Claimant Can’t Prove It Had Settlement Agreement With Assistant U.S. Attorney Regarding Termination of Contract; Appeal of U.S. Coating Specialties & Supplies, LLC, ASBCA No. 58245

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Appeal of termination for default is denied. The claimant contended the termination for default was improper because as part of its bankruptcy proceedings, it had made an agreement with an Assistant U.S. Attorney in which the government had avowed that it would terminate the contract for convenience. The board, however, found that the contractor could not establish the existence of this side agreement; there was no evidence of mutuality of intent or of offer and acceptance. Aside from the side agreement, the board found that the contracting officer had not abused their direction in terminating for convenience. The contractor had rejected the contract in bankruptcy proceedings, which amounted to a repudiation. Moreover, before the contractor had filed bankruptcy, it had fallen behind schedule and failed to make progress on the critical path.

U.S. Coating Specialties & Supplies, LLC had a contract with Army Corps of Engineers to construct a building to house a supercomputer. U.S. Coating subcontracted with another company, Mid-State Construction, for the project. Several months into performance, however, U.S. Coating stopped paying Mid-State. Mid-State terminated the contract and then won a $1.2 million arbitration award against U.S. Coating.

The arbitration award caused U.S. Coating to file for Chapter 11 bankruptcy. U.S. Coating’s surety and the government both filed motions in the bankruptcy court to lift the automatic stay and to compel U.S. Coating to assume or reject the construction contract under the Bankruptcy Code. While those motions were pending, U.S. Coating, the surety, and an assistant U.S. attorney representing the government held a teleconference to discuss settlement of the pending motions. The parties worked out a settlement under which they agreed that U.S. Coating would reject the construction contract. The bankruptcy court entered an order to the effect.

But it turned out the parties had different conceptions of what they had agreed to. U.S. Coating believed that the as part of the settlement, the U.S. attorney had stated that the government would agree to terminate the construction contract for convenience. The government saw things differently. Indeed, shortly after the bankruptcy court issued the order lifting the stay and rejecting the contract, the contracting officer terminated the U.S. Coating contract for default.

U.S. Coating appealed the termination to the ASBCA, claiming that it had only agreed to settlement in the bankruptcy court on condition that the government agreed to terminate the contract for convenience. The Corps moved for summary judgment, asserting that the government’s alleged side agreement was barred by the parol evidence rule. The board denied that motion, finding that disputed issues of fact precluded summary judgment. The parties then submitted the matter for consideration under Board Rule 11, which permits the board to decide the case on the record and make findings on disputed facts.

The board first considered whether U.S. Coating and the government had a separate oral agreement under which the government agreed it would terminate the contract for convenience. To prevail on this theory, U.S. Coating would have to prove the existence of an implied-in-fact contract, which has four elements: (1) mutuality of intent, (2) consideration, (3) lack of ambiguity in offer and acceptance, and (4) a government representative whose conduct is relied upon and who had actual authority to bind the government.

The board found that U.S. Coating was unable to establish these elements. As an initial matter, U.S. Coating could not provide mutuality of intent. To establish mutuality, there must be objective evidence of an offer and acceptance. The problem here was that U.S. Coating never explicitly claimed that an agreement with the U.S. attorney was ever reached. Rather, the company claimed that the U.S. Attorney had represented that he would have no issues with a termination for reasons other than default. This, the board reasoned, fell well short of an agreement. Moreover, a sworn statement from U.S. Attorney indicated that he did not believe he possessed the authority to agree to a termination for convenience. This would have made it impossible for him to possess the requisite intent to bind the government.

Additionally, the board continued, the record was at best ambiguous concerning the existence of an offer and acceptance. The board acknowledged that it was hard to believe that U.S. Coating would agree to settle the bankruptcy litigation in exchange for a termination for default. Nevertheless, U.S Coating’s subjective beliefs were not sufficient to establish the existence of offer and acceptance. The subjective unexpressed intent of one party is irrelevant to contract interpretation.

Having found that U.S. Coating could not establish a side agreement for a termination of convenience, the board turned to whether the contracting officer abused her discretion in terminating the contract for default. The government bears the burden of proof with respect to whether a default termination was justified.

Here, the board found that U.S. Coasting decision to reject the contract in bankruptcy, considered alone, was sufficient to establish prima facie grounds for default termination. Rejection of a contract in bankruptcy frees the estate from the obligation to perform the contract. In other words, rejection of a contract is a repudiation that gives the contracting officer discretion to terminate the contract.

But even when a contractor has rejected the contract, the contracting officer must exercise their discretion to terminate the contract reasonably. Here, the board found that the contracting officer did not abuse her discretion in terminating the contract. Even before the it filed for bankruptcy, U.S. Coating had failed to make progress on critical path items. Additionally, for months before bankruptcy, U.S. Coatings negative float had more than doubled, and the company was not responding to the agency’s questions about the schedule.

U.S. Coating asserted that its default was excusable because its subcontractor, Mid-State, had walked off the job and instituted arbitration proceedings. The board, however, found that Mid-State had reasonably walked off the job because it was not being paid.

U.S Coating attempted to argue that the government had acted in bad faith in terminating the contract. There was nothing in the record, however, to rebut the presumption that government officials are presumed to act in good faith.

U.S. Coating is represented by Louis H. Watson, Jr. of Watson & Norris, PLLC. The government is represented by Michael P. Goodman, Steven H. Finch, and John M. Breland of the Army Corps of Engineers.

ASBCA - U.S. Coating Specialties & Supplies