Decision to Forego a Warranty Dooms Government’s Claim Against Contractor for Defective Products; Appeal of Raytheon, ASBCA No. 61859

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Contractor’s motion for summary judgment on government’s claim is granted in part. The government claimed that the contractor had breached by providing defective parts. The government, however, had declined to obtain a warranty from the contractor. Thus, its acceptance of the parts, absent proof of latent defects, was conclusive. The board found that the government was unable to prove latent defects or a revocation of acceptance. The contractor also moved for summary judgment on the government’s claim for late delivery, arguing that the government could not allege breach for late delivery when it accepted the items. But the board found that the government could accept the items and still sue for a partial breach for late delivery.

Raytheon had a contract with the Army to provide thermal sights for light armored vehicles. Instead of a warranty for the sights, the Army agreed to a Product Quality Deficiency Report (PQDR) clause. Under that clause, in the event the Army reported a component defect, Raytheon would investigate and report its back to the Army to propose a corrective action. Unlike a warranty, the PQDR clause did not require Raytheon to perform any repair work or replace components at its own expense.

The contract required Raytheon to deliver the sights by April 2013. But Raytheon encountered difficulties in production and requested a schedule extension. Raytheon proposed various types of consideration—e.g., software enhancements, spare parts—in exchange for the schedule extension. The parties, however, never settled on acceptable consideration before Raytheon delivered the sights in July 2013. Raytheon determined that the consideration issue had been overcome by events.

But four years after receiving the sights the Army issued a final decision demanding $6.3 million from Raytheon. The Army alleged that Raytheon had breached the contract by (1) providing defective sights, and (2) delivering the sights two months late. Raytheon appealed the decision to the ASBCA, and then moved for summary judgment on the Army’s claims.

In its motion, Raytheon argued that because the Army had declined to include a warranty in the contract, the agency’s acceptance of the sights negated any claim it had for latent defects. The board agreed with Raytheon. In the absence of a warranty, the board reasoned, the inquiry turned on the contract’s Inspection of Supplies clause. That clause entitled the government to inspect all items before acceptance, and it gave the government the right to reject any non-conforming supplies. Acceptance of the clause was conclusive unless the government could prove latent defects, fraud, or mistake.

The board found that the Army had not presented facts to nullify the conclusiveness of its acceptance. The Army argued that it had shipped the defective sights back to Raytheon, which effectively revoked its prior acceptance. But the board found that shipping the sights back to Raytheon the government had merely invoked the PDQR process. Under the PDQR process Raytheon was only required to inspect the items and propose corrective action. The clause did not mandate repair or replacement and did not amount to a revocation of acceptance.

The Army argued that letters it sent to Raytheon before filing a claim amounted to a revocation of acceptance. In those letters, the Army had complained about quality issues with the sights. Nevertheless, the board reasoned that even if it were to construe those letters as an attempt to revoke acceptance, they were too late to be an effective revocation. A revocation of acceptance must occur within a reasonable time after discovery of latent defects. Here, the Army sent the letters years after it allegedly discovered the defects.

As to the government’s claim concerning late delivery, Raytheon claimed that the government could not assert a breach claim because it had accepted Raytheon’s defective performance. Raytheon argued that when one party commits a material breach, the other part can either (1) allege total breach and terminate the contract, or (2) declare only a partial breach and recover those damages caused by the partial breach. Because it failed to timely declare a total breach and terminate when Raytheon delayed delivery, the Army, Raytheon contended, could not now sue for breach.

But the board found that Raytheon’s argument missed the mark. The Army’s claim did not demand damages for total breach. Rather, the Army only sought costs it claimed to have incurred because of the delayed delivery. This, the board reasoned, was more in line with a partial breach of the contract. A non-breaching party who accepts delayed performance can still seek damages for partial breach due to the delay.

Raytheon also argued that the Army had waived any claim for late delivery when it accepted the sights and ignored Raytheon’s offers of consideration in exchange for an extension. But a waiver is an intentional abandonment of a known right. Here, the evidence did not show that the Army had knowingly abandoned its claim for late delivery. Rather, it showed that the Army had offered comments and counterproposals on consideration for the extension. Indeed, the contracting officer had issued his own reminder after the sights were delivered that consideration for the late delivery was still necessary. The board declined to find an intentional waiver on these facts.

Raytheon is represented by Kevin P. Connelly and Jeffrey M. Lowry of Veddar Price P.C. The government is represented by Scott N. Flesch, Major Abraham L. Young and Frank A. March of the Army.

ASBCA - Raytheon Company