In a recent case involving dewatering for the Army Corps of Engineers – Hanover Insurance Co. v. U.S. (U. S. Court of Federal Claims, May 27, 2014) – a federal court denied a contractor and surety’s claims for $24 million relating to a termination for default and the Contract Disputes Act.
The Contract Disputes Act of 1978 (CDA) was enacted to ensure standardized procedures for litigating contract disputes against the federal government. Under the CDA, the process starts by submitting a claim to the Contracting Officer (CO), who issues a “final decision.” The final decision is a decision on the merits. To challenge a final decision, a contractor can appeal to the Board of Contract Appeals or the United States Court of Federal Claims. However, before bringing an appeal, a contractor must first obtain a final decision.
In Hanover, on Aug. 24, 2010, Lodge entered into a contract with the Corps to design and implement a dewatering plan, as part of a Florida Everglades upgrade project. Hanover Insurance provided payment and performance bonds to Lodge. Lodge’s dewatering plan included relocating surface water from the construction area to onsite retention areas, where it was supposed to dissipate through percolation or evaporation. In addition, Lodge planned on constructing a temporary cofferdam using metal sheet piling. In developing its dewatering plan, Lodge relied on geotechnical information included in the solicitation from the Corps.
On Nov. 29, 2010, Lodge submitted its dewatering plan and the Corps approved it. Several months later, Lodge submitted its design for the sheet pile cofferdam. On July 1, 2011, the Corps approved the design. In July 2011, Lodge began implementing its plan. However, it soon became apparent that water was not dissipating fast enough to allow Lodge’s work to be completed within the contract time of 720 days. On June 26, 2012, Lodge submitted a certified claim to the CO seeking $3,282,123.02 for additional dewatering and a time extension of 91 days.
In the meantime and during construction of the cofferdam, breaches occurred in two areas. Two weeks later, on March 29, 2012, the Corps retroactively disapproved Lodge’s design for the cofferdam. On June 11, 2012, the Corps issued a notice to cure. On June 21, 2012, Lodge responded to the cure notice and submitted another certified claim, seeking an additional $679,279.58 and 63 days related to the Corps’ retroactive disapproval of its design.
On June 29, 2012, the Corps issued a show cause notice to Lodge. On July 6, 2012, three days before it responded to that notice, Lodge submitted a third certified claim, seeking $1,805,760.33 and an undetermined number of days for removing and reinstalling the cofferdam in the area of the breaches.
The Corps found Lodge’s response unsatisfactory. On July 23, 2012, the Corps terminated Lodge for default, asserting that Lodge did not diligently pursue the work to ensure timely completion, and failed to submit an acceptable cofferdam design.
On that same day, the Corps made a demand on Hanover under the performance bond to either complete the work, or tender a new contractor to complete the work. While negotiating the completion of the work with Hanover, the CO denied Lodge’s claims.
Hanover tendered a new contractor. On Dec. 31, 2012, Hanover and the Corps executed a Tender and Release Agreement. Under the agreement, Hanover agreed to pay $23,995,183.86 to the Corps, which was the difference between the amount to be paid to the new contractor ($47,778,910.00) and the unpaid balance of the contract with Lodge ($23,783,726.14).
In return, the Corps agreed to release Hanover from claims under the performance bond. The parties also agreed that Hanover retained all its rights under the bonds, that Hanover did not waive Lodge’s right to challenge the default termination or pursue other claims, and that Hanover reserved the right to pursue Lodge’s claims. The CO executed the agreement.
On July 22, 2013, Hanover and Lodge filed separate lawsuits against the Corps in the Court of Federal Claims. They both argued the Corps’ termination for default was wrongful, and as a result, they should be entitled to the $23,995,183.86 owed to the Corps under the Tender and Release Agreement. The two lawsuits were consolidated.
The Government moved to dismiss the consolidated lawsuit, arguing the court lacked jurisdiction because Hanover’s and Lodge’s claims for $24 million, based on an alleged improper termination for default, were never submitted to the CO and were not the subject of a final decision. Hanover and Lodge responded that the court had proper jurisdiction because their claims were effectively part of the CO’s termination for default and execution of the Tender and Release Agreement.
They further argued it would have been futile to submit a claim for money damages to the CO based on an alleged improper termination because there was little (to no) chance the decision would be reversed.
The court disagreed with Hanover and Lodge. The court found the CDA requires contractors to submit claims to the CO and obtain a final decision before proceeding to court. In fact, the failure to obtain a final decision – regardless of how futile it might appear – results in the court’s lack of jurisdiction to even hear a contractor’s appeal. As a result, the court dismissed the consolidated lawsuit based on lack of jurisdiction.
The Hanover matter emphasizes the importance of making a claim for any and all relief being sought to the Contracting Officer. A final decision by the Contracting Officer is a prerequisite to appealing to the next level. Without a final decision, a contractor (and its surety) can be foreclosed from pursuing any claimed damages.
In Hanover, the contractor’s failure to obtain a final decision relating to the termination for default resulted in the court’s dismissal of its claim for $24 million.
Attorney Brian Morrow is a partner in Newmeyer & Dillion LLP and a licensed civil engineer specializing in construction law, including road and heavy email@example.com