K-Con, Inc. v. Sec'y of the Army

• Decision Date: 05 November 2018
• Docket Number: 2017-2254
• Citation: 908 F.3d 719
• Parties: K-CON, INC., Appellant v. SECRETARY OF the ARMY, Appellee
• Court: U.S. Court of Appeals — Federal Circuit

908 F.3d 719

K-CON, INC., Appellant

v.SECRETARY OF the ARMY, Appellee

2017-2254

United States Court of Appeals, Federal Circuit.

Decided: November 5, 2018

Robert J. Symon, Bradley Arant Boult Cummings LLP, Washington, DC, argued for appellant. Also represented by Aron C. Beezley.

Jessica R. Toplin, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, DC, argued for appellee. Also represented by Joseph H. Hunt, Robert E. Kirschman, Jr., Steven J. Gillingham.

Before Reyna, Bryson, and Stoll, Circuit Judges.

Stoll, Circuit Judge.

K-Con, Inc. and the Army entered into two contracts for pre-engineered metal buildings. The Armed Services Board of Contract Appeals ("Board") held that bonding requirements were included in the contracts by operation of law at the time they were awarded, pursuant to the Christian doctrine.¹ See G. L. Christian & Assocs. v. United States (Christian I ), 312 F.2d 418 (Ct. Cl. 1963). K-Con appeals. We conclude that the two contracts are construction contracts and that, under the Christian doctrine, the standard bond requirements in construction contracts were incorporated into K-Con's contracts by operation of law. Accordingly, we affirm.

I

K-Con claims that, after the Army awarded two contracts for pre-engineered metal buildings, the Army delayed issuance of a notice to proceed for two years, resulting in $116,336.56 in increases in costs and labor. According to K-Con, this delay was due solely to the government's decision to add to each contract the performance and payment bonds set forth in Federal Acquisition Regulation ("FAR") 52.228-15, Performance and Payment Bonds—Construction.

In September 2013, the government awarded to K-Con task orders for the design and construction of a laundry facility and the construction of a communications equipment shelter at Camp Edwards, Massachusetts. The contracting officer issued both solicitations using the General Services Administration eBuy system using Standard Form 1449, Solicitation/Contract/Order for Commercial Items. Neither solicitation included an express requirement that K-Con provide performance and payment bonds. Nor did the solicitations include FAR clause 52.228-15, Performance and Payment Bonds—Construction, the standard language for performance and payment bonds included in government construction contracts, mirroring the requirements in FAR 28.102-2(b).

In October 2013, the Army instructed K-Con to provide performance and payment bonds in accordance with FAR 28.102-2(b) before the Army could issue its notice to proceed with the contracts. Nearly two years later, in September 2015, K-Con provided the required bonds and the parties modified each contract to compensate K-Con for the cost of the bonding fees. In January 2016, K-Con submitted a request for equitable adjustment ("REA") for each contract, requesting a total of $116.336.56² for increases in costs and labor over the two-year period. Subsequently, the contracting officer issued Final Decisions for each contract. The contracting officer determined that the contracts were for construction, and therefore the performance and payment bond requirements were mandatory. The contracting officer further denied both requests on the basis that the bond requirements set forth in FAR 58.228-15 were incorporated into the contracts at the time they were awarded, under the Christian doctrine. On appeal, the Board agreed with the contracting officer. K-Con filed a motion for reconsideration, which the Board denied.

K-Con appeals, seeking reversal of the Board's determination. K-Con argues that the contracts were not construction contracts and, alternatively, that the bond requirements were not incorporated into the contracts by way of the Christian doctrine. Based on these arguments, K-Con requests a remand to the Board to determine the amount to be awarded for K-Con's claims. We have jurisdiction under 28 U.S.C. § 1295(a)(10).

II

A

K-Con first argues that the Board erred in holding that the contracts at issue are construction contracts. K-Con asserts that they are contracts for commercial items, which do not carry mandatory bonding requirements. The government responds that both contracts are patently ambiguous as to whether they are construction contracts and, thus, it was incumbent on K-Con to inquire as to whether the contracts were for construction or commercial items. Because it did not do so, the government contends that K-Con is precluded from now arguing that the contracts are for commercial items. We agree.

"A patent ambiguity is present when the contract contains facially inconsistent provisions that would place a reasonable contractor on notice and prompt the contractor to rectify the inconsistency by inquiring of the appropriate parties." Stratos Mobile Networks USA, LLC v. United States , 213 F.3d 1375, 1381 (Fed. Cir. 2000). This is distinct from a latent ambiguity, which exists when the ambiguity is "neither glaring nor substantial nor patently obvious." Cmty. Heating & Plumbing Co. v. Kelso , 987 F.2d 1575, 1579 (Fed. Cir. 1993) (citing Mountain Home Contractors v. United States , 425 F.2d 1260, 1264 (Ct. Cl. 1970) ). We review de novo both the existence of an ambiguity and whether any ambiguity is patent or latent because they are both issues of law.

Stratos , 213 F.3d at 1380 (citing Grumman Data Sys. Corp. v. Dalton , 88 F.3d 990, 997 (Fed. Cir. 1996) ).

We conclude that the contracts were patently ambiguous. On the one hand, as the Army admits, if the contracts had been issued using the standard construction contract form, they would have been construction contracts without any ambiguity. But that is not what happened here. Instead, these contracts issued using the standard commercial items contract form. The line item descriptions even included the phrase "FOB: Destination," which is typically used for commercial items contracts. J.A. 31, 53.

On the other hand, there were many indications that the contracts were for construction, not commercial items. For example, the contract line item descriptions for both contracts, which "identify the supplies or services to be acquired," were for construction activities. See generally FAR part 4.10 (establishing uniform use of line items). The communications shelter contract required the contractor to "[c]onstruct Telecom Hut D." J.A. 57. Similarly, in the laundry facility contract, the contract line item number called for "[c]onstruction of a new pre-fabricated metal building." J.A. 31. According to the statement of work in the laundry facility contract, the project scope included "design and construction." J.A. 32. Indeed, the statement of work included many construction-related tasks, including developing and submitting construction plans, obtaining construction permits, and cleaning up construction areas. The statement of work also required compliance with FAR regulations relevant only to construction contracts as well as Davis-Bacon wages,³ which are likewise only applicable to construction contracts. The use of the commercial items solicitations form and the construction-related terms of the contracts themselves were facially inconsistent indications that would have placed a reasonable contractor on notice that the contracts are patently ambiguous.

Because the solicitations contained contract language that was patently ambiguous, K-Con cannot argue that its interpretation was proper unless K-Con contemporaneously sought clarification of the language from the Army. See Grumman , 88 F.3d at 998 (addressing the issue in the context of a bid protest). K-Con did not seek such clarification and therefore cannot now argue that the contracts should be for commercial items.

B

We now turn to K-Con's second argument. According to K-Con, even if the contracts were properly considered construction contracts, the Board erred in holding that the contracts included bond requirements under the Christian doctrine.

Here, the relevant regulation is FAR 52.228-15, which requires the offeror in construction contracts valued at over $150,000 to furnish performance and payment bonds:

As prescribed in 28.102-3(a), insert a clause substantially as follows:

Performance and Payment Bonds—Construction (OCT 2010)

...

(b) Amount of required bonds. Unless the resulting contract price is $150,000 or less, the successful offeror shall furnish performance and payment bonds to the Contracting Officer as follows:

(1) Performance bonds (Standard Form 25). The penal amount of performance bonds at the time of contract award shall be 100 percent of the original contract price.

(2) Payment Bonds (Standard Form 25-A). The penal amount of payment bonds at the time of contract award shall be 100 percent of the original contract price.

FAR 52.228-15 (emphasis added); see also 40 U.S.C. § 3131(b) ; FAR 28.102-1(a).

Neither contract expressly incorporated this required clause. However, under the Christian doctrine, a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal administrative regulations. See Gen. Eng'g & Mach. Works v. O'Keefe , 991 F.2d 775, 779 (Fed. Cir. 1993) (citing Christian I , 312 F.2d at 424, 427 ). In Christian , the Court of Claims concluded that the standard termination clause required by the Armed Service Procurement Regulations must be read into the contract, even though the contract lacked a termination clause. Christian I , 312 F.2d at 424–26. Accordingly, the court denied the contractor's breach-of-contract claim when the government terminated the construction contract for its own convenience. Id. at 427. For a court to incorporate a clause into a contract under the Christian doctrine, it generally must find (1) that the clause is mandatory; and (2) that it expresses a significant or deeply ingrained strand of public procurement policy. See Gen. Eng'g & Mach. Works , 991 F.2d at 779.

We review the Board's determinations on the applicability of the Christi...