If You Can’t Comprehend ‘Em, Just Apply Contra Proferentum! ASBCA Construes Latent Ambiguity Against the Government; Appeal of Metro Machine dba General Dynamics NASSCO-Norfolk, ASBCA No. 61817


Appeal seeking costs incurred from the aborted dry-docking of a Navy ship is sustained. The contractor had a contract to repair a Navy ship, which required the ship to be dry-docked. During the dry-docking process, haul lines on the ship broke, and the Navy, over the objections of the contractor, cancelled the dry-docking. The contractor dry-docked the ship a few days later and then filed a claim for the costs of the second dry-docking. The contractor argued that second dry-docking was a constructive change and an abuse of the Navy’s discretion under the contract. The board found that the second dry-docking was not a constructive change because it was not work performed outside the contract. Moreover, the Navy was rightly concerned about dry-docking with broken lines and thus did not abuse its discretion in cancelling the dry dock. The board did, however, find that the contract was ambiguous as to which party should bear the costs of an aborted dry-dock. Because this was a latent ambiguity, the board construed the ambiguity against the Navy, finding ithe agency bore the cost impact for a cancelled dry-docking.

Metro Machine dba General Dynamics NASSCO-Norfolk (NASSCO) had a contract with the Navy to repair a ship. The contract required dry-docking of the ship—basically pulling the ship out of the water. The contract required that dry-docking be supervised by a Docking Observer. The Docking Observer was a Navy official who had the authority to stop the docking if the ship’s safety or other Navy assets were jeopardized.

To accomplish the dry-docking, NASSCO would submerge a dock and then use the ship’s power and hauling lines to position the ship over the submerged dock. Once the ship was in position, NASSCO could raise the dock and pull the ship from the water.

On the day that NASSCO attempted to perform the dry-dock, one of the inhaul lines it used to pull the ship into position broke. Despite this line break, the Navy’s Docking Officer allowed the dry-docking to continue. NASSCO had to switch from automatic control of the lines to manual control, but it was still prepared to dry-dock the boat.

But as NASSCO was manually hauling the boat into dry dock, another outhaul cable bird-caged, meaning it wrapped around the spool of the winch due to excess slack. Despite losing two cables, NASSCO believed it could still haul the boat into dry-dock using other lines and tugboats. But the Docking Observer instructed NASSCO to stop the dry docking. NASSCO ended up dry-docking the ship a few days later.

NASSCO requested an equitable adjustment for the costs incurred due the change in the dry-docking schedule. Essentially, NASSCO contended that it was prepared to proceed with the initial dry- dock even though two lines had broken. The Navy, however, caused it to incur costs by NASSCO to dry-dock another day. The Navy refused the adjustment, claiming that the dry-docking delay was caused by NASSCO’s defective equipment. Thereafter, NASSCO submitted a certified claim to the Navy for the dry-docking, but the Navy denied it. NASSCO appealed to the ASBCA.

On appeal, NASSCO argued that it was entitled to recover under a constructive change theory. Basically, NASSCO contended that by halting the dry-docking, the Docking Officer had caused the company to perform additional work—namely, the second docking.

A claim for constructive change has four elements: (1) the contractor was compelled to work outside of the contract, (2) the person directing the work had authority to alter the contractor’s duties, (3) the contractor’s performance requirements were enlarged, and (4) the work was not volunteered but directed by the agency.

The board found that NASSCO could not satisfy the first and the third elements. NASSCO’s argument was wrongly premised on the proposition that it was only required to complete one dry-docking. The contract made it clear that the Navy had the right to cancel a dry-docking and that a cancellation would not relieve the contractor of its responsibility to dry-dock the boat. Thus, NASSCO could not prove that the second dry-docking was outside the contract or an enlarged performance requirement.

NASSCO also contended that the Docking Officer had abused his discretion in cancelling the dry-docking and that his concern with the broken lines was unjustified. The board acknowledged that the evidence showed that the dry-docking likely could have completed with the broken lines as NASSCO contended. Nevertheless, the board also found that the Docking Officer’s concern was justified. The Docking Officer did not abuse his discretion just because his decision to cancel was not absolutely correct.

The board also considered whether the contract allocated risk for a cancelled dry-docking. The contract provided that a canceled dry-docking would not relieve the contractor of responsibility, but would protect the Navy’s interest “even though there may be a cost impact.” The board found that this “cost impact” language was ambiguous. It was not clear which party was supposed to bear the cost impact.

The board noted that there was no extrinsic evidence that could clarify the meaning of cost impact. What’s more, the “cost impact” language was not a patent ambiguity. It was not such a glaring inconsistency that NASSCO had a duty to inquire about the language.

Rather, the board found that the language was a latent ambiguity. When a contract contains a latent ambiguity, the doctrine of contra proferentum applies, which requires the tribunal to construe the ambiguity against the drafter, i.e., the Navy. Construing the “cost impact” language against the Navy meant that the risk of any cost impact of a cancelled drydingock was borne by the Navy. The board noted that it did not criticize the Docking Officer for exercising his broad authority to cancel the dry-docking. Instead, the board concluded, if there was any criticism, it was of the Navy’s poor drafting that created the ambiguity.

NASSCO is represented by Michael J. Gardner of Greenberg Traurig LLP. The agency is represented by Craig D. Jensen and Philip S. Lazarus of the Navy.

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