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Fighting the Power: Construction Dispute Resolution with the U.S. Government

Construction Litigation Update Jeffrey O. Davis, Kevin M. Long, Stephen J. Gardner, Eric J. Van Schyndle

The recent economic challenges in the construction industry have caused many contractors and design professionals to consider beginning or increasing their involvement in public work. However, public work - and particularly construction work with the federal government - comes with its own set of obligations and challenges not present in private projects. One such challenge is the unique and sometimes inflexible dispute resolution mechanisms available to those who contract with the federal government. Many of those disputes must be resolved through a specialized court known as the United States Court of Federal Claims (the "CFC"). This update summarizes the CFC's jurisdiction and identifies some traps for the unwary that contractors and design professionals should be aware of.

The U.S. Court of Federal Claims

The CFC is where contractors are permitted to bring claims for monetary damages against the federal government. Jurisdiction in the CFC involves diverse but specific issues and, in the construction context, is usually based on the federal laws called the Tucker Act and the Contract Disputes Act. For a construction suit to be maintained in the CFC, an individual must have had a contract with the U.S. Government or must identify a pertinent law or regulation that mandates the payment of money. The government must also have breached its obligations under such contract, law or regulation.

Because the federal government is always the defendant in suits in the CFC, attorneys for the Department of Justice ("DOJ") - the agency that represents the federal government - are quite experienced in the jurisdiction and rules applicable to the CFC. The DOJ frequently seeks early dismissal of cases against the federal government when unwary plaintiffs have inadvertently made procedural errors in bringing their claims to the Court. In addition, plaintiffs are often caught off guard by the unique rules governing the administration of federal government contracts and can end up facing unexpected defenses raised by the DOJ.

Operation of the Court

The CFC sits in Washington, D.C. and consists of 16 judges and 8 senior judges who are appointed to 15-year terms by the president. Procedures vary significantly from judge to judge within the CFC. However, most judges will set the trial venue near the witnesses. Accordingly, a federal lawsuit arising out of a project in Wisconsin will technically take place at the CFC in Washington but physically occur at a federal courthouse in Wisconsin. Pre-trial motions will take place in Washington, but most judges liberally allow telephonic appearances.

Ensuring That You are in the Right Court

The subject matter jurisdiction of the CFC is very narrow. Generally, the CFC does not have jurisdiction to entertain tort claims (e.g., defamation or personal injury claims) against the government; plaintiffs must be certain that their claims are founded on a contract or some money-mandating law. When tort claims are brought in the CFC, they are usually dismissed and must be refiled in a federal district court.

In addition, suits seeking equitable relief, such as orders compelling government agencies to take certain action, are usually brought in federal district court, not the CFC. Unwary plaintiffs whose CFC complaints could be interpreted as seeking equitable relief (such as the release of funding) can expect a motion to dismiss from the DOJ, though clarifying amendments to the complaint can sometimes cure these types of problems.

Dismissals of CFC cases are also prevalent whenever the plaintiff has filed a similar suit against the government in another forum. Under statutes like 28 U.S.C. ยง 1500, the CFC must dismiss a new complaint where the plaintiff already had a suit for the same claim pending in another federal court. Similarly, under what is known as the Election Doctrine, the CFC will dismiss a complaint if the plaintiff had a case already pending before the Civilian Board of Contract Appeals for the same claim. Thus, plaintiffs should consider filing suit in the CFC for their money damages claims before filing suits with the same or similar claims elsewhere.

Properly Preparing Contractors' Claim for Suit

Before filing a suit in the CFC, plaintiffs contracting with the U.S. government must ensure that their contracts were awarded or approved by an official who had actual authority to enter into contracts on behalf of the government. Contracts that were approved by government employees without actual authority to bind the government will not be found enforceable.

Next, once a breach of contract claim has accrued, the plaintiff must present its claim to the contracting officer before filing at the CFC. If a claim was not fully presented to the contracting officer, the CFC will dismiss the plaintiff's suit. A claim must be presented in some detail, and a demand for damages must be explicitly made; a request for advice or for the government's interpretation of a contract provision is not sufficient. Additionally, for claims in excess of $100,000 the contractor must certify the claim to the contracting officer.

After presentation of a claim to the contracting officer, plaintiffs still cannot file suit until the contracting officer reaches a final decision denying the claim. However, if a contracting officer does not issue a final decision within a prescribed time limit, the plaintiff will be able to file suit in the CFC based on what is known as a "deemed denial" or effective denial of its claim. Thus, plaintiffs need not always wait for what can oftentimes be a slow administrative process. However, any claim must be filed within one year of the contracting officer's final decision.

Multiple Party Claims

In many construction disputes, allegations regarding fault can be made against numerous parties. While the CFC is the only court in which the party with the contract must bring its claim against the U.S., other parties are not proper parties in that suit. Accordingly, the government contractor with concurrent interrelated claims against subcontractors, insurers, designers or others must bring a separate cause of action against those entities. While the practices differ from judge to judge at the CFC, some courts have been amenable to coordinated discovery and other efforts to streamline related actions.

Additionally, only the primary contractors may bring suit in the CFC. Damages suffered by a subcontractor can only be brought against the federal government through a primary contractor, and only if the primary contractor has suffered actual damages. The Severin Doctrine prohibits recovery against the United States when the primary contractor has been absolved of liability to the subcontractor. Thus, if the primary contractor and subcontractor come to a settlement of any claims, any recovery from the federal government for those claims may be barred.

Insurance Defense Duties

Underlying nearly every construction lawsuit are insurance coverage issues, and litigation in the CFC can present unique permutations to those issues. Standard commercial general liability insurance policies provide insured contractors a defense for a "suit" filed against the contractor. In the CFC the insured, as a rule, is the party who must initiate the proceedings, even if that means challenging a prior administrative finding that the insured contractor is the one who breached and owes the government money or additional work. Where that is the case, a real question arises as to whether the insured's affirmative challenge in the CFC is a covered "suit." Fortunately, the case law to date, though scant, has been positive for insureds by recognizing the common sense reality that such a challenge is defensive in nature.

Recently, the California Supreme Court (the "Court") confirmed that a federal administrative adjudicated proceeding under the Contract Disputes Act was a "suit" for purposes of determining an insurer's duty to defend. In Ameron International Corporation v. Insurance Company of State of Pennsylvania, the contractor sought coverage from insurers that issued general liability policies for settlement of a contract dispute with the federal government and related defense costs. In 1990, a bureau of the U.S. Department of Interior issued a "Contracting Officer's Final Decision" finding the contractor responsible for defects and seeking $40 million in damages. The contractor challenged the decision before the Interior Board of Contract Appeals (an alternative to bringing suit in the CFC) and put its insurers on notice. The contractor settled the claims for $10 million and pursued the insurers. The insurers argued that under a prior California decision a contracting officer's final decision and subsequent action was not a "suit." In Foster Grant v. National Union, the Court found that a claim based on an environmental protection agency's pollution remediation order did not trigger coverage. In Ameron, the Court disagreed, and found that these actions as well as claims brought directly in the CFC were "suits" that must be defended by insurers.

Federal Procurement Contracts can be Construed Differently Than Typical Contracts

Many standard provisions in government contracts come from a set of federal regulations known as the Federal Acquisition Regulation or "FAR." Because these regulations are repeatedly inserted as contract clauses in government contracts, they have been litigated and interpreted enough times that many have accepted judicial interpretations.

For example, the federal government generally only enters into contracts having certain types of payment structures, as set forth in the FAR (e.g., Cost-Plus-Fixed-Fee, Cost-Plus-Incentive-Fee, Time and Materials, etc.). It can be very difficult for contractors to argue that provisions in their contracts permit some other type of payment structure, such as a percentage profit structure, though such payment structures may be common in contracts between private parties. In other words, what may seem to be an alternative payment provision in a contract might not be construed that way by the CFC.

As another example, many provisions of the FAR that are inserted as contract clauses in federal government contracts are construed as flowing down to subcontractors. For example, the requirements of the Buy American Act can be interpreted as applying to certain subcontractors as well as prime contractors.

Furthermore, a judicial rule known as the Christian Doctrine requires courts to insert some of the more common regulations (those that reflect a deeply ingrained public policy) into government contracts in which the regulations did not originally appear at the time the parties entered into the contracts. Though this does not occur regularly, plaintiffs that are unfamiliar with federal contract administration can unexpectedly find themselves dealing with additional clauses being read into their contracts by operation of law.

Moreover, even apart from provisions of the FAR, there are some general rules of contract interpretation that apply specifically to federal government contracts. For example, provisions that may seem like warranties are strictly construed in favor of the government. Plaintiffs should not assume that a warranty exists when a contract provision states that a contractor will be able to do something (e.g., haul materials to a site via a certain entrance).

Working With and for the Federal Government

In the private market, many (and some would say most) construction disputes are resolved via business solutions due to financial realities such as ongoing relationships among owners, developers and contractors, and the significant transactional cost of full-blown construction litigation. In federal government contracting disputes, these factors play a different and often muted role. Accordingly, contractors should take extra care to understand their rights and obligations when involved in federal government construction projects.

If you have particular questions about your present or prospective government construction project, please contact either of our Construction Litigation Group chairs, David Muth at (414) 277-5621 / david.muth@quarles.com, Ed Salanga at (602) 229-5422 / edward.salanga@quarles.com or your Quarles & Brady attorney.

Kevin Long

Kevin Long is the national chair of Quarles & Brady LLP's Commercial Litigation Group and a member of the Firm's executive committee. Kevin earned his bachelor's degree in civil engineering at Marquette University in 1989. Kevin recently represented a government contractor in simultaneous proceedings in the U.S. Court of Federal Claims and Wisconsin State Court. Issues involved the propriety of a Contracting Officer's Final Decision, issues of defective design, and impact of defense tender rejections under indemnification agreements and additional insured endorsements.

Jeffrey Davis

Jeff Davis is the national chair of Quarles' insurance recovery practice. In addition to numerous other policyholder representations, Jeff represented the insured in Johnson Controls v. Employers Insurance of Wausau, in which the Wisconsin Supreme Court overruled prior law and allowed insurance recovery for environmental liability, and Plastics Engineering v. Liberty Mutual, where the same court adopted an "all sums" allocation method and multiple occurrence theory, thereby allowing insureds to receive full defense and indemnity for "long tailed" or "progressive" injury claims.

Stephen Gardner

Stephen Gardner is an associate in the Firm's Commercial Litigation Group. Stephen recently clerked for Chief Judge Edward J. Damich of the United States Court of Federal Claims and is intimately familiar with the procedural workings of the U.S. Court of Federal Claims.

Eric Van Schyndle

Eric Van Schyndle is an associate in the Firm's Commercial Litigation Group and the Firm's Government Affairs Compliance team. Eric recently represented a government contractor in simultaneous proceedings in the U.S. Court of Federal Claims and Wisconsin State Court. Before joining the Firm, Eric worked for the United States House of Representatives Transportation & Infrastructure Committee, where he took part in the drafting and implementation of SAFETEA-LU.