The “Negligent Negotiations” Theory of Recovery – Is it a Go or No Go at the Boards of Contract Appeal? Part 2

Attention contractors – have you heard about “negligent negotiations”?  A trio of interesting – but arguably contradictory – Board of Contract Appeals decisions addressing this theory of recovery have opened up potential new avenues of relief for contractors…but left a number of unanswered questions.  In this two-part series, we are taking a look at recent case law and exploring what these cases say about a contractor’s right to recover.  

In our last post, we discussed the 2019-2020 Chugach decisions from the Armed Services Board of Contract Appeals (“ASBCA”).  Today, we are tackling a recent Civilian Board of Contract Appeals (“CBCA”) case, Hamstra Chico LLC.  If you are ready, let’s jump back in. 

CBCA – Hamstra Chico LLC

You may remember the Chugach decisions (found here and here) from our last post.  These decisions demonstrate that the ASBCA is willing to hear contractor claims premised on the arguably novel theory of “negligent negotiations.”  So, what exactly is this theory?   It allows a  contractor to recover when it can show that the Government was aware of significant weaknesses or deficiencies in the contractors’ proposal, but failed to address those weaknesses or deficiencies during FAR Part 15 negotiations.  In other words, if you were to incur damages during performance of a contract as a result of a significant weakness or deficiency in your proposal, and the Government had been aware of that weakness/deficiency but failed to address it with you during discussions, you may very well be able to recover those damages by asserting a negligent negotiations claim before ASBCA.  That is great news.  Even so, there are a number of questions left open by the Chugach decisions, not the least of which was how other forums -such as the Court of Federal Claims (“COFC”), Federal Circuit, and Civilian Board of Contract Appeals – might view this novel theory of recovery.  Well, while we might need to wait to hear what COFC or the Federal Circuit think, a recent CBCA case, Hamstra Chico LLC, provides some insight on that Board’s opinion. 

In Hamstra, the United States Department of Veterans Affairs (“the VA” or “the Agency”) issued a solicitation to obtain proposals for the construction and subsequent lease of a building for a fifteen-year term. The solicitation originally provided that “the cost of electricity, gas, and water will be paid directly by the VA” but this was later revised.  Under the revised solicitation, the costs of electricity were to be borne directly by the contractor. The contractor, Hamstra Chico LLC (“HC”), expressly acknowledged receipt of the amendment, accepting all terms and conditions. 

However, it would appear that HC did not entirely understand that it should include ongoing electrical costs in its total proposed contract cost.  As the contractor later explained, its proposal was based on the understanding that the Agency would pay for the overwhelming majority of the electrical utilities associated with the building.  Though, according to HC, the Agency must have realized HC’s error when reviewing the contractor’s proposal, the Agency never brought this pricing error to HC’s attention, despite engaging in four rounds of discussions with HC.  During these discussions, HC asserted, the VA never “brought up its contrary understanding of the terms of the lease,” which HC later argued the Agency was required to do.

After the building was constructed, HC attempted to have the Agency take over the utility costs.  HC filed a claim, arguing that the Agency had engaged in “defective negotiations” when it failed to identify the electricity costs as a deficiency or a significant weakness during the multiple rounds of negotiations with HC.  HC argued that, in failing to inform HC of its pricing error, the Agency violated FAR 15.306(d)(1) and (3).  In making this argument, HC relied on the May 2019 Chugach decision discussed in our last post.

On appeal, the CBCA did not find the reasoning in Chugach applicable to the case before it.  As a threshold matter, the CBCA noted that an ASBCA decision was not binding on CBCA.  It went on to distinguish the Chugach case from the situation facing HC.  In Chugach, the CBCA said, the contractor contended that it won an award with staffing levels that the Agency expressly found, internally, to be inadequate and a “significant weakness”.  The Agency did not inform the contractor of this weakness during discussions.  The contractor asserted that it would have increased staffing had it been informed of the weakness.  Based on all of this, the ASBCA found it had jurisdiction to hear the claim.  Here, in contrast, the CBCA reasoned, jurisdiction was not at issue.  HC sought to reform the contract to correct a mistake it made regarding pricing.  Moreover, unlike in Chugach, where the agency had expressly identified a weakness, but failed to convey that weakness to the contractor, here, there was no proof that the Agency had ever expressly identified – even internally – any problem with HC’s proposal pricing.  The Board explained:

“The contractor faults the [A]gency which, according to the contractor, ‘never brought up its contrary understanding of the terms of the lease as it was required to do.’ With this basic premise, the contractor errs. The contractor never expressed its understanding until after award. The contractor recognizes that the amendment made it clear that the agency would not directly pay for electricity. The contractor priced the contract as it deemed appropriate under the solicitation language.”

In other words, there was no evidence to show that the Agency ever knew that HC had misunderstood the pricing requirements.  The CBCA further reasoned that the parties had presumably reached agreement on a fair and reasonable price for the overall contract, not just a single line item or subcomponent.  Accordingly, the CBCA concluded that it would “not adopt or extend the analysis in Chugach to permit this contractor to pursue further the relief sought.”   

So, what does this mean for the applicability of Chugach, and the “negligent negotiations” doctrine at the CBCA going forward?  To be honest, it is a little unclear.  The CBCA did not reject the applicability of a “negligent negotiations” theory outright – it simply found it inapplicable to HC’s situation.  Certainly, the CBCA appears reluctant to allow contractors to reform contracts to correct proposal pricing mistakes if those mistakes were not expressly identified as a weaknesses or deficiencies by the Government, and where those mistakes may not have even been evident to the Agency reviewing the proposals.  But what about a situation more like Chugach, where the Agency was not only aware of the contractor’s errors, but internally noted them as “significant weaknesses” or deficiencies, yet still failed to alert the contractor to the issues during negotiations?  What if the Agency was aware that something in a contractor’s proposal likely constituted a mistake, but did not specifically determine it to be “significant weaknesses or “deficiency?”  The Hamstra Chico LLC decision leaves these questions unanswered.

It will be interesting to see how the case law regarding negligent negotiation continues to develop at the Boards of Contract Appeals, and it will also be interesting to see – if and when the COFC and Federal Circuit weigh in – how the Courts address the issue.  In the meantime, if you are pursing claims before the CBCA, it would be wise not to put too many eggs in the “negligent negotiations” basket.  It is likely best to rely on the more standard theories of recovery.  If you have questions about how to structure your request for equitable adjustment or claim, or how to litigate before the Boards of Contract Appeals, the Obermayer government contracts team is here to help.


The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.

 

 

About the Authors

Maria L. Panichelli

Partner

Maria is a partner and the Chair of the Government Contracting department.   She focuses her practice exclusively on federal government contracting and procurement, guiding her clients throughout the entire lifecycle of their...

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Michael A. Richard

Associate

Michael is an attorney in Obermayer’s Government Contracting Department, where he excels at getting clients to the settlement table. Michael’s tenacity is truly a force to be reckoned with. Over the past...

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