Government Contracts attorneys have long advised clients to be wary of executing contact modifications containing broad release language. In such situations, a simple modification extending the contract schedule or addressing a specific item of work can result in the government later taking the position that by executing the modification the contractor intended to release all related claims, no matter how tenuous the connection between the subject of the modification and the later claims.

A recent case from the Court of Federal Claims stands as a good reminder to contractors not to let their guard down when executing modifications with the government. On September 23, 2019, the court issued a decision in Meridian Engineering Company v. The United States, No. 11-492C, in which it clarified the law surrounding the scope of releases and the doctrine of accord and satisfaction.

Case Background

The case involves a long-running dispute between Meridian Engineering Company (Meridian) and the U.S. Army Corps of Engineers related to the construction of a flood control project in Nogales, Arizona. Numerous issues, including design problems, flooding, and differing site conditions, arose during construction, ultimately leading to the project’s suspension and termination after partial completion.

During the project, the Corps issued a bilateral modification (R8) to extend the schedule by 12-calendar days and which deleted the installation of an access ramp. R8 included release language that stated “[T]his adjustment constitutes compensation in full on behalf of the Contractor . . . for all costs and markups directly or indirectly attributable for the change ordered, for all delays related thereto, for all extended overhead costs, and for performance of the change within the time frame stated.”

Following R8, the Corps executed several modifications extending the contract schedule, one of which was another bilateral modification, all containing the same release language. The project continued to extend for months, until the Corps terminated the project due to delays and structural failures.

Meridian Files Suit

Although the project ended, the parties continued to dispute costs. During this time, the Corps internally circulated a draft modification (R33) that would have responded to Meridian’s request for equitable adjustment for the flood events and subsurface soil issues. Meridian filed suit against the Corps in 2011, seeking costs associated with design, soils, and flooding issues.

Two trials were held in 2014 and 2016 on the issues of liability and damages. At the end of the damages trial, the court awarded Meridian $983,771.10 and Meridian appealed. In 2018, the Court of Appeals for the Federal Circuit issued a decision that partially affirmed, vacated, reversed, and remanded portions of the case back to the Court of Federal Claims.

The central issue on remand was whether the releases contained in the bilateral modifications constituted a meeting of the minds between Meridian and the government to release the flood claims in light of all of the evidence.

Accord and Satisfaction

During the original trial, the court ruled that Meridian’s claim for the flood events was barred by the defense of accord and satisfaction due to the releases present in the releases in R8 and R17, which extended the contract schedule for the government’s late provision of survey drawings. In vacating that ruling on appeal, the Court of Appeals for the Federal Circuit questioned whether the subject matter of the releases applied to the flood-damage claim.

The appellate court also stated consideration should be given to the fact the government directed Meridian to submit revised estimates for the flood claim on multiple occasions after the execution of the bilateral modifications.

On remand, the Court of Federal Claims stated that two necessary elements of accord and satisfaction were in dispute in this case:

  1. What the proper subject matter of the releases are; and
  2. Whether the parties came to a meeting of the minds on the scope of the releases.

Meridian argued that each of the releases speaks only to specific costs associated with the explicit purposes listed in the modifications, i.e., the deletion of an access ramp and delays associated with survey drawings. The government argued a broader reading of the release language that would include the release of all flood-event damage claims, past and future, arguing that these are encompassed within the “related costs” language of the release.

Court Rules Army Corp’s Modifications Did Not Cover Flood Damage

Five years after it had initially dismissed such claims, the court reversed its prior position and agreed with Meridian, holding that R8 and R17 did not cover flood damage that had not yet occurred and whose scope was not predicted. The court stated that no accurate line of causation can be drawn between the delays in the modifications and the flood damage.

The court also held the draft of R33 established the Corps knew the flood claims had not been released and, as such, there was no meeting of the minds between the parties on whether the releases covered those claims.

While the ultimate result of this case is favorable to contractors and suggests courts may be more thoughtful when considering the breadth of release language contained in contract modifications, the case remains a cautionary tale. Meridian reasonably executed specific modifications, while actively discussing and negotiating its flood claims with the government.

Avoiding Litigation After Government Contract Modifications

Despite this course of events, during the initial trial the government was able to successfully defeat Meridian’s flood-related claims based on the unconnected release language. Only after Meridian appealed the decision and essentially engaged in a second trial on this issue, did Meridian obtain the right result – eight years after it first sued the government.

So what can contractors do to avoid ending up in Meridian’s situation?

  • First - Do not execute any modifications without fully reading the document. Look for words like “release” and “accord and satisfaction” and make sure the scope of clauses containing those words is limited to the work or issue described in the modification. Be wary of ambiguous references to “the work” that could be argued to refer to all work under the contract. Make sure your project managers and field staff are also aware of such issues and do not simply execute modifications upon receipt.
  • Second - Do not be afraid to push back. The government can and will modify the language of modifications, despite the fact that many government representatives are often reluctant to tweak the language. If they refuse, request they issue a unilateral modification and document in writing your objection to the scope of the release language
  • Third - When in doubt, contact your friendly, neighborhood government contracts attorney for advice.