Payment for work beyond the requirements of the contract is the subject of a recent opinion of the Armed Services Board of Contract Appeals in Sinil Co., Ltd., 09-2 BCA ¶ 34213, ASBCA No. 55819 (August 4, 2009). The Board’s opinion relates a cautionary tale to contractors who perform additional work.
In this case, the U.S. Army entered into two indefinite delivery/ indefinite quantity contracts with Sinil. One contract was for repair and replacement of deteriorated security fences. The other contract was for asphalt paving.
Both contracts included the DFARS Contracting Officer’s Representative (COR) clause which provides in part that the COR is not authorized to make any commitments or changes that will affect price, quality, quantity, delivery, or any other term or condition of the contract. Moreover, this instruction was reiterated at a post-award conference between Sinil and the Army where Sinil was also advised that any changes to the contract had to be made in writing by the contracting officer. Finally, Sinil was provided with a standard designation memorandum whenever a new COR was appointed, reminding Sinil that the CORs were not empowered to take any action that may affect the scope or other terms and conditions of the contract.
While performing the two contracts, Sinil performed dozens of delivery orders. As work under each delivery order was completed, Sinil submitted certified payment requests stating that the payment requested was correct and that payment had not been received.
Following an audit by the Army Audit Agency, the contracting officer issued a decision finding that Sinil had been overpaid by more than $1.4 million in connection with the fence contract. In response, Sinil claimed that it had performed work outside the scope of the delivery orders which if considered, would have resulted in an underpayment by the Army of over $290,000. The contracting officer issued a separate decision on the paving contract finding that Sinil was overpaid nearly $100,000. Sinil contended that it performed work outside the scope of the delivery orders under that contract as well which if considered, would have resulted in an underpayment of nearly $26,000.
Sinil submitted a certified claim under both contracts asserting the underpayments as an offset to the contracting officer’s decisions finding that Sinil had been overpaid. The contracting officer denied this claim. All three of the contracting officer’s decisions were appealed by Sinil to the ASBCA.
In arguing its appeal, Sinil maintained that Army employees other than the contracting officer requested Sinil to perform additional work. The Army responded that these employees had no such authority. Also, the Army contended that the requests for additional work were not ratified by anyone with authority to do so. Lastly, the Army argued that Sinil executed releases in exchange for payment of each delivery order but did not include any reservations of claims in these releases. Although the ASBCA opinion breaks no new ground, it provides useful reminders to contractors concerning authorizations for work, ratification of work orders, and payment releases.
Addressing the question of authority, the Board noted that the law relating to government officials’ authority to enter into binding contracts is straightforward. A contract with the United States requires that the government representative who entered into or ratified the agreement has actual authority to bind the United States. A contractor who executes an agreement with the Government assumes the risk of ascertaining the authority of the agents who purport to act for the Government and this risk remains with the contractor even when the government agents themselves may be unaware of the limitations of their authority. The Board also noted that Sinil was specifically on notice that only the contracting officer could authorize work through the COR clause in the contracts, the instructions given at the post-award conference and the COR designation memoranda.
The Board next addressed the issue of ratification. It noted the governing law states that agreements made by government agents without authority may subsequently be ratified by those with authority. However, ratification can occur only if the ratifying officials have actual or constructive knowledge of the unauthorized acts. In this case, the Board found no ratifications. To the contrary, when the Army became aware that Sinil was billing for work not properly requested, the contracting officer terminated the appointment of the COR who ordered the unauthorized work and initiated recoupment actions against Sinil.
In seeking dismissal of Sinil’s claims that it was underpaid, the Army demonstrated to the Board that Sinil provided a release of any claim for additional payment each time it accepted payment of an invoice for a delivery order. Sinil did not include any exceptions in these releases. Sinil responded to this argument by contending that when it sought payment for delivery orders, it was in no position to make claims for equitable adjustment because doing so would have delayed payment and created a cash flow problem. Sinil further contended that at the time the equitable adjustment issues arose they were not sufficiently large to justify making claims. Sinil submitted its equitable adjustment claims only after the Army sought to recoup a large sum of money from Sinil.
Again, the Board found the law pertaining to this issue is well-established. Under the terms of the contract the Army paid invoices upon execution of a release by Sinil of all claims against the Government, except those specifically excepted. If there are outstanding claims excepted on the release, then payment will not necessarily bar resolution of those claims. However, if there are no claims excepted in the release or if the claims excepted are not legally cognizable as claims, then payment will prohibit their subsequent submittal.
Lessons to be Drawn
Based on the application of above legal principles to the facts at hand, the ASBCA denied Sinil’s claim to recover for unpaid work. The lessons of this case are clear and should be ingrained in every company doing business with the Government. Contractors must ascertain who, if anyone, besides the contracting officer, has authority under their contract to bind the Government. A contractor must not undertake work that is not authorized by a government official with proper authority. A key distinction between government and commercial contracting is that the doctrine of apparent authority, pursuant to which a contractor may rely on the instructions of an agent who appears to be cloaked with the authority to bind his principal, does not apply to the Government. When unauthorized work is performed, the contractor should immediately seek ratification for that work from the contracting officer or other authorized official. If a contractor has reason to believe it has grounds for a claim against the Government, it must reserve this claim in any release provided to the Government once the grounds for that claim have arisen. This reservation has to be made regardless of the financial hardship it may create or the seemingly small size of the claim.
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