Even though it sometimes seems otherwise, there are limits to the Government’s authority when it comes to enforcing a contractual release. As the following decision demonstrates, this is especially so when a contractor’s personal residence is on the line.

In North American Landscaping, Construction, and Dredge, Co., Inc. (“NALCO”), ASBCA Nos. 60235 et al. (Aug. 9, 2018), a contractor, NALCO, won a contract with the Army Corps of Engineers to dredge portions of the Scarborough River in Maine. But not long after the project began, a dispute arose between NALCO and the Corps over the appropriate amount of mobilization costs. The contracting officer (“CO”) ended the dispute—or so she thought—by invoking paragraph (b) of DFARS 252.236-7004, meaning the Corps would only pay $100,000 of the $800,000 in costs that NALCO had anticipated would be covered.

This became a grave problem for NALCO’s owner who quickly encountered cash flow deficits. As the Board summarized, he was so desperate that he “decided to get a loan using his personal house and equipment as collateral,” “borrowed $100,000 from members of his church to make payroll,” and “eventually lost his house, equipment and his business to creditors.” Id. ¶ 32 (emphasis added). Desperate, and facing the prospect of termination for default, he agreed to settle and release his resulting claims against the Corps after the CO extended a “take it or leave it offer.” Id. ¶ 64.

Eventually, this became a problem for the Government too when the ASBCA issued a 57-page decision excoriating the Corps, finding the CO had (1) abused her discretion by refusing to pay NALCO’s anticipated mobilization costs, (2) breached the implied duty of good faith and fair dealing, and (3) coerced the contractor into signing the release.

The CO abused her discretion because she knew from NALCO’s bid, prior to awarding the contract, that NALCO would be unable to afford the upfront mobilization costs “but was focused on capturing NALCO’s low bid and protecting the [Corps] rather than focusing on successful performance” of the project. Id. at 41. In turn, this knowledge, along with the Corps’ “disturbing attitude toward NALCO as seen in the record,” constituted a breach of the implied duty of good faith and fair dealing. Id. at 42.

Lastly, the CO engaged in coercive conduct during settlement negotiations because she knew of the professional and personal financial ruin that NALCO’s owner was facing, yet she threatened to terminate NALCO for default if he did not accept her lowball offer and sign a release. The Board found NALCO’s owner had signed the agreement under duress because the financially ruinous prospect of default termination left him no reasonable option other than to sign the release. On these grounds, the Board invalidated the settlement agreement and remanded for a determination on quantum.

While these facts may appear extreme, and while the occasion for invalidating a settlement release may seem rare, the Board’s NALCO decision reminds us that the Government too must play within the rules and cannot get away with abusing its power through threats or intimidation.