Claim releases are a pervasive part of federal government contracts. Most government change orders include language limiting the contractor’s right to make a later claim for delay or cumulative impact. This release language is frequently broad enough to cover future claims that are impossible to price and may be completely unanticipated at the time the change order is signed. This, in turn, can lead to disputes about the scope of the release. Releases may also be required to finalize termination for convenience settlements and to obtain final payment.

Because they are given in exchange for payment, releases are essentially separate contracts made during performance of the underlying contract. While an unambiguous release will be enforced according to its terms, an ambiguous release is subject to the same rules of interpretation as any other contract. However, sometimes, even an unambiguous release can be avoided. This article will address the rules governing avoidance of unambiguous releases in government contracts and discuss how those rules have been applied in three recent federal cases.

The Federal Circuit, the Court of Federal Claims and the boards of contract appeals have recognized that there are “special and limited circumstances” under which a claim will not be barred by an unambiguous release. These generally fall into one of two categories: releases procured by wrongful conduct such as economic duress or fraud and releases that do not reflect the true intent of the parties. Mingus Constructors, Inc. v. United States, 812 F.2d 1387 (Fed.Cir. 1987); J.G. Watts Construction Co. v. United States, 161 Ct.Cl. 801 (1963)

Wrongful Conduct Voiding a Release

The issue of wrongful conduct was discussed at length by the Court of Federal Claims in IMS Engineers-Architects, P.C. v. United States, 92 Fed. Cl. 52 (2010). On December 4, 1991, IMS, a participant in the Small Business Administration’s 8(a) program, contracted through SBA with the Corps of Engineer’s Huntsville Division to perform environmental work at the Watervliet Arsenal in New York. It appears that local staff at Watervliet preferred to work with a larger contractor. For more than two years, IMS tried to obtain an approved scope of work from the government. Then, during September 1994, IMS’s contract was transferred from the Huntsville Division to the Corp’s Baltimore District. At the same time, the Corps arranged for IMS’s work to be taken over by a large, national engineering firm. The large firm offered to subcontract a part of the work to IMS, but IMS refused. This left the Corps in a quandary as to what to do with IMS. The Corps did not have grounds to terminate IMS for default and could not come to an internal consensus to terminate for convenience. This drug on until March 1996, when the Corps finally notified IMS to stop work and submit a termination for convenience settlement proposal.

In June 1996, IMS submitted its settlement proposal requesting payment of $825,000. IMS was unable to provide supporting documentation for most of its claim. The Corps made a counter offer of $377,000, and a settlement was reached at $499,999. On December 23, 1996, in exchange for payment, IMS gave the Corps a release of all claims arising under the contract. In June 2000, IMS submitted a request for equitable adjustment to the Corps that was denied. On May 8, 2007, IMS filed suit in the Court of Federal Claims seeking the full amount of its 1996 termination settlement proposal. To avoid the 1996 release, IMS claimed economic duress and fraud. IMS also claimed that the Corps continued to consider its claim after it signed the release showing that the release was not intended to bar its claim. Following trial, the court rejected IMS’s arguments.

To avoid its release on grounds of economic duress IMS was required to show (1) it involuntarily involuntarily accepted the Corps’ terms, (2) circumstances permitted no other alternative, and (3) such circumstances were the result the Corps’ coercive acts. In addition, the showing of coercion had to prove the government’s action was wrongful—i.e., that it was (1) illegal, (2) a breach of an express provision of the contract without a good-faith belief that the action was permissible under the contract, or (3) a breach of the implied covenant of good faith and fair dealing. Absent wrongful conduct, economic pressure and the threat of considerable financial loss do not constitute duress. The court found that while the Corps’ handling of IMS’s 8(a) subcontract was questionable, IMS was aware of the Corps’ behavior and that behavior did not “procure, obtain or otherwise taint” the release. The court concluded that IMS voluntarily accepted the Corps’ settlement offer and, therefore, could not show economic duress. The court rejected IMS’s fraud claim because IMS could not show that the Corps’ misrepresented IMS’s entitlement to lost profits. The Corps had told IMS correctly that recovery of profit was limited to work performed before the termination for convenience. Finally, the court found no evidence that the Corps continued to consider IMS’s claim after receiving IMS’s release.

Intent to Release Claims

A release that does not reflect the true intent of the parties will not be enforced. If a contractor can show clear and convincing evidence that a release contains a material mistake, the release will be reformed to reflect the parties’ true intent. This is an extremely difficult burden to meet. However, intent can also be shown by conduct following the release. By continuing to consider a claim after execution of a release the government may show that it never intended or understood the claim to be covered by the release.

In Hedgecock Electric, Inc., ASBCA No. 56307, 12-2 BCA ¶ 35,086, the contractor signed change orders releasing future claims “for both time and money and for any and all costs, impact effect, and for delays and disruptions arising out of, or incidental to, the work as herein revised.” Despite this plain language, the Armed Services Board of Contract Appeals found that the contracting officer advised the contractor that delays and time extensions would be considered at the end of the project and that the government specifically invited, discussed, negotiated and acknowledged requests for time extensions for government caused delays during the entirety of the project. Based on the government’s post-release conduct, the board found that the change orders’ unambiguous language did not express the intent of the parties and did not release the contractor’s delay claims. The Civilian Board of Contract Appeals reached an opposite conclusion in Walsh/Davis Joint Venture v. GSA, CBCA No. 1460, 12-1 BCA ¶ 34,968. In this case the joint venture signed change orders releasing future claims for “all costs, direct, indirect, and impact and delay associated with this change.” The JV later submitted a cumulative impact claim on behalf of its electrical subcontractor. The contracting officer gave the claim a cursory review and submitted it for audit, but took no further action. The board found that these actions did not constitute consideration sufficient to avoid the contractor’s release.

Comment

The release language in a change order probably will not include the word “release.” Words such as “this change order includes all costs including delay and cumulative impact” will be treated as a release of future claims. Always read release language carefully. If you want to reserve future claims, try to do so on the face of the change order. If the contracting officer will not accept your reservation, return the change order with a letter reserving your rights as to future claims.

If a cost issue arises that you did not anticipate, submit a request for equitable adjustment to the contracting officer and endeavor to create a record of negotiation to show the issue was not released.