Contract Provision Stating that Agency “Shall Consider” Equitable Adjustment Does Not Merely Obligate Agency to “Think Over” or Contemplate Adjustment; BGT Holdings, LLC v. United States, Fed. Cir. No. 2020-1084

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COFC decision dismissing contractor’s claim is reversed. The contractor alleged that the government breached and changed the contract by failing to provide government-furnished equipment. The COFC dismissed for failure to state a claim. But the Federal Circuit found the contractor had sufficiently pleaded a claim for breach. The contract provided that if the government failed to provide equipment, it had to consider an equitable adjustment. The government had not provided the equipment and rejected an equitable adjustment, but the government argued it had not breached because the contract only required it to simply consider an adjustment. The court found this argument absurd. The requirement to consider an adjustment obligated the government to consider a request in good faith; it did not give the government discretion merely think about an adjustment before rejecting it. The court further held that the contractor sufficiently pleaded a constructive change. The contract provided that only the contracting officer could change the contract. The court opined that the contractor had adequately alleged that the contracting officer had ratified the decision to withhold equipment.

BGT Holdings had a contract with the Navy to provide a gas turbine generator. The Navy agreed to provide certain government-furnished equipment—i.e., an exhaust collector and engine mounts. The contract included a government-furnished equipment clause, which provided that if Navy failed to deliver the equipment or modified its commitment to provide the equipment, then the agency “shall consider” an equitable adjustment.

The contract also incorporated a change clause unique to certain Navy contracts. That clause provided that BGT should not comply with an order or direction unless it was issued in writing and signed by the contracting officer. The clause further provided that orders from officials other than the contracting office shall not constitute a change under the changes clause.

A few months into performance, the procurement manager informed BGT that the Navy would not be providing the exhaust collector and engine mounts unless BGT agreed to reduce the contract price. BGT refused. The Navy informed the company that the exhaust collector and engine mounts had been reallocated and would not be available. BGT purchased the items itself and then submitted a $610,000 request for an equitable adjustment for the cost of the items. The Navy accepted the generator but denied the request for an adjustment.

BGT filed suit with the Court of Federal Claims. First, BGT alleged that the Navy breached the contract by not providing an equitable adjustment after failing to deliver the promised equipment. Second, BGT alleged the Navy’s decision to withdraw the government-furnished equipment was a constructive change. Third, BGT asserted that while the decision to withhold the equipment had not come from the contracting officer, the contracting officer ratified the decision, which waived the special Navy changes clause and resulted in an official change to the contract. Fourth, BGT claimed that failure to deliver the equipment breached the contract’s covenant of good faith and fair dealing.

The COFC, however, dismissed BGT’s suit for failure to state a claim. The COFC reasoned that BGT’s claims for constructive change and official change were barred by the changes clause, which stated that only the contracting officer could order a change of the contract. The decision on the equipment had not been made by the contracting officer, so, the COFC opined, there was no change. The COFC also found that the change clause precluded BGT’s claim for breach. The COFC rejected the good faith and fair dealing claim, finding that the contract expressly allowed the Navy to withhold government-furnished equipment. BGT appealed to the Federal Circuit.

The court first addressed BGT’s claim that the Navy breached by failing to provide an equitable adjustment. Contrary to the COFC’s findings, the court held that BGT had stated a claim. The government-furnished property clause specifically provided that if the Navy failed to deliver equipment, the contracting officer must consider an equitable adjustment. Here, BGT alleged that the Navy withheld the equipment, that BGT purchased the equipment itself, that BGT requested an equitable adjustment, and that the Navy denied the request. These allegations were sufficient to support a claim of breach under the government-furnished property clause.

Even assuming that the contracting officer had not made the decision to withdraw the property, the COFC erred by not considering a pathway to relief under the government-furnished property clause. If relief under the government-furnished property clause were not available, then the Navy could always avoid liability for failing to provide promised equipment by having someone other than contracting officer make the withholding decision.

The government argued that BGT’s breach claim was untenable because the government-furnished property clause only required the contracting office to “consider” a request for an equitable adjustment, not to grant an adjustment. The court rejected this argument, finding that it would produce an absurd result. It was implausible that the Navy’s only obligation was to “think over” a request for an equitable adjustment. The court reasoned that it was unlikely the drafters of the provision envisioned that the government would have an unfettered right to withdraw promised equipment. Rather, the correct interpretation of the “shall consider” language was that it held the government to a duty of good faith, not that it gave the government absolute discretion to reject a request.

The court next turned to the claim that the Navy’s withholding of the equipment resulted in a constructive change to the contract. The COFC rejected that claim on the grounds that the decision to withhold was not communicated to BGT in a writing signed by the contracting officer as required by the changes clause.

But the court found that the COFC had not adequately considered BGT’s claim. BGT argued that the changes clause did not preclude its claim because the contracting officer ultimately ratified the decision. The court found this compelling. The contract did not expressly limit the contracting officer’s authority to ratify prior actions that were not made in full compliance with the changes clause. Thus, nothing prevented BGT from asserting the constructive-change-through-ratification theory.

As to the official change claim, the COFC had found that BGT had contractually waived this claim by agreeing to the Navy change clause. But the court found that the COFC failed to apprehend BGT’s argument. BGT contended that the contracting officer waived the change clause through a pattern of conduct—namely, he ultimately authorized withdrawal of the equipment, which only he had authority to do. The court reasoned that the changes clause had nothing to say about the contracting officer waiving the clause. Thus, nothing in the contract itself precluded BGT from asserted an official change claim based on waiver of the changes clause.

With regard to the claim for breach of the duty of good faith and fair dealing, the court agreed with the COFC. The contract unquestionably gave the Navy the right to withdraw government-furnished equipment. BGT could not use the doctrine of good faith and fair dealing to complain about conduct the contract expressly permitted.

BGT is represented by Milton C. Johns of Executive Law Partners, PLLC. The government is represented by Borislav Kushner, Jeffrey B. Clark, Elizabeth Marie Hosford, and Robert Edward Kirschman, Jr.

BGT Holdings