CBCA Wary of “Negligent Negotiations” Claim Recognized by ASBCA

On July 16, the Civilian Board of Contract Appeals (CBCA) denied an appeal brought by Hamstra Chico LLC under a new theory of “negligent negotiations.” See Hamstra Chico LLC v. Department of Veterans Affairs, CBCA No. 6669 (July 16, 2020). In doing so, the CBCA declined to adopt or extend a recent case at the Armed Services Board of Contract Appeals (ASBCA), Chugach Federal Solutions, Inc., ASBCA No. 61320, 19-1 BCA ¶ 37,380 (“Chugach III”), which recognized the novel “negligent negotiations” claim theory.

The ASBCA’s Chugach III decision concluded that contractors may bring a “negligent negotiations” claim under the Contract Disputes Act (CDA) based on an agency’s failure to hold “meaningful discussions” during contract formation in a negotiated procurement under FAR Part 15. To be meaningful, discussions must provide offerors an opportunity to address any deficiencies, significant weaknesses or adverse past performance information in their proposals. See FAR 15.306(d)(3). Under the theory of “negligent negotiations” recognized by the ASBCA, a contractor can potentially recover increased performance costs which could have been avoided if the government complied with its pre-award obligation to engage in “meaningful discussions.”

In an article for Law360, Steve Bacon wrote about the Chugach case and its implications for contractors. The ruling in Chugach III is significant because it expands the fairly limited grounds on which a contractor may recover from the government for its pre-award conduct. But in Hamstra, the CBCA appears wary of this new claim theory and seems to suggest a very narrow application for it, if it indeed remains viable at all.

Background

In Hamstra, the Department of Veterans Affairs (VA) solicited proposals for the construction of a building and its subsequent lease for a 15-year term. The contractor’s proposed annual rental cost was to include utilities, including electricity, and other operating costs. Hamstra’s initial proposal had a component price for electricity but did not include it as part of the overall proposed contract price, which the VA accepted when it awarded the contract. Hamstra faulted the VA for not identifying that it failed to include electricity as a contractor obligation. It claimed that the VA should have notified it during negotiations that its proposed electricity costs were a deficiency or significant weakness, and that the VA’s failure to do so constituted improper negotiations.

The solicitation originally contained contradictory terms regarding who was responsible for the cost of electricity. In one place, the solicitation stated that the agency would pay directly for electricity and other utilities, but it also separately stated that utility costs should be included as part of the total rental costs. A subsequent solicitation amendment clarified that issue by removing the language stating that the agency would pay for utilities directly, and the VA considered revised proposals. However, Hamstra did not change its electricity component cost, despite an increase in its total operating cost.

Later, after building construction was complete, Hamstra sought to have the VA take over the building’s utility costs. Hamstra submitted a certified claim alleging that it had understood that the VA would pay for “the overwhelming majority of the electrical utilities” and that, in four rounds of discussions, the VA had never raised its contrary understanding of the terms of the lease, as Hamstra claims it was required to do. Hamstra then filed an appeal at the CBCA based on a deemed denial of the claim and sought contract reformation as the remedy, based in part on Chugach III. Hamstra wanted the contract rewritten to make the agency responsible for all electrical costs during the lease and to reimburse it for electricity costs it had paid. The VA moved for summary judgment, arguing that Hamstra was not entitled to the remedies it sought. The CBCA granted the motion for summary judgment, denying Hamstra’s appeal.

Discussion

The CBCA was not persuaded by Hamstra’s argument that the VA conducted improper negotiations merely by failing to clarify its understanding of the terms of the lease related to electricity costs. According to the Board, Hamstra did not express its understanding of the terms until after award. In fact, Hamstra acknowledged that the solicitation amendment made it clear that the agency would not directly pay for electricity. Nevertheless, Hamstra did not revise its total proposed rental price to include the component electricity cost. The CBCA pointed to FAR 15.405(a) for the rule that, after an agency and contractor reach agreement on a fair and reasonable price for the overall contract, the contractor cannot later alter the price and terms after receiving the award. Notably, the Board called it “pure speculation” that the VA would have awarded to Hamstra with the terms it sought in a contract reformation, which were different than those used in the source selection, or that Hamstra would have won such a competition.

The Board pointedly noted that the ASBCA’s Chugach III decision was not binding. In that case, the contractor alleged that a source selection panel found that the contractor’s proposed staffing level was significantly low, and a significant weakness, but did not notify the contractor of this information during negotiations. The contractor sought contract reformation, asserting that it would have increased staffing had the agency informed it of its inadequate staffing levels. In that situation, the ASBCA found that it had jurisdiction over the dispute under the CDA, so that Chugach could pursue its negligent negotiations claim. But the CBCA distinguished the facts of Hamstra, where jurisdiction was not at issue.

In contrast to the allegation addressed in Chugach III, the VA did not identify a deficiency or significant weakness in Hamstra’s proposal. Rather, Hamstra acknowledged receipt of the solicitation amendment clarifying that the contractor was responsible for the electricity costs and determined how it wanted to price the contract. Hamstra did not assert a mistake on its part or a problem with the overall lease price. The CBCA summed up: “We do not adopt or extend the analysis in Chugach to permit this contractor to pursue further the relief sought.” The CBCA granted the VA’s motion for summary judgment and denied Hamstra’s appeal on the merits.

Conclusion

Although the CBCA distinguished the ASBCA’s ruling in Chugach III, the Hamstra decision does not address the ASBCA’s more recent summary judgment decision in the Chugach appeal. See Chugach Federal Solutions, Inc., ASBCA 61320 (May 27, 2020) (“Chugach IV”). After discovery in Chugach, the Navy conceded that it had identified a significant weakness in Chugach’s first proposal revision, and that this information was not conveyed to Chugach during the first round of discussions. Nevertheless, the Navy argued that it was entitled to summary judgment because the source selection team did not identify any “significant weakness in Chugach’s fifth and final proposal revision” and therefore did not violate FAR 15.306(d)(3) by failing to note a significant weakness. The ASBCA rejected the Navy’s argument because it found there was “a material factual dispute as to whether the Navy properly informed Chugach of the source selection team’s conclusion that there was a significant weakness.”

Although the language of the opinion is unclear, the ASBCA’s summary judgment ruling in Chugach IV suggests that a contractor may be able to recover under the theory of “negligent negotiations” if it can show that the government should have identified a significant weakness or deficiency in its proposal, but failed to do so in violation of FAR 15.306(d)(3). In other words, the ASBCA seems willing to scrutinize whether the government properly evaluated the contractor’s proposal. In contrast, the CBCA strongly rejected Hamstra’s claim that the VA should be held responsible for not identifying its proposed electricity costs as a deficiency or significant weakness during negotiations.

Hamstra and Chugach IV indicate that there is at least a potential split in the summary judgment standards the boards will apply to a “negligent negotiations” claim. And given the CBCA’s discussion of Chugach III in the Hamstra decision, it is not clear whether the CBCA will ultimately decide to recognize the viability of such a claim under the CDA. Although the CBCA did not find the “negligent negotiations” claim theory appropriate for the circumstances of Hamstra, it remains to be seen whether it would apply the new theory to a situation more analogous to the allegation addressed in Chugach III, where the contractor alleged that the agency failed to inform it of an identified significant weakness of which the contractor was unaware. It is also still unclear whether the claim theory of “negligent negotiations” will indeed take root at the ASBCA, and whether the Federal Circuit will eventually recognize this claim theory.