The government, like any commercial entity, enters into contracts and pays for the goods and services it agrees to use. Also like a commercial entity, the government makes use of all of the traditional forms of agreement available to a commercial entity, including those that are, perhaps, precursors to a final agreement but are not, in and of themselves, a legally enforceable contract. Most contract professionals know that an agreement to agree, a basic ordering agreement, and a blanket purchase agreement are not formal contracts. As such, they give rise to no obligation to order or to pay for goods or services delivered UNLESS (and until) an additional document that rises to the level of a contract is executed between the parties.
This was the situation with Hallym Furniture Industrial Co., Ltd., that had negotiated a Blanket Purchase Agreement (BPA) with the Army to repair wooden furniture in Korea. There were some orders placed under the BPA and issues arose over billing. The Army paid Hallym what it believed it was due and then cancelled the BPA. Hallym pursued its case against the Army in the Armed Services Board of Contract Appeals (ASBCA, BCA, or Board). Hallym filed a claim seeking reinstatement of the BPA, bid preparation costs, and lost profits on the basis of the BPA. No claim was apparently filed that related to any of the ten completed orders.
What exactly is a contract? Everyone who has taken a basic business law class can recite the five basic elements that must exist to find (or give rise to) a contract. Those are:
Capacity of the parties.
The first two are often referred to as the “mutuality of agreement” and consideration creates the ‘mutuality of obligation.” The Uniform Commercial Code (UCC) loosens these rigid requirements somewhat because one of the underlying purposes of the UCC is to “find” a contract rather than NOT “find” a contract. In other words – it is designed to facilitate commerce and make it easier to enter into contracts.
Government contracts are distinctly different. They still follow what is known as the Federal Common Law. While much of the common law of contracts, both government and commercial, is derived from the common civil law we inherited when we were a British colony, the area of government contract law has hung on to many of the rules and principles of that common law rather than move, as all the states have, to a more codified law reflected predominantly by the UCC. Thus, government contracts are always resolved under the Federal Common Law.
This becomes important for new participants in government contracting to understand. The underlying body of law as between the two types of contracts is different. The exact same fact situation can have different outcomes simply because the government is one of the parties rather than two commercial entities. This requires us to distinguish what is and isn’t a government contract and thus the body of law under which such claims are resolved.
At the same time, since both bodies of law had the same genesis, there are many things that are identical in application and interpretation.
Much of the UCC adopted the commercial common law as it existed when the uniform code was drafted; it also deviated significantly from that common law when it was felt that contracting should be made easier and less prone to technical readings or loopholes in the common law. The guiding principles of the UCC specifically state that one of its intent was to find a contract rather than impose impediments. Even so, older principles of common law that recognized that some parties talk about a contract and take steps to create a contract, but by their actions and the use of specific agreements make it clear that NO contract has arisen, still apply. Both a BPA and a BOA are, and always have been under the common law, NOT contracts that can be legally enforced. They are a framework against which future contracts may be awarded. If such an order is placed, the terms and conditions of the BPA will control, including, often, the specific ordering procedures that must be used.
Hallym seems to have completely misunderstood many aspects of government contracting. First, a BPA is by definition NOT a contract. The orders under it were – each in their own separate way. But not the BPA. Thus seeking its reinstatement (an action in equity, but only lawyers care about that distinction) isn’t something the BCAs can do. You can’t reinstate something that was not a contract in the first place. And even if they DID get that remedy – there is nothing that requires the Army to place another single order against it. It is an action that does not provide a tangible remedy.
Halym also sought its bid preparation costs. There certainly were negotiations in creating the BPA, but those are not the same as bid preparation as is done in response to an IFB or an RFP. We aren’t told, but there may have been preparation costs for each of the ten orders that were placed, especially if they were competitive. This is another gross misunderstanding of how government contracts work. Unless you are already under a contract and the government request that you propose on something new or different, usually under the changes clause of the contract, your bid and proposal costs are never directly recoverable. Those costs must be allocated against all of your work as an overhead cost. In certain protest where the contractor has “substantially prevailed” they are awarded proposal costs under the idea that the government’s wrong action caused the unnecessary expenditure of those funds. In this case, there was no wrongful act by the government. The real issue apparently was a dispute over invoices.
Hallym then claimed lost profits – a form of recovery NEVER given under a government contract. This is one area where the federal common law and the UCC diverge. Consider a government Termination for Convenience (T4C). As a matter of public policy, when the government determines that its need for the product of the contracts has gone away, they are allowed to make the contract go away as well. In the commercial world this is a breach of contract and the damages are measured by the standard of putting the non-breaching party in the same position they would have been as if the contract had been fully performed. One portion of those damages includes the full profit that would have been earned if the contract were fully performed – a concept referred to as anticipatory profits.
Government contracts contain a Termination for Convenience clause which reserves to the government the right to walk away from a signed contract if the need has gone away. You can read about the Christian Doctrine here, but for present purposes the important point is that the T4C clause is always included in every government contract even if it was, for whatever reason, omitted. When the government exercises the right to terminate, the T4C clause serves, among other things, to limit the damages they will pay for their “breach”. Anticipatory profits are specifically not allowed to be claimed. Profit is allowed ONLY on that part of the contract that has been delivered and accepted.
Effectively Hallym requested three remedies, when it was entitled to none. They are now without a BPA vehicle to obtain orders for furniture repair from the government. They are without the costs they expended in negotiating the BPA. And they are without the profits they had hoped to earn on orders that were never placed.
The board denied all of Hallym’s claims and agreed with the government. The rulings of the Federal Circuit are precedent that the boards must follow. In this case, the rule has often been reconfirmed that BPAs do not impose binding obligations on parties. They are not contracts. They lack a mutuality of obligation and therefore lack consideration. The government is not obligated to place any orders under a BPA. A BPA, therefore, contains what might be called an illusory promise without mutual obligations. Under a BPA (or BOA, or agreement to agree) neither party was required to do anything further. Hallym’s BPA did not require either party to take action until an order was issued. The BPA was merely a set of ground rules, not a contract itself. Simply calling it a BPA signals that it carries the usual concept of a BPA – no agreement beyond the terms, conditions, and clauses that would apply if and when a firm order is placed.
The board noted that this particular BPA was not a model of clarity. It had some confusing language and some that suggested it represented a binding contract. Hallym argued, in part, that the terms of the BPA forced it to accept the order once the government issued it. Without an enforceable contract, it is unclear how the government would have enforced this requirement. The board reasoned that this still did not create the mutuality of obligation that would allow them to find that the contract was supported by consideration. Without that – it is not a contract. An obligation arose only after an order was issued by the government.
BPA’s might be extensively detailed to the point that orders are just placed and filled without any additional need for negotiation. Others are less detailed and a great deal of negotiation must occur before an order actually issues. None of this changes the fundamental role of a BPA as a vehicle to facilitate future contracts. It is not a contract in and of itself.
The board provided the following cited rationale for their decision:
Fundamental contract law dictates that there can be no contract without mutual obligations between the parties. See Kam-Almaz v. United States, 682 F.3d 1364, 1368 (Fed. Cir. 2012); Night Vision Corp. v. United States, 469 F.3d 1369, 1375 (Fed. Cir. 2006). Specifically, the Court of Appeals for the Federal Circuit has held that BPAs that do not impose binding obligations upon the parties are not contracts. Crewzers, 741 F.3d at 1384; Modern Sys. Tech. Corp. v. United States, 979 F.2d 200, 206 (Fed. Cir. 1992) (“absence of mutuality of obligation leads to the conclusion that the parties lacked the requisite contractual intent”); see also See Ridge Runner Forestry v. Veneman, 287 F.3d 1058 (Fed. Cir. 2002).6 In particular, where the government is not obligated to place call orders, as here, the BPA “reflect[s] illusory promises that do not impose obligations on either party.” Crewzers, 741 F.3d at 1382–83. [@4]
This is a well-supported argument – full of precedent and case law. And as noted, it is “fundamental contract law” suggesting that everyone engaged in this area of commerce should have an understanding of this rule. There are no surprises or the creation of new law here. It is well settled.
There are several alternatives to this business arrangement that would have served Hallym, and possibly the government, better. For example, the parties might have considered a requirements contract that would require the government to order ALL of its furniture repair needs from one contractor. This might be limited to a geographic area or other practical limitations for ease of administration. The key difference is – a requirements contract is a legally enforceable contract even without a minimum quantity. It’s promise to order ALL of its needs from one contractor (however that commitment might be defined or limited) creates the necessary “mutuality of obligation” that consideration demands. The government still could have exercised its T4C rights, thus bringing the contract to an end and it is unlikely that Hallym would have come out better under those circumstances.
Another contract variation might have been an IDIQ, short for Indefinite Delivery, Indefinite Quantity. These are still activated by the issuance of specific orders, but they are legally enforceable contracts because they require a minimum order quantity up front. This is the “consideration” that supports the contract under common law. It reflects a “mutuality of obligation”. If that amount is not ordered, the contractor is entitled to recovery up to that minimum amount. It is often used when, as here, multiple awards are made. Unlike a requirements contract, however, the government might only order the minimum and simply place no new orders. That is not a termination since no future work is being terminated. It is often the cheapest way for the government to exit a contract. Contractors are encouraged to price the minimum quantity at a level that is competitive, but covers all of their initial costs.
There are a number of lessons that can be learned from Hallym’s errors and misunderstandings of government contracts.
1. Only contracts are contracts; BPAs, BOAs, and agreements to agree are simply not legally enforceable. They are merely the framework for future contracts.
2. One rule that remains from the federal common law is that contracts must be supported by “consideration” or “a thing for a thing” as reflected in the Latin phrase “quid pro quo.” A set of terms and conditions as are found in a BPA does not give rise to a contract.
3. Certain costs are not recoverable from the government. Anticipatory profits are one of those.
The government as well has a few things to learn.
1. The BPA was poorly drafted and gave the BCA sufficient cause to have ruled against the government if it had wished to. The decision the Board rendered was legally correct, but that never excuses bad document drafting.
2. The search for “consideration” is often a search for the slimmest of threads. The Board did not find such a link here, but again – it perhaps could have, given the poor drafting of the agreement.
3. One rule of contract interpretation is that when an ambiguity is found in a contract, it is generally interpreted against the party responsible for drafting it. The Board could have hung its hat on that peg and ruled against the government.
4. The choice of using multiple BPAs may not have been the best type of agreement to use. Given that the performance was to occur in Korea, this may have been an accommodation for local customs and prior course of dealing. That aspect is not developed by the Board, and in fact is not ultimately relevant. Giving each of the awardees an IDIQ with a low (but legally adequate) minimum to serve as lawful consideration might have eased administration. Again, without factual development being revealed in the case, this is all speculation.
5. There is never an excuse for sloppy contract drafting. Yes, there may have been some local business customs, and there may have been some language barriers. NONE of these are excuses. Over-reliance on standard clauses without proper customization is simply bad contract operations.
6. The government always has a mandate to maximize competition. Whether legally correct or not, treating contractors in a way they perceive to be unfair will limit the pool of competitors. Perhaps the government needs to sponsor some classes to help the contractors understand some of the rules. This might facilitate smoother operations between the parties. No one is well-served by disputes that could have been avoided with better contract drafting and better communication from the outset.
Monday morning quarter-backing is often not useful, so there may have been many other factors and considerations not known to us sitting here in hindsight. Nonetheless the lessons are pertinent and important for contractors to understand – whether domestic or foreign.
Federal contracting is controlled by many, many laws and regulations. Even apart from the many laws and the Federal Acquisition Regulation system (which includes all of the supplements by all of the affected agencies), there are countless ancillary laws that cover supply chain, computer security, special acquisition methods, and the laws that govern the expenditure of appropriated funds. The contract professional will make themselves aware of these laws and strive to adhere to them.
Did you know that in two places the FAR states that “No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met.” FAR 1.602-1(b). Read that again and think about the heavy responsibility this lays on the CO. ALL laws. ALL executive orders. ALL regulations. It is difficult enough to even know what they are. The requirement is repeated in FAR 1.602– 2(a) and adds a requirement to ensure adequate funds are available. FAR only has to say it once for it to be required.
Similarly, contractors must be equally well versed in the rules. And especially aware of “fundamental contract law” that applies to government contracts. It is hard enough to lose a contract or contract vehicle. It is doubly hard to lose the contract and the full claim.
CCS provides a full range of training and development for contract professionals and those who interact with the acquisition process. Let us know your specific and specialized needs for training sessions that ensure the attendees really learn the material.