Decision Two: Sovereign Acts, Agency Deference and Contract Disputes

A second key government contract case decided in 2017 involved court agency deference to an agency’s interpretation of its own regulations. The case decided a subcontractor’s Request for an Equitable Adjustment (REA) springing from what the subcontractor argued was a change in government regulation and policy.

The case, Garco Construction Inc. v. Secretary of the Army (ASBCA 57796,15-1 BCA ¶ 36,135, motion for recon. denied, 16-1 BCA ¶ 36,278, aff’d, Garco Constr., Inc. v. Sec’y of the Army, 856 F.3d 938 (2017), petition for cert. denied March 19, 2018), involved the upholding of the government’s interpretation of an ambiguous US Air Force base access policy for contractor workers. See http://caselaw.findlaw.com/us-federal-circuit/1859687.html to read the decision.

Contract Background

In 2006, Garco Construction Inc. was awarded a contract to build housing units on Malmstrom Air Force Base (AFB) in Montana. The contract incorporated Federal Acquisition Regulation (FAR) 52.222-3, “Convict Labor.” This FAR section authorizes contractors to employ convicts if the convicts are authorized to work by the local jurisdiction and meet the five requirements listed in the section.

In 2005, Malmstrom AFB had adopted a base policy for contractor entry. The policy required individuals seeking base access to undergo a “wants and warrants check.” While the contract was being performed, the Air Force conducted criminal background checks on Graco’s subcontractor’s employees and then denied base access to certain ex-felon and pre-release workers. The subcontractor, JTC, objected. It argued a criminal background check exceeded the AFB policy’s “wants and warrants” requirements.

In October 2007, the AFB base commander issued a new memorandum expressly requiring background checks for base access. Two days later the subcontractor submitted an REA based on the inability to use convict labor and the resulting $454,266 increase in its labor costs. It also claimed the costs of interviewing, hiring and training new workers and paying overtime. The Air Force denied the REA, and JTC, through Garco, requested reconsideration by the contracting officer.

Legal Decisions

Following a “deemed denial” final decision, the REA claim was appealed to the Armed Services Board of Contract Appeals (ASBCA). In 2014, the ASBCA granted partial summary judgment to the government holding that the “22 October 2007 base access memorandum was a “sovereign act” and the Air Force was not liable for damages from that date forward.”

In a later decision based on a motion for reconsideration, the ASBCA also held that the original 2005 base access policy, in place at contract award in August 2006, was also a sovereign act and was not modified, but rather was clarified, by the October 2007 memorandum. The Board rejected Garco’s argument that before 2007 the Air Force could only deny access to workers who had outstanding “wants or warrants.” The Board found that a “wants and warrants” check was synonymous with a background check and the 2007 memorandum clarified the existing base access policy. The Board concluded the increased enforcement of the base access policy did not constitute a “constructive acceleration” of the contract.

A constructive acceleration occurs when a delay takes place beyond a contractor’s control, and the contract completion date remains unchanged. A constructive acceleration must meet the following criteria:

The delay is a result of causes entitling the contractor to time extension;

  • The contractor requests time extension for the delay;
  • The time extension is refused;
  • The work must be completed in accordance with the original schedule;
  • The contractor endeavors to accelerate by working additional hours or committing additional resources; and,
  • The contractor incurs additional expense in carrying out its acceleration efforts.

Garco appealed the ASBCA decision to the US Court of Appeals for the Federal Circuit.

On appeal, Garco asserted the 2005 base access policy did not authorize the Air Force to prohibit workers with a prior criminal record, and instead, authorized denial of access only if there were outstanding wants or warrants.

The Federal Circuit disagreed in May 2017 and reaffirmed that an agency’s construction of its own regulations is “of controlling weight unless it is plainly erroneous or inconsistent with the regulation,” (856 F.3d at 943).

The Federal Circuit examined Garco’s argument that the base access policy required no more than a check for wants and warrants, but found that while the policy created ambiguity, the entire context of the regulation was base security and if there was ambiguity there must be agency deference given to the Air Force’s interpretation of its own regulations because if an “interpretation is not plainly erroneous or inconsistent with the regulation and we therefore must give it controlling weight.” 856 F.3d at 945.

Garco filed a petitioned for a writ of certiorari with the US Supreme Court in August 2017. It presented the question of whether Bowles v. Seminole Rock & Sand Co. and Auer v. Robbins should be overruled. Several amicus briefs were filed, including by the U.S. Chamber of Commerce that argued that “Auer deference” harms the business community by increasing regulatory uncertainty, and urging the overruling of Auer and Seminole, or at a minimum, overruling Auer for cases involving Government contract disputes. The Government opposed the petition for certiorari, noting eight prior petitions where the Court declined to grant review to consider whether to overrule these precedents. On March 19, 2018 the US Supreme Court denied the petition (see http://www.scotusblog.com/case-files/cases/garco-construction-inc-v-secretary-army/)

Lessons Learned (or Repeated)

Lesson One: An agency’s interpretation of its own regulation is entitled to agency deference. In disputes involving an agency regulation, contractors should be aware that unless the regulation is viewed as unambiguous, the tribunal will give an agency deference to an agency’s interpretation unless that interpretation is “plainly erroneous or inconsistent with the regulation.”

Lesson Two: Not deferring to an agency’s view regarding its own ambiguous regulations in breach of contract disputes places contractors at a disadvantage. The doctrine of deference (sometimes called the Auer deference) has been criticized, but it is still the law.

Lesson Three: Determining whether a regulation is ambiguous, whether a court or board is likely to defer to agency discretion, whether an REA should be filed, and whether a time extension should be granted to complete a contract should not be undertaken without the help of an experienced government contracts attorney.

Tags:

Leave a Reply

Your email address will not be published. Required fields are marked *