Cir. 1983) and Ruggiero v. United States, 420 F.2d 709 (Ct. Cl. 1970)). A contracting officer who reasonably suspects or should suspect that a mistake has been made must request the bidder to verify the bid, and must inform the bidder of why the request for the verification is being made. See 48 C.F.R. § 14.407-1; Hamilton Enterprises, 711 F.2d at 1045-46 (citing “landmark case” of United States v. Metro Novelty Manufacturing Co., 125 F. Supp. 713 (S.D.N.Y. 1954)). Except where the government has breached its duty to examine the bid for mistakes, the bidder must show that its bid error resulted from a “clear cut clerical or arithmetical error or a misreading of the specifications.” Geisler, 232 F.3d at 869 (citations omitted).

Quasi-Contractual Claims

The United States itself generally is immune from so-called “quasi-contract” claims. Quasi-contracts, also known as contracts “implied in law,” “impose duties that are deemed to arise by operation of law, in order to prevent an injustice.” Lumbermens Mut. Cas. Co. v. United States, 654 F.3d 1305, 1316 (Fed. Cir. 2011) (citing Hercules Inc. v. United States, 516 U.S. 417, 423 (1996) (additional citations omitted)). They can be contrasted with implied in fact contracts, which “are ‘founded upon a meeting of the minds, which, although not embodied in an express contract, is inferred, as a fact, from conduct of the parties.'” Id. (citations omitted). The government’s waiver of sovereign immunity extends only to implied in fact contracts and does not permit claims upon contracts implied in law. Id.; 28 U.S.C. § 1491(a)(1) (Tucker Act waives sovereign immunity only as to claims based “upon any express or implied contract with the United States”); see also id. § 1346(a)(2).

However, the government can proceed against a defendant to recover monies illegally or improperly disbursed, including those disbursed on an erroneous understanding of facts, in a quasi-contractual suit for unjust enrichment. See, e.g., Mt. Sinai Hospital of Greater Miami v. Weinberger, 517 F.2d 329 (5th Cir. 1975); J.W. Bateson Co., Inc. v. United States, 308 F.2d 510, 514-515 (5th Cir. 1962); Kingman Water Co. v. United States, 253 F.2d 588 (9th Cir. 1958); United States v. Independent School District No. 1 of Okmulgee, OK, 209 F.2d 578 (10th Cir. 1954); United States v. Bentley, 107 F.2d 382 (2d Cir. 1939). Similarly, the United States may recover the value of government services provided under a mistake as to the recipient’s eligibility for such services. United States v. Shanks, 384 F.2d 721 (10th Cir. 1967).

No statutory authority is necessary to sustain a suit for public monies which have been erroneously, wrongfully, or illegally disbursed. Fansteel Metallurgical Corp. v. United States, 145 Ct. Cl. 496, 500 (Ct. Cl. 1959); see also United States v. Wurts, 303 U.S. 414, 415 (1938) (“The Government by appropriate action can recover funds which its agents have wrongfully, erroneously, or illegally paid.”); Johnson v. All-State Const., Inc., 329 F.3d 848, 852-53 (Fed. Cir. 2003) (the United States Court of Appeals for the Federal Circuit and its predecessor court “have repeatedly recognized the government’s right of set-off,” which “can be defeated only by explicit language”); Great Am. Ins. Co. v. United States, 492 F.2d 821, 826 (Ct. Cl. 1974) (“The Government’s right to recover funds, from a person who received them by mistake and without right, is not barred unless Congress has ‘clearly manifested its intention’ to raise a statutory barrier” (quoting Wurts, 303 U.S. at 416)). The Government may recover erroneous overpayments through setoff without recourse to the procedures of the Contract Disputes Act. See Applied Cos. v. United States, 144 F.3d 1470, 1478 (Fed. Cir. 1998).

Under certain circumstances, a specified federal official may choose to waive the government’s entitlement to recoup improper payments of: (1) government civilian pay, (2) pay and allowances for member and former members of the uniformed services, and (3) pay and allowances of members and former members of the National Guard under 5 U.S.C. § 5584, 10 U.S.C. § 2774, and 32 U.S.C. § 716, respectively, as interpreted in 4 C.F.R. § 91.1 et seq. Such statutes provide only for discretionary administrative relief and do not impose any legal limitation upon the right of the United States to seek recoupment. See United States v. Kelley, 192 F. Supp. 511, 513 (D. Mass. 1961).

Warranties

  1. Express Warranties

Government contracts frequently contain express warranty clauses. The warranty clause, by its terms, provides the exclusive remedies for nonlatent defects or those not involving fraud or such gross mistakes as amount to fraud, by requiring the contractor to repair or replace the defective article or part, or, if the article or part was retained, by requiring the contractor to pay an amount which is equitable under the circumstances. See United States v. Franklin Steel Products, Inc., 482 F.2d 400, 404 (9th Cir. 1973), cert. denied, 415 U.S. 918 (1974). A frequent defense asserted by contractors in such cases is that the government’s right of inspection before acceptance, under another clause included in such contracts, see 48 C.F.R. § 52.246-2 et seq., relieved the contractors of liability since the government should have inspected, or it negligently inspected, the product or part. However, the inspection clause was added to give the government further protection, not less. United States v. Aerodex, Inc., 469 F.2d 1003 (5th Cir. 1972); United States v. Franklin Steel Products, supra. Assuming, arguendo, that the government had a duty to inspect, the warranty clause specifically provides that inspection and subsequent acceptance are not conclusive as to “latent defects, fraud, or such gross mistakes as to amount to fraud.” Thus, latent defects, not discoverable by visual inspection or the tests specified in the contract, would be the basis for relief in any event. See United States v. Franklin Steel Products, supra at 403.

  1. Implied Warranties
  2. Affirmative Actions Based on Implied Warranties.

Unless specifically forbidden from doing so by regulation or by the contract in question, the government may claim the benefits of implied warranties found in the Uniform Commercial Code (UCC). Although federal law applies to determine the rights and liabilities of parties to a government contract, the Uniform Commercial Code may serve as a guide for federal law in this area, at least to the extent that the question is not governed by the contract or by federal regulations. See United States v. Hext, supra; Everett Plywood & Door Corp. v. United States, 419 F.2d 425 (Ct. Cl. 1969); United States v. Wegematic Corp., 360 F.2d 674 (2d Cir. 1966). The implied warranty of merchantability is found at section 2-314 of the UCC. The implied warranty of fitness for a particular purpose is found at section 2-315. In a proper case, the government may also recover incidental and consequential damages, pursuant to section 2-715 of the UCC. It should be noted that the implied warranties found in sections 2-314 and 2-315 will not apply if, prior to entering into the contract, there was an examination of inspection of the goods by the buyer, unless the defects could not have been reasonably discovered at the time of the examination. U.C.C. § 2-316.

  1. Defenses to Allegations of Implied Warranties

A contractor may not defend or recover on an implied warranty theory where the government expressly disclaims such warranties. Webco Lumber, Inc. v. United States, 677 F.2d 860 (Ct. Cl. 1982). This issue arises most often in contracts which contain an estimate of quantities. Where such estimates are clearly defined as estimates only and any implied warranty is expressly disclaimed, the disclaimer will be given effect. Id.; Caffall Brothers Forest Products, Inc. v. United States, 678 F.2d 1071 (Ct. Cl.), cert. denied, 459 U.S. 908 (1982). To prevail on a claim of breach of warranty, the plaintiff must establish that:

  1. The government assured the plaintiff of the existence of a fact;
  2. The government intended that the plaintiff be relieved of the duty to ascertain the existence of the fact for itself; and
  3. The government’s assurance of that fact proved untrue. See Kolar, Inc. v. United States, 650 F.2d 256 (Ct. Cl. 1981). All implied warranty claims should be viewed in light of the accepted proposition that the government does not normally guarantee the success of a contractor’s operation. Id. For a warranty to exist, there must be either an affirmation of fact or a promise which relates to performance under the contract. American Ship Building Co. v. United States, 654 F.2d 75 (Ct. Cl. 1981). A requirement in a government contract that performance be completed within a specified time is not a guarantee that performance can, in fact, be completed within that time. Id.

 

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