Contractor’s Inferior Knowledge and Mistakes Are No Excuse for Avoiding the Preclusive Effect of a Contractual Release
As the following decision demonstrates, careful recordkeeping can be critical to avoid forfeiting a claim upon the completion of a project with the government. Appeal of Merrick Construction, LLC, ASBCA No. 60906 (March 22, 2018). In Merrick, the Armed Services Board of Contract Appeals (“ASBCA”) found that a contractor forfeited a claim against the Army Corps of Engineers by signing a release of liability at the end of construction project, even though the claim was unknown to the contractor at the time it signed the release.
The Corps awarded Merrick a contract to perform construction work on a hurricane levee near New Orleans, LA. Two years into the project, the Corps issued a unilateral change order directing that Merrick install a temporary pumping system to be rented on a month to month basis, with the cost to be reflected in subsequent contract modification. After Merrick hired a subcontractor to install the pumping system, the Corps issued a modification setting the rental rate at approximately $200,000 per month. The Corps issued two additional contract modifications extending the rental period by several months; when the pumping system was no longer needed, the Corps directed that it be removed.
At some point thereafter, Merrick noticed an accounting discrepancy between the monthly rental charges from its subcontractor and the amounts that the Corps was paying each month to compensate Merrick for those charges. Believing that this discrepancy was due to excessive billing by the subcontractor, Merrick sued the subcontractor.
In the meantime, Merrick’s project manager at the construction project left his job and was replaced with a different Merrick employee. The new project manager had not been involved in negotiating the contract modifications for the pumping system rentals. Six months after taking over, Merrick completed the project and, upon requesting final payment, signed a general release without reservation or exception.
Then, while negotiating the lawsuit against the subcontractor, Merrick learned that the accounting discrepancy was attributable to an underpayment by the Corps, not overbilling by the subcontractor. Merrick filed a $200,000 claim with the Corps, contending that it had missed one month of rental costs for the pumping system. The contracting officer denied the claim, Merrick appealed to the ASBCA, and the government filed a motion for summary judgment.
In opposition to the government’s motion before the ASBCA, Merrick contended that the release did not bar the claim because the Corps had superior knowledge about the accounting discrepancy, especially given that the new project manager had not been involved in negotiating the contract modifications relevant to the pumping system. As a separate basis for avoiding the release, Merrick contended its claim was permissible under the doctrine of mistake or unilateral mistake.
The ASBCA granted the government’s motion and dismissed Merrick’s claim as barred by the release. The Board rejected Merrick’s contention that the Corps had superior knowledge about underpaying for the pumping system. Merrick, it explained, had failed to raise any evidentiary issue concerning the Corps’ knowledge. The only evidentiary support for Merrick’s arguments was unsworn statements of counsel. Merrick did not cite any of its communications with the Corps, or any internal communications at the Corps. In discussing these evidentiary shortcomings, the Board highlighted that Merrick had not responded to the government’s motion by moving for further discovery under Federal Rule of Civil Procedure 56(d). As such, Merrick could not establish a genuine issue concerning whether the Corps knew or should have known about the underpayment.
The ASBCA similarly rejected Merrick’s reliance on the doctrine of mistake or unilateral mistake. Although mistake occasionally provides grounds for avoiding the preclusive effect of a release, Merrick could not avail itself of this protection because “unilateral ignorance of one’s legal rights where all the facts bearing on the existence of the injury were known does not suffice to relieve one of the consequences of having released the claim.” Merrick, ASBCA No. 60906, at *5 (quoting J.G. Watts Construction Co. v. United States, 161 Ct. Cl. 801, 810 (1963)).
In closing its discussion on the doctrine of mistake, the Board suggested that Merrick’s faulty recordkeeping was to blame for not asserting the claim prior to signing the release: “failure by the contractor to keep adequate records to at least know the source and the amounts of its cost overruns is not a sufficient reason to entertain suits on claims otherwise released.” Id. (quoting Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1395 (Fed. Cir. 1987). At the time Merrick signed the release, all the facts indicative of the underpayment were available, yet Merrick signed the release without exception. Thus, even though Merrick was unaware of the claim at the time, it could have discovered the claim through reasonable diligence. By failing to do so, and by signing the release, Merrick forfeited the claim.
This decision demonstrates the critical importance of careful recordkeeping throughout the duration of any contract with the government. It also exemplifies the need for diligent review prior to signing a release of claims or other legal rights. Lastly, as is evident from the Board’s reference to Rule 56(d), this decision shows why a party should always carefully consider whether further discovery is necessary for opposing a motion for summary judgment.
If you have questions about whether your business could be harmed by a similar set of circumstances, please don’t hesitate to contact us for advice.