Legal Insights: Can You Purse a Contract Claim Against the Federal Government?
01/21/2017

Legal Insights: Can You Pursue a Contract Claim Against the Federal Government?

By Ross Crown

You are doing work for the federal government but something is not right. You are losing money or not making as much money as expected. Can you assert a claim against the federal government? Whether or not a contractor can pursue a claim against the federal government depends on both the contract and the contractor satisfying a number of requirements. The key requirements of a valid claim including the following.

Contractor Must Have the Right Type of Contract

To assert a contract claim against the federal government, a prospective claimant must first have the proper kind of contract. The type of contract required to support a claim is an express or implied contract entered into by an executive agency for (1) procurement of property other than real property, (2) procurement of services, (3) procurement of construction, alteration, repair or maintenance of real property, or (4) disposal of personal property. The contract may be written or oral. If a contractor seeks to bring a claim based on an implied contract, it must be implied-in-fact. An implied-in-fact contract is one founded upon a meeting of the minds and is inferred, as a fact, from the conduct of the parties showing, in the light of surrounding circumstances, their tacit understanding. In contrast, implied-in-law contracts (i.e. those based on quasicontract or unjust enrichment theories) do not arise from mutual assent between the parties. Implied-in-law contracts are not actually contracts, but rather legal fictions created by the courts to impose legal duties on one or both parties to prevent injustice. The elements of an implied-in-fact contract are the same as for an express contract, only the nature of the evidence needed to prove the contract differs. The claimant must show a mutual intent to contract, including offer, acceptance and payment. In addition, the person who agrees to the contract on behalf of the government must have actual authority to bind the United States.

Direct Contractual Relationship Needed Between the Contractor and the Government

To assert a contract claim, a contractor must also have a direct contractual relationship with the federal government, or what is termed “privity of contract.” This means that a contractor’s subcontractors or lessees cannot bring a claim against the government. Moreover, even a direct contractual relationship is not sufficient to support a claim if the contract was assigned to the claimant. Federal law voids contracts with the government that are assigned to another contractor. This prohibition on assignments allows the government to know with whom it is dealing and protects the government against the possibility of duplicate claims. Assignments of contracts willbe recognized by the government under three circumstances. First, if the agency clearly assents to the assignment. This consent is usually demonstrated with a writing, such as a supplemental agreement or a novation acknowledging the assignment. Second, where the assignment occurs by operation of law in instances of corporate succession through merger or consolidation. Third, when a contract is assigned to a financing institution and the government is given written notice of the assignment.

Contractor Must Preserve a Changes Claim

Perhaps the most common type of contract claim arises from changes imposed on performance of the contract by the agency. Changes are of two types. An actual change occurs when the contracting officer issues a written order pursuant to a changes clause incorporated into the contract. A constructive change arises when a contractor is forced to change its performance of a contract without receiving a written change order. In responding to a constructive change, contractors must bear in mind that that generally the burden is on the contractor to document changes. Thus, the claimant should obtain approval for any changes from the contracting officer in a timely fashion and in writing. Also, it is critically important to give notice of a claim for changes as soon as a compensable change to the contract is identified. Where a change is made pursuant to a Changes clause in the contract, these clauses typically grant the contractor a certain period of time (usually 30 days) within which it must assert its right to an equitable adjustment if the change order causes an increase in the contractor’s cost of performance or the time required for performance. Notice provisions generally apply to constructive changes as well. A contractor should give notice of an increase in cost or time of performance after it receives any written or oral order (including directions, instruction, interpretation or a determination) from the contracting officer that causes a change. The required contents of a notice of change will vary depending on whether a particular Changes clause applies, but notice should generally include the identity of the individual requesting the change, the nature of the change and a description of the additional work required by the change. A notice should also request confirmation of the authority of the  government representative directing the change. Exceptions to the notice requirement exist under at least three circumstances. First, where the responsible government officials are aware, or should be aware, of the facts giving rise to the claim. Second, where the government has actual knowledge of the facts underlying the claim. In this event, the burden is on the government to establish it was prejudiced by the absence of formal notice. Third, where the contracting officer issues a decision on the merits of a claim without regard to the lack of notice.

Contractor Must be Damaged by the Government

No matter what the government might do wrong in soliciting or administering a contract, a valid claim does not exist unless the contractor has sustained some type of damage as a result of the agency’s acts or omissions. The claim must include proof of an unfavorable cost impact. Such proof requires invoices, correspondence or other evidence specifically demonstrating actual payment of additional costs, over and above the costs the contractor otherwise would have otherwise have incurred. Cost estimates are usually not sufficient. Where lost profits are alleged, a contractor must show: (1) the lost profits are the proximate result of the government’s conduct, (2) there would have been a profit but for the agency’s acts or omissions, and (3) there is some basis upon which a reasonable estimate of the lost profits can be made. Moreover, a contractor is not entitled to a profit above the amount it would have earned had the contract been performed as anticipated.

Claim Must Not be Released

If all the other required elements of a claim exist, a contractor will still be unable to pursue that claim if the claim has been released. Potential claims can be forfeited by the contractor executing a release in exchange for final payment under the contract. Typically, contractors are required to sign a release of all claims arising under a contract when final payment is tendered. If a claim or potential claim is pending at the time of final payment, then the contractor must insist on language in the release preserving the contractor’s right to pursue the claim. Without such language, the claim will be barred once final payment has been made. The same problem may arise when the government offers a bilateral contract modification. If the agency agrees to modify the contract in response to a potential claim, that modification will usually include a release of all claims arising from the circumstances that prompted the modification. If the proposed bilateral modification does not offer full compensation, the contractor ought to refuse to sign the modification unless it is willing to forego pursuing the remainder of its claim. Should the contractor instead decide to preserve its claim, the agency would likely issue a unilateral modification that the contractor is not required to sign.

Viable Claim Requires the Contractor’s Attention

As the above checklist demonstrates, a viable claim consists of more than just contesting a wrongful governmental act or omission. Contractors planning to assert a contract claim must be alert to all the requirements that constitute a viable claim if they expect to realize a recovery.

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Ross is a partner in the Albuquerque office of Lewis Roca Rothgerber Christie LLP where his practice emphasizes government contracts.

This article is intended for general information only and should not be construed as legal advice or opinion. Any questions concerning your legal rights or obligations in any particular circumstance should be directed to your lawyer.

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