Court: “Long Term” Contract Did Not Guarantee Option Years

The government was not required to exercise option years in a “long term” contract to lease aircraft, according to a recent decision of the U.S. Court of Federal Claims.

In Sundowner 102 LLC v. United States, No. 12-304C (2013), the Court held that the use of the words “long term” in a contract did not limit the government’s discretion to decline to exercise option years.

The Sundowner case involved a contract between the Department of Justice and Sundowner 102, LLC.  The contract called for Sundowner to supply eight aircraft for lease to the DOJ in order to transport prisoners and detainees.

The contract had a one-year base and seven option years.  At three points, the contract referred to itself as a long-term lease or contract.  For instance, the Standard Form 1449 stated, “[t]his contract is for the long-term lease of jet aircraft . . ..”

The contract included a provision entitled “Options To Extend.”  This provision stated that the DOJ “reserves the right to exercise options to extend the term of the contract . . ..”  A portion of the provision stated that the DOJ could extend the contract, at its option, for periods of “one (1) year or fractions thereof,” and set forth the procedure for how an option would be exercised.

The DOJ exercised the first two option years, but declined to exercise the third option.  Instead, the DOJ issued Sundowner a one-month extension “to allow for contract close-out.”

Sundowner filed a claim for breach of contract with the contracting officer, alleging that the DOJ had been required under the contract to award all option years, assuming that funding was available.  Sundowner indicated that it had based its pricing on the assumption that all option years would be exercised.

The contracting officer denied Sundowner’s claim.  Sundowner subsequently filed a complaint in the U.S. Court of Federal Claims.  Sundowner’s complaint alleged that the DOJ’s failure to exercise the options was a breach of contract and a breach of the government’s implied obligation of good faith and fair dealing.

Judge Eric G. Bruggink disagreed with Sundowner’s assertions.  Judge Bruggink noted that under the Court’s prior case law, “only specific language” will limit the government’s discretion to award or decline an option.

Judge Bruggink declined to find that the description of the lease as “long term” was such specific limiting language. Judge Bruggink explained, “[t]he contract’s reference to itself as ‘long-term’ we view as merely descriptive of the overall contract, assuming all option years are exercised.  It certainly creates no ambiguity as to the term ‘option.'”

Judge Bruggink concluded, “[b]y its terms, the contract clearly gave the government the option of extending the contract, or not.”  Judge Bruggink dismissed Sundowner’s complaint and entered judgment in favor of the government.

The Court’s decision in Sundowner is a good example of how difficult it is to successfully argue that the government was required to exercise an option.  As the case demonstrates, the government has broad discretion whether or not to exercise an option, and only specific contractual language will limit that discretion.

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