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This memorandum addresses relatively recent cases dealing with Federal government subcontractors in the following areas: non-solicitation clauses in subcontracts; the calculation of compensation for additional costs resulting from post-award design changes; prime contractors as necessary party to suits against the government; tortuous interference with business relationships; and additional compensation for costs resulting from an ambiguous solicitation.  It also includes information on proposed SBA rule changes to incentivize and improve compliance with small subcontracting plans.

I. Recent Cases

A. Non-Solicitation Clauses

  • 1.) Planned Systems International, Inc. v. Federal Technology Corporation - Non- Solicitation Clause did not bar Subcontractor from Competing against Contractor for other Contracts (4th Cir. 2003).
A court's task when interpreting a contract is to determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated. If the language of the contract is plain and unambiguous there is no room for construction and a court must presume that the parties meant what they expressed in the contract.

In Planned Systems International, Inc. v. Federal Technology Corporation, the Department of the Interior had solicited bids for a contract to provide security management and technical support services for certain military health services programs. Planned Systems International, Inc. ("PSI") bid on and was awarded the contract to provide services. PSI entered into a subcontract with Federal Technology Corporation ("FedTec") that required FedTec to deliver a portion of the services required under the prime contract (the "Subcontract"). The Subcontract between PSI and FedTec contained the following clauses:

  • 27 Conflict of Interest
  • 27.1 During the term of this subcontract the Subcontractor shall not directly or indirectly engage in soliciting the sale to or performance of services being delivered under this agreement to the Customer. This does not preclude the Subcontractor from pursuing interests outside the scope of this subcontract statement of work and the prime contract statement of work.
  • 27.2 During the term of this subcontract, the Subcontractor shall refrain from all activities that would jeopardize and/or be detrimental to PSI's ongoing or future activities under the contract for which this Subcontract is issued.
During the term of the Subcontract the Army solicited bids for a contract to perform security management and technical support services for certain military health system programs. PSI and FedTec both submitted a bid in response to the Army's solicitation. The Army awarded the contract to FedTec. PSI subsequently filed suit against FedTec alleging that Clause 27 of the Subcontract prohibited FedTec from soliciting for and competing with PSI for the Army contract. FedTec filed a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief could be granted. The District Court granted FedTec's motion to dismiss because it found that the language of Clause 27 was clear and unambiguous and restricted in its effect solely to the scope of the subcontract. PSI appealed.

The Fourth Circuit found that FedTec agreed with PSI that during the period that the prime contract and subcontract were in effect, FedTec would not solicit "the Customer" in relation to the services to be sold or performed under the agreement during the same time period. The unambiguous language in both Clause 27.1 and 27.2 permitted FedTec to solicit the "sale [or] performance" of services under another contract during a separate and distinct time period. Therefore, the Fourth Circuit affirmed the District Court's decision.

B. Calculation of Compensation Caused by Design Changes

  • 1. PDM Strocal, Inc. v. Fireman's Fund Insurance Company - General Provisions of Subcontract were Properly Used in Determining Subcontractor's Rate of Pay for Non-Owner Initiated Changes (U.S. Court of Appeals 2003).
A basic tenet of contract interpretation is that every word must be given effect if at all possible. In addition, contract provisions should be harmonized whenever possible and construed to reach a reasonable solution.

In PDM Strocal, Inc. v. Fireman's Fund Insurance Company, J.A. Jones Construction Company ("Jones") was the general contractor on the Federal courthouse construction project in Las Vegas, Nevada. Jones and PDM Strocal, Inc. ("Strocal") entered into a subcontract that required Strocal to perform a portion of the work required under the prime contract. Strocal brought suit against Jones seeking compensation for additional material and work arising from numerous design changes that took place after the Notice to Proceed. The District Court found in favor of Strocal and awarded Strocal $1.3 million.

On appeal, Jones argued that because paragraph 8, subparagraph 2 of Schedule F of the subcontract specified that it is applicable when determining the cost of changes which are not "owner initiated," that is the only clause that applies to non-owner initiated changes. The court found that although the paragraph applied only to non-owner initiated changes, it was not clear that this clause was the only clause applicable to such changes. The court found that paragraph 8, subparagraph 2 of Schedule F could be read harmoniously with other paragraphs of the contract. Therefore, the district court properly applied other paragraphs of the contract when calculating the total cost of the changes that were not "owner initiated."

C. Prime Contractor Not Necessary Party to Suit

  • 1. J.G.B. Enterprises, Inc. v. United States - Failure to Join Prime Contract did not Prevent Court from According Complete Relief (U.S. Court of Federal Claims (2003).
J.G.B. Enterprises, Inc. ("JGB") was a subcontractor under two government contracts awarded to Capital City Pipes, Inc. ("Capital City"). JGB brought suit against the United States alleging that Capital City failed to pay JGB for goods it furnished pursuant to the subcontract. JGB alleged that it was a third-party beneficiary of the prime contract and was therefore entitled to recover directly against the Government. The Government filed a motion to dismiss for failure to join an indispensable party because the Government had already paid Capital City the funds to which JGB claimed that it was entitled.

The United States Court of Federal Claims found that it must first determine whether "Capital City" is "necessary" under the Rules of the United States Court of Federal Claims. The Rules provide that a person is a necessary party to an action if: (1) in the person's absence complete relief cannot be accorded among those already parties or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may: (1) as a practical matter impair or impede the person's ability to protect that interest or (2) leave any of the persons already parties subject to a substantial risk of incurring double, multiple or otherwise inconsistent obligations by reason of the claimed interest.

The Government argued that JGB's suit would expose the Government to "double, multiple, or otherwise inconsistent obligations" if Capital City was not joined to the action because the contract payments claimed by JGB had already been paid by the Government to Capital City. In addition, the Government argued that if Capital City was not joined the court would not be able to accord "complete relief" to the parties in the event of a judgment for JGB.

The Court of Federal Claims found that if it entered judgment against the Government the Government would be obligated to pay any judgment rendered against it, but the Government's subsequent inability to recover from Capital City would impose no "obligation" on the Government. The Court of Federal Claims found that although the results of this case and the Government's future action against Capital City would be inconsistent, the Government would not be subject to double, multiple or otherwise inconsistent "obligations" under the Rules.

The Court of Federal Claims also found that the failure to join Capital City as a necessary party would not prevent the court from according complete relief to the parties. The term "complete relief" only refers to relief as between the persons already parties - not between a party and the absent person whose joinder is sought. The court can accord complete relief between JGB and the Government. A judgment in the matter would not affect the rights of Capital City nor subject the Government to the risk of further litigation. Therefore, the Court of Federal Claims denied the Government's motion to dismiss for failure to join an indispensable party.

D. Tortious Interference with Business Relationship

  • 1. Amphion, Inc. v. Buckeye Electric Co. - Plaintiff's Claim that Defendant made False Statements regarding Liability for Contractual Debt Survives Rule 12(b)(6) Motion to Dismiss (U.S. District Court, E.D. Michigan (2003).
In Amphion, Inc. v. Buckeye Electric Co., Key Handling Systems, Inc. ("Key") subcontracted work to Amphion, Inc. ("Amphion") on contracts with the United States Postal Service. Amphion in turn subcontracted work on the contracts to Buckeye Electric Co. ("Buckeye").

Amphion subsequently sued Buckeye alleging that Buckeye and its attorney tortiously interfered with Amphion's business relationship with Key and the USPS. Amphion alleged that Buckeye falsely communicated to Key that Amphion owed money to Buckeye for subcontract work Buckeye performed for Amphion resulting in Key disqualifying Amphion from servicing Key's future contracts with the USPS.

The District Court, applying Michigan law, found that there are four elements of a claim for tortuous interference with a business relationship: (1) the existence of a valid business relationship or expectancy; (2) the defendant has knowledge of the relationship or expectancy; (3) the defendant intentionally interferes by improperly inducing or causing a breach or termination of the relationship or expectancy; and (4) plaintiff suffers damages because of the interference.

As to the existence of a valid business relationship, Buckeye did not dispute that such a relationship existed between Amphion, Key and the USPS. As to Buckeye's knowledge of the existence of the relationship, the court found that it could be inferred from Amphion's claim that it had repeatedly informed Buckeye about the consequences its conduct could have on Amphion's business relationship with Key and the USPS. As for the issue of damages, Amphion had alleged that it had been eliminated from re-qualification with Key to service future USPS contracts thereby destroying Amphion's ability to acquire future contracts.

The court found that the third element - intentional interference - required either conduct that is wrongful per se or done with malice. The Michigan courts have determined that the third element "requires the plaintiff to demonstrate illegal or unethical conduct on the part of the defendant." However, if the defendant's actions were motivated by legitimate business reasons, its actions would not constitute improper motive or interference. Therefore, the court had to determine whether, viewing the facts in the light most favorable to Amphion, Buckeye committed acts that were wrongful per se or done with malice. Amphion had alleged that (1) Buckeye falsely communicated to Key and the USPS that Amphion was liable for Amphion's debt to Buckeye; (2) Buckeye sent a copy of the proposed complaint against Amphion to Key and the USPS that they knew contained false statements about Amphion; and (3) Buckeye pressured Key and the USPS to pressure Amphion to pay Buckeye.

The court found that making false statements about liability for contractual debt can be considered an unethical act. As the Michigan courts have considered "unethical conduct" to be wrongful per se, an allegation of false statements is therefore sufficient to state a claim for tortuous interference. The court found that similar analysis applies to making false statements in a proposed complaint, which can also be considered unethical conduct and therefore wrongful per se under Michigan law. As for the allegation that Buckeye exerted pressure on Key and the USPS, the court found that it was unclear whether such pressure is wrongful per se. The court found that while this course of conduct is not clearly wrongful per se, Amphion had alleged that these actions were done to "purposefully destroy" its business relationships. The court found that these actions meet the malice standard because Amphion alleged specific acts along with destructive intent. Therefore, the court found that Amphion's complaint does articulate acts that wrongfully or maliciously interfered with Amphion's business relationships. Therefore, the court denied Buckeye's Rule 12(b)(6) motion to dismiss.

E. Ambiguous Drawings in Solicitations - Additional Compensation for Work Performed

  • 1. Centex Construction Company - Subcontractor had Duty to Inquire Prior to Submitting Bid (ASBCA 2003)
The United States Army Engineer District, Savannah, Georgia (the "Government") issued a solicitation for the construction of hospital buildings. The contract was awarded to Centex Construction Company, Inc. ("Centex"). Centex awarded a subcontract for mechanical work to Atlantic Coast Mechanical, Inc. ("ACM") who, in turn, entered into a second tier subcontract with McCorvey Sheet Metal Works, Inc. ("McCorvey") for sheet metal ductwork.

The solicitation called for the installation of manual volume control dampers in the ductwork. McCorvey submitted a Request for Information to ACM concerning the installation of the dampers in the ductwork because a note below the drawing of the ductwork included in the solicitation stated "in high pressure systems do not install any splitter or volume dampers." The Government's resident engineer on the project instructed the contractors that the dampers shown in the drawing were necessary and that the contract work should proceed. In response, McCorvey wrote a letter to the Government stating that it disagreed with the Government's reasoning for installation of the dampers and again referenced the note below the drawing in the solicitation that stated that dampers should not be installed in high pressure systems. McCorvey also stated in the letter that if the Government insisted upon installation of the dampers, McCorvey would pursue its right to make a claim for compensation because McCorvey did not include the cost of installing the dampers in the proposal it submitted to Centex.

ASBCA found that a contractor pursuing a remedy based on its interpretation of an ambiguous contract must show reliance on that interpretation in submitting its bid. In addition, where a contractor shows that it used a subcontractor's bid and hence the subcontractor's interpretation in preparing its bid to the government, a subcontractor's reliance can me imputed to a contractor.

ASBCA found that the contract was susceptible to only one reasonable interpretation - that the dampers were to be installed in the ductwork where indicated. ASBCA found that McCorvey's assumption that the note stating that dampers were not required was a correction to the use of dampers in the drawing was not based on any language in the note - it was merely McCorvey's opinion. If McCorvey's interpretation was correct, McCorvey had a duty to inquire as to the Government's intention prior to submitting a bid. In the alternative, ASBCA found that while McCorvey had demonstrated that it relied on its interpretation when submitting its bid to ACM, ASBCA found that there was no evidence that ACM relied on McCorvey's bid when submitting its bid to Centex. In addition, ASBCA found that there was no evidence that Centex relied on ACM's bid when submitting its bid to the Government. Therefore, Centex's appeal was denied.

F. Court of Federal Claims - Pending Bid Protest

We have heard through the grapevine that the first bid protest filed by a subcontractor is pending before the Court of Federal Claims. Apparently, the government contracted with Sikorsky and directed that Sikorsky contract with a particular subcontractor. As a case of first impression, the issue will be whether the Court has jurisdiction to hear the protest; whether there is privity. We will try to learn more about the case and keep you posted.

G. Appeal of Malaspina Investments, Inc. (AGBCA 2003)

This is an appeal to the Agriculture Board of Contract Appeals filed by a subcontractor in the name of the prime. The Board held that the Board had jurisdiction to hear the claim since the subcontractor had received authority from the prime to file the appeal within the 90 day period for filing an appeal of a contracting officer decision. This decision is significant because if a subcontractor properly asks for and the prime does not give authorization to file a timely appeal, there may be a basis for a claim against the prime.

II. Recent Proposed Regulatory Changes

A. 10/20/2003 Proposed Rule - RIN 3245-AF12 - SBA 13 CFR Part 125.3 Government Contracting Programs, Subcontracting Opportunities.

On October 20, 2003, the SBA proposed regulatory changes in response to believed impact contract bundling changes will have on subcontracting opportunities. The proposed regulations seek to improve the achievement of small business subcontracting plans by using prime contractor performance goals and past performance evaluations in the source selection process for placing orders under Federal Supply Schedules, government-wide acquisition contracts, and multi-agency contracts. The proposed rule also includes guidance on Subcontracting Orientation and Assistance Reviews (SOAR) used by CMRs to promote prime contractor understanding and compliance with SBA subcontracting objectives. The proposed rule also identifies the various categories of small businesses to be afforded maximum practicable subcontracting opportunities. Final comments on the rules were due on December 19, 2003.