Kyle Engineering Co. v. Kleppe

• Decision Date: 03 July 1979
• Docket Number: 77-3100,Nos. 77-3071,s. 77-3071
• Citation: 600 F.2d 226
• Parties: KYLE ENGINEERING COMPANY, a California Corporation, John E. Kyle, Sr., David Kyle and Georgia Mae Kyle, Plaintiffs-Appellants, v. Thomas S. KLEPPE, Administrator of the Small Business Administration, Defendant-Appellee. KYLE ENGINEERING COMPANY, a California Corporation, John E. Kyle, Sr., David Kyle and Georgia Mae Kyle, Plaintiffs-Appellees, v. Thomas S. KLEPPE, Administrator of the Small Business Administration, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 226

600 F.2d 226

KYLE ENGINEERING COMPANY, a California Corporation, John E.

Kyle, Sr., David Kyle and Georgia Mae Kyle, Plaintiffs-Appellants, v. Thomas S. KLEPPE, Administrator of the Small Business

Administration, Defendant-Appellee.

KYLE ENGINEERING COMPANY, a California Corporation, John E.

Kyle, Sr., David Kyle and Georgia Mae Kyle, Plaintiffs-Appellees, v. Thomas S. KLEPPE, Administrator of the Small Business

Administration, Defendant-Appellant.

Nos. 77-3071, 77-3100.

United States Court of Appeals, Ninth Circuit.

July 3, 1979.

James D. Murray (argued), Pfeiffer & Murray, Los Angeles, Cal., for Kyle Engineering, et al.

Robert S. Greenspan, Atty. (argued), U. S. Dept. of Justice, Washington, D. C., for Thomas S. Kleppe.

Appeal from the United States District Court, Central District of California.

Before GOODWIN and TANG, Circuit Judges, and EAST ^*, District Judge.

TANG, Circuit Judge.

Kyle Engineering Co. (Kyle) appeals the district court's order dismissing its suit against the administrator of the Small Business Administration (SBA) for damages arising from the SBA's allegedly faulty performance of its contract with Kyle. The administrator cross appeals from the district court's dismissal of his counterclaims for the amounts due from Kyle on notes guaranteed by the SBA. We reverse the district court's orders and remand for further proceedings.

Kyle is a California corporation, a small business concern as defined in 15 U.S.C. § 632 (Supp. IV 1974), and a minority business. ¹ In November 1968 Kyle borrowed $80,000.00 from a California bank. The loan was partially guaranteed by the SBA. To secure payment of the note, Kyle granted a security interest to the bank in almost all of its present and future assets, and the individual plaintiffs personally guaranteed the note.

In April and October 1970 Kyle entered into two subcontracts with the SBA to supply the U. S. Navy with cabinets and other equipment. Under 15 U.S.C. § 637(a)(2), the SBA is authorized to enter into procurement contracts with other government agencies, and then subcontract with small business concerns the performance of the procurement contracts. This program is known as the § 8(a) or set-aside program. See 13 C.F.R. § 124.8-1. Each subcontract contained a provision that incorporated by reference, as part of the contract, portions of the Armed Service Procurement Regulations (ASPR). The ASPR describe the rights and remedies available to the contractor in the event of various specified contractual disputes. The Kyle-SBA subcontracts incorporated, among others, ASPR provisions pertaining to new material, price reductions, government delay, and termination for the convenience of the Government. They also included the standard "disputes clause," which provided that all disputes concerning a question of fact arising under the contract should be decided by the contractor officer, with a right of appeal to the Secretary.

Kyle apparently had difficulty performing these contracts. Kyle claimed that these difficulties were due to the SBA's lack of cooperation.

In July 1970 Kyle borrowed an additional $60,000.00 from the same bank. In October 1971, the notes, guaranties and security interest held by the bank were assigned to the SBA. Kyle failed to make the payments as required, and on November 24, 1971, the SBA foreclosed on the notes and sold Kyle's plant, work in progress, materials and tools. After the sale, a balance of $36,477.16 remained outstanding on the first note, and the entire $60,000.00 remained on the second.

On November 29, 1971, after Kyle had allegedly failed to meet its delivery schedule, the SBA terminated Kyle's § 8(a) contracts on the basis of Kyle's default.

Two years later, Kyle sued the SBA in district court. In its first amended complaint, ² Kyle claimed that the SBA had not performed as required under the § 8(a) contracts, specifically alleging, among other things, that the SBA set prices lower than the parties had intended, that the SBA had unreasonably delayed in furnishing materials to Kyle, and that the drawings furnished by the SBA were either illegible or contained improper changes. Kyle prayed for reformation of the contract, declaratory relief and damages.

In its answer, the SBA contended that Kyle's complaint should be dismissed for its failure to exhaust administrative remedies. The SBA also counterclaimed for the $96,477.16 that it claimed Kyle owed it as a result of Kyle's default on the two promissory notes guaranteed by the SBA. In its reply, Kyle raised as affirmative defenses the SBA's alleged failure to comply with the requirements of the California Commercial Code for the sale of collateral and the SBA's alleged interference with Kyle's performance of the § 8(a) contracts.

After discovery and just prior to trial, the district court entered an order dismissing the complaint because of Kyle's failure to exhaust the disputes procedure contained in the contract. In the same order, without explanation, it dismissed the SBA's counterclaims. ³ Each party appeals the dismissal of its claims.

I The Kyle Appeal

Kyle raises four issues on appeal. It contends that the district court erred (1) in denying its leave to file a second amended complaint; (2) in vacating the notice of the deposition of the Administrator; (3) in ordering that all discovery be completed by November 29, 1974; and (4) in dismissing the action on the basis of its alleged failure to exhaust administrative remedies. It is the issue of exhaustion that is the central issue on appeal and we discuss this issue first.

A. Exhaustion

As noted, the Kyle-SBA contract incorporated the standard disputes clause, 32 C.F.R. 7.103-12:

(a) Except as otherwise provided in this contract, any dispute concerning a question of fact arising under this contract which is not disposed of by agreement shall be decided by the Contracting Officer, who shall reduce his decision to writing and mail or otherwise furnish a copy thereof to the Contractor. The decision of the Contracting Officer shall be final and conclusive unless, within 30 days from the date of receipt of such copy, the Contractor mails or otherwise furnishes to the Contracting Officer a written appeal addressed to the Secretary. The decision of the Secretary or his duly authorized representative for the determination of such appeals shall be final and conclusive unless determined by a court of competent jurisdiction to have been fraudulent, or capricious, or arbitrary, or so grossly erroneous as necessarily to imply bad faith, or not supported by substantial evidence. In connection with any appeal proceeding under this clause, the Contractor shall be afforded an opportunity to be heard and to offer evidence in support of its appeal. Pending final decision of a dispute hereunder, the Contractor shall proceed diligently with the performance of the contract and in accordance with the Contracting Officer's decision.

The United States Supreme Court has, on several occasions, expressly addressed the effect of a standard disputes clause on the ability of the contractor to seek relief in a district court without prior exhaustion of the administrative scheme described in the clause. See, e. g., Crown Coat Front Co. v. United States, 386 U.S. 503, 87 S.Ct. 1177, 18 L.Ed.2d 256 (1967), United States v. Utah Construction Co., 384 U.S. 394, 86 S.Ct. 1545, 16 L.Ed.2d 642 (1966). The cases make "clear that the contractor must seek the relief provided under the contract or be barred from any relief in the courts." Crown Coat Front Co., Inc., 386 U.S. at 512, 87 S.Ct. at 1182. The disputes clause

is a clear, unambiguous provision applicable at all times and binding on all parties to the contract. No court is justified in disregarding its letter or spirit. * * * It creates a mechanism whereby adjustment may be made and errors corrected on an administrative level, thereby permitting the Government to mitigate or avoid large damage claims that might otherwise be created. United States v. Blair, 321 U.S. 730, 735 (64 S.Ct. 820, 823, 88 L.Ed. 1039). This mechanism, moreover, is exclusive in nature. Solely through its operation may claims be made and adjudicated as to matters arising under the contract. * * * And in the absence of some clear evidence that the appeal procedure is inadequate or unavailable, that procedure must be pursued and exhausted before a contractor can be heard to complain in a court.

Id., (quoting United States v. Holpuch Co., 328 U.S. 234, 239-40, 66 S.Ct. 1000, 90 L.Ed. 1192 (1946). Even when the contractual scheme has been pursued and completed, the contractor is not entitled to a de novo determination of his claim for an "equitable adjustment." Instead, the district court's role is that of a reviewing court, and the court may refuse to follow the administrative determination only if it is arbitrary or capricious, or unsupported by substantial evidence. Id. 386 U.S. at 513, 87 S.Ct. 1177. See 41 U.S.C. § 321 (1970). Only when there is "clear evidence" that the administrative procedure is inadequate or unavailable is the exhaustion requirement excused. Holpuch, 328 U.S. at 240, 66 S.Ct. 1000.

It is important to note, however, that not all contractual disputes are subject to the exhaustion requirement; exhaustion is required only for disputes "arising under the contract."...