England v. Contel Advanced Systems, Inc.
| Decision Date | 06 October 2004 |
| Docket Number | No. 04-1006.,04-1006. |
| Citation | 384 F.3d 1372 |
| Parties | Gordon R. ENGLAND, Secretary of the Navy, Appellant, v. CONTEL ADVANCED SYSTEMS, INC., Appellee. |
| Court | U.S. Court of Appeals — Federal Circuit |
James D. Colt, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for appellant. On the brief were Peter D. Keisler, Assistant Attorney General; David M. Cohen, Director; Mark A. Melnick, Assistant Director; and Nancy M. Kim, Trial Attorney.
Gayle R. Girod, Reed Smith, LLP, of Washington, DC, argued for appellee. With her on the brief was Natalia W. Geren.
Before NEWMAN, LOURIE and DYK, Circuit Judges.
Opinion for the court filed by Circuit Judge DYK. Dissenting opinion filed by Circuit Judge PAULINE NEWMAN.
Appellant the Secretary of the Navy ("the Navy") appeals from the decision of the Armed Services Board of Contract Appeals ("ASBCA" or "the Board") finding the Navy liable to Contel Advanced Systems, Inc. ("CASI") for breach of contract and remanding to the contracting officer for determination of quantum. Contel Advanced Systems, Inc., ASBCA Nos. 50648, 50649, 51048, 51049, 2003 WL 21373938 (June 11, 2003). We hold that Contel's claim is essentially a claim for interest and barred by the no-interest rule. Accordingly, we reverse.
This dispute stems from a contract to design, install and maintain a telecommunication system ("the project") for the Naval Weapons Center in China Lake, California. In 1987, the Navy issued a request for proposal ("RFP") for the project. The project was to take place in two phases: (1) an implementation phase, during which the telecommunication system would be designed and installed; and (2) a maintenance and administration phase. During the implementation phase, the contractor would first prepare a station design plan ("SDP"). After the SDP was approved by the Navy, the contractor would install the system. Thereafter, "cutover" (the time when the new telecommunication system replaced the old one) and implementation would occur. If certain performance goals were met, system acceptance would occur 30 days after cutover.
The dispute here involves one aspect of the contract relating to the implementation phase. When the RFP issued, the Navy did not know the exact quantities of certain types of station/ancillary equipment that it would need. This equipment was listed under contract line item number B007 ("CLIN B007"). Offerors were instructed to provide fixed unit prices for items under CLIN B007. The Navy would then multiply the unit prices by its best estimate of quantity to arrive at a bid for the project. The RFP stated that the "total price for [CLIN] B007 shall be redetermined based on the quantity of equipment actually installed," pursuant to the approved SDP. (J.A. at 120.) Thus, the amount of equipment included under CLIN B007 in the original offer was to be adjusted to reflect the actual amount of equipment installed according to the SDP, and the final price was to be adjusted accordingly. The RFP asked potential offerors to quote prices for the implementation phase under four different methods of purchase: (1) straight purchase, (2) lease to ownership ("LTO"), (3) lease with option to purchase, and (4) straight lease.
CASI submitted an offer in accordance with the RFP and was awarded the contract for the project in September 1990. The Navy opted to purchase the implementation phase of the contract at the LTO price of $30,009,154.80 to be paid in 60 monthly installments. Under the LTO option, the Navy's installment payments included an interest component.
CASI prepared its initial SDP in January of 1991. It was approved by the Navy a few months later. Soon after, the parties executed several price modifications that increased the tentative LTO price for the implementation phase to $36,223,371. This new tentative LTO price was based on quantity estimates for several CLIN B007 items. The parties recognized that a number of these quantity estimates were significantly higher than the actual amount of equipment that would be installed under the approved SDP. In January 1992 CASI requested the Navy to reduce the LTO price to reflect these overestimates. In April and May of 1992 CASI performed an audit to ascertain the amounts of equipment actually installed and submitted a letter to the Navy, recommending that the LTO price be adjusted downward to $33.5 million. The parties met in May 1992 to modify the LTO price but were unable to agree to a modification at that time. Thereafter, the Navy issued a unilateral modification that, among other things, stated that the LTO price for the implementation phase remained at approximately $36.2 million. Cutover occurred on April 10, 1992, and system acceptance occurred on May 11, 1992.
In order to fund its expenditures during the implementation phase, CASI obtained a loan from its parent corporation. The full balance of this loan was due upon system acceptance. However, under the project contract, CASI would only begin to receive installment payments for the implementation after system acceptance. To repay the obligation to its parent corporation on system acceptance, CASI sought to obtain a third-party loan under which it would assign the Navy's installment payments to the lender. While the Navy at no time directed CASI to obtain financing, it refused to make payments to the third-party lender unless the invoices exactly matched the official contract price of approximately $36.2 million. CASI concluded that it could obtain financing only if it borrowed the full amount of the existing contract price. CASI borrowed a principal of approximately $27 million, an amount equivalent to the May 1992 contract price of approximately $36.2 million, once interest over the LTO term was added in. The approximately $27 million that was borrowed exceeded the principal amount of the equipment actually purchased under the SDP. The excess borrowed funds were placed in an interest-bearing account. The interest rate on the deposited amount was far lower than the cost of borrowing from the third-party lender.
After system acceptance, the Navy began making monthly payments of about $600,000 (approximately one-sixtieth of the official contract price of approximately $36.2 million) to CASI's third-party lender. This continued until October 1996 when the Navy finally issued a unilateral modification reducing the LTO price to $32,351,679, a net decrease of approximately $4.4 million.1 Curiously, CASI, which had earlier insisted that the Navy reduce the contract price, objected "that the LTO [] reconciliation was erroneous, and the Navy had no authority to unilaterally reduce the contract value." Contel, slip op. at 22. At this time the Navy had made 52 installment payments. After making another installment payment in November and a partial payment in December 1996, the Navy concluded that it had repaid the entire adjusted contract price and ceased making installment payments. Following the Navy's refusal to pay the remaining installment payments, the third-party lender demanded payment from CASI. CASI negotiated a new payment schedule with the third-party lender, which required it to pay the lender an additional $2,121,106, representing interest owed on the funds borrowed in excess of the final contract price, less the interest CASI earned from the deposit of these funds prior to the determination of the final contract price.
On February 4, 1997, CASI submitted a certified claim to the contracting officer ("CO") for $2,121,106, which as it explained represented the additional interest costs it suffered as a result of the Navy's failure to reconcile the LTO price in 1992. In a final decision dated March 14, 1997, the CO denied this claim because there "was no agreement for reimbursement of any costs incurred by CASI for financing" and "[h]ow a contractor finances its efforts ... is not the Government's concern." (J.A. at 248-249.) The CO also blamed the delay in finalizing the LTO price on CASI's failure to promptly provide an "accurate accounting" of the equipment installed. (J.A. at 248.) Further, the CO determined that the Navy had actually overpaid CASI by $279,464.32 and demanded repayment in this amount.
Several months later, CASI submitted a second certified claim that asserted "alternative theor[ies] of recovery." (J.A. at 251.) Specifically, CASI argued that the LTO price should not have been adjusted downward because it was set at a fixed price of approximately $36.8 million, regardless of the quantities of equipment installed. CASI also urged that it was entitled to the "administrative costs" and attorney's fees it incurred as a result of the Navy's "wrongful cessation of payments" to the third-party lender. (J.A. at 252-53.) Both of these theories were also rejected, and CASI appealed the denial of both certified claims to the ASBCA.
On June 11, 2003, the ASBCA issued a decision in favor of CASI on its first certified claim. The Board held that "the Navy had a duty to reconcile the [LTO price] no later than system acceptance and its refusal without a valid excuse to do so was a breach of its duty to cooperate and a breach of contract." Contel, slip op. at 26 (citations omitted). It rejected the Navy's arguments that "various unresolved obstacles prevented it from reconciling the LTO[ ] price by system acceptance," because it found that "reconciliation," i.e., reduction of the LTO price based upon the quantity of equipment actually installed, "could have been accomplished based on the information in the SDP" and that "CASI was eager to complete the reconciliation." Id. at 30.
The Board further held that the "no-interest rule" did not bar recovery on the first certified claim, which represented the additional interest costs CASI suffered as a result of the...
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