The Government improperly threatened to terminate a contractor for default, because there was no good reason to believe the contractor had actually defaulted.

In a fascinating new decision by the Armed Services Board of Contract Appeals, the Government’s threat–made to a contractor with cash-flow issues–amounted to coercion, and invalidated a settlement agreement that awarded the contractor much less than it probably should have received.

The ASBCA’s decision in North American Landscaping, Construction and Dredge Co., Inc., ASBCA Nos. 60235 et al. (2018) involved a contract between the titular company (abbreviated NALCO), and the U.S. Army Corps of Engineers.  Under the contract, NALCO was to perform maintenance dredging of two channels and an anchorage on the Scarborough River in Maine.  After evaluating bids, the Corps awarded the contract to NALCO.

A disagreement soon arose about the nature and extent of the Corps’ obligation to pay NALCO’s mobilization costs under DFARS 252.236-7004.  NALCO expected to be paid approximately $800,000, but after various communications, the Corps agreed to pay only $101,102.70.  This led NALCO to inform the Corps that it would have significant cash flow problems in its performance of the contract.  NALCO’s owner took out a home equity loan and borrowed $100,000 from members of his church in an effort to maintain adequate cash flow for the business.  Ultimately, NALCO was unable to fully perform within the contract period.

After demobilizing, NALCO and the Corps then entered into settlement negotiations.  NALCO submitted a settlement proposal seeking $1,023,898.  After discussions, the Contracting Officer told NALCO that “$375,000 was take it or leave it and if NALCO did not take it she would terminate the contract for default.”

NALCO’s owner understood “that if the contract was terminated for default he would get no money and the bond company would auction off his personal house, property and NALCO’s equipment.”  Under these circumstances, NALCO signed the settlement offer of $375,000.  The modification memorializing the settlement offer included a waiver and release of further claims against the Corps related to the contract.

Unsurprisingly, NALCO was dissatisfied with the settlement.  After unsuccessfully seeking relief through other avenues, NALCO filed a claim with the Contracting Officer seeking more than $2 million in damages.  The Contracting Officer denied the claim (presumably citing the waiver and release) and NALCO appealed to the ASBCA.

Interpreting DFARS 252.236-7004, the ASBCA said that it was an “abuse of discretion” for the Corps to offer NALCO so little in mobilization costs.  The Corps’ rejection of NALCO’s “plea for payment,” showed “a degree of callousness unexpected from the government since the government caused NALCO’s cash flow crisis.”

After holding that other Corps actions violated the Government’s implied duty of good faith and fair dealing, the ASBCA turned to the negotiated settlement of $375,000.  The ASBCA held that because the Corps caused NALCO’s cash flow difficulties and breached the contract, “NALCO’s failure to perform due to financial difficulties is excusable.”  Under these circumstances, the Corps “had no right to terminate for default and therefore no right to threaten to terminate for default.”

The ASBCA explained that “[s]uch threats can be coercive.”  Coercion can occur when the government takes an action that is “(1) illegal, (2) a breach of an express provision of the contract without a good faith belief that the action was permissible under the contract, or (3) a breach of the implied covenant of good faith and fair dealing.”

Here, the ASBCA had already determined that the Corps had violated the implied covenant of good faith and fair dealing.  And while the Corps’ actions weren’t illegal, the ASBCA also found that the Corps “violated an express provision of the contract, the Default clause [FAR 52.249-10] without a good faith belief that the action was permissible under the contract.”  Thus, “having found two of the three indicia of coercion, we find that NALCO was coerced into signing [the modification memorializing the settlement agreement] and its release is unenforceable.”

The ASBCA granted NALCO’s appeal in part, and remanded the matter to the parties to determine the exact amount to which NALCO would be paid.  (NALCO will have the right to appeal again if those negotiations don’t succeed in producing a fair agreement).

Contractors should be careful not read too much into the NALCO case.  Other precedent says that, as a general matter, the Government can be a tough negotiator, and most settlements aren’t invalidated because of coercion or duress.  This case is very fact-specific: it is clear from the ASBCA’s full opinion (which weighs in at 57 pages) that the ASBCA was very unhappy with the Corps’ treatment of NALCO pretty much from Day One.  Indeed, the ASBCA said that “[a]t every point where an important decision had to be made, the [Corps] chose to protect itself rather than act to successfully complete the contract or redress NALCO’s legitimate claims.”

That said, NALCO demonstrates that while the Government is allowed to be tough, it cannot be unfair.  Here, the Corps unfairly “squeezed” a contractor for a one-sided settlement, using unjustified threats of default and a cash flow crisis the Government itself had created to get NALCO to sign.  That crossed the line from merely tough to impermissible coercion.

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