A recent case in the Federal Circuit revealed the danger of leaving undefined terms in construction contracts. 

The Department of Veterans Affairs (VA) awarded a contract to Reliable Contracting Group, LLC, for design and construction improvements to a new medical center. The contract required Reliable to install three backup generators. Notably, the contract required the generators, and all other equipment under the contract, to be “new.” While a separate provision of the contract defined “new” under FAR 52.211-5, the provision relating to the generators did not provide a definition. The failure to define this one, small word led to the dispute in this case.

Reliable subcontracted with a separate company to obtain the generators, and that company then contracted with another subcontractor to ensure their procurement. When the generators arrived, however, the VA immediately noted that they were not“new”as required under the contract, and instead showed“a lot of wear and tear including field burns.”The VA asked Reliable to certify that the generators were new before installing them. Instead, Reliable, as well as its subcontractors, all agreed in writing that the generators were in poor condition and failed to meet the contract specifications. However, Reliable later determined that, despite their poor conditions, the generators had never been used. The VA still rejected the generators, and ultimately the subcontractors procured and installed different, mutually acceptable generators.

Reliable later submitted a claim to the VA, and subsequently to the Civilian Board of Contract Appeals (CBCA), seeking approximately $1.1 million for the additional costs it incurred following the VA’s rejection of the original generators. The CBCA rejected Reliable’s claim, finding that the generators were not capable of being factory tested as required under the definition of “new” provided elsewhere in the contract. Reliable appealed, claiming that the proper interpretation of the word “new” was “unused.”

The Federal Circuit rejected both definitions. The court determined that the CBCA’s definition was improper because the VA never argued that the basis of the generator’s nonconformance was their lack of factory testing, and the contract lacked an express requirement of such testing. The court found Reliable’s interpretation to be similarly insufficient because it was incomplete. Rejecting the idea that the opposite of “new” is “used,” the court determined that the contract provided no single plain meaning of the word “new” in the contract, and that the word was therefore ambiguous. Consequently, the court turned to a variety of dictionaries to conclude that “new” was properly understood to mean both unused and “free of significant damage.”

Based on this definition, the court remanded the case back to the CBCA for a determination of the extent of the damage of the generators. Notably, while Reliable and its subcontractors had unequivocally admitted that the generators were significantly damaged, the court found that these admissions provided probative evidence that the generators did not comply with the contract, but they were not binding for judicial purposes.

This case demonstrates the importance of clearly defining every term in a construction contract, especially those terms that relate to requirements for workmanship and material, and the importance of using that same definition throughout the contract to prevent claims of ambiguity. As a result of its failure to do both, the VA is now vulnerable to a claim worth over $1 million. Contractors should make sure to carefully read and define all the terms in each construction contract and consult with their attorneys if anything is unclear. Words have power, especially in the context of a construction contract, and no contractor or subcontractor should leave the interpretation of those words to a dictionary.

Reliable Contracting Grp., LLC v. Dep’t. of Veterans Affairs, 779 F.3d 1329 (Fed. Cir. 2015)