The Court of Federal Claims Provides Guidance on Cardinal and Constructive Change Law

A recent case from the Court of Federal Claims provides us with a useful summary of several legal principles applicable to constructive changes and cardinal changes. The case arose out of a contract to supply mail processing machines to the U.S. Postal Service. In Northrop Grumman Systems Corporation v United States, 12-286C (October 31, 2018), the contractor alleged that the Postal Service had constructively changed the supply contract through several different actions. The contractor and the Postal Service moved to dismiss or obtain summary judgment dismissal of several of the other party’s claims. Most notably for purposes of this article, the Postal Service moved for summary judgment on several of the contractor’s constructive change claims.

The Court defined a constructive change as when the Contracting Officer, without a formal change order, requires the contractor to perform work that the contractor regards as being beyond contract requirements. In such cases, the contractor may elect to treat the contracting officer’s directive as a constructive change and pursue an equitable adjustment. The Court went on to state that a successful constructive change claim thus requires demonstration of (1) government authority to direct the contractor to perform work beyond the contract’s scope, and (2) written notice that the contractor regarded the direction as a change order.

The Court observed that only one constructive change claim appeared to have been directed by the Contracting Officer himself. With regard to the other claims, the Court addressed the law relating to several authorization theories.

The first theory raised was implied actual authority. The Court narrowly interpreted this theory as it applied to the government. The Court stated that an employee of the government has implied actual authority to enter an agreement only when that authority is an “integral part of the duties assigned to [the] government employee.” The Court went on to state that authority is integral “when the government employee could not perform his or her assigned tasks without such authority.” The Court contrasted implied actual authority with apparent authority, which exits when an agent with no actual authority holds himself out to have such authority to another’s detriment. The Court stated that in the latter instance, the government is immune to actions of its agents who merely possess apparent authority. In the case at hand, the Court stated that the government representative that the contractor received direction from merely had apparent authority. Consequently, the contractor could not rely on the representative’s directions to support its construction change claims.

The contractor next argued that the contracting officer ratified the directions in question. The Court described ratification as “the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him.” Ratification occurs where the individual affirming the action (1) possesses the actual authority to contract; (2) fully knew the material facts surrounding the unauthorized acts of his or her subordinate, and (3) knowingly confirmed, adopted or acquiesced to the unauthorized action of the subordinate. In the case at hand, the Court stated that, although the Contracting Officer might have sat in meetings or reviewed progress reports, there was no evidence that the Contracting Officer had a full knowledge of the facts of the alleged directions or that he knowingly agreed or acquiesced to any of the directions. However, the Court did state that written documentation provided to the Contracting Officer setting forth various changes, if indeed reviewed by the Contracting Officer within a meaningful period, could raise an issue of whether the Contracting Officer acquiesced in the unauthorized actions of the subordinate. However, after reviewing the submitted evidence, the Court found that the evidence did not support an interference of ratification.

The key teaching point from this portion of the decision is that a contractor should (a) make sure that the government representative has proper and necessary authority to direct changes to the contract, and (b) if there is a question of authority, then the contractor should request in writing ratification by the contracting officer of the direction received from the contracting officer’s subordinate.

The theory of cardinal change was also addressed in the decision. The Court noted that a cardinal change is “a substantial deviation from the original scope of work that changes the nature of the bargain between the parties.” Further, the Court stated that it is such a fundamental change that the parties cannot redress the change under the contract. In this case, the contractor attempted to characterize its cardinal change claim as seeking declaratory relief in the form of reformation of the contract. The contractor took this approach to avoid the fact that its cardinal change claim submitted to the Contracting Officer had not sought a sum certain in monetary damages. The Court held that the contractor could not circumvent the requirement to state a sum certain in its claim by camouflaging a monetary claim as one seeking only declaratory relief. The Court further noted that if the only significant consequence of the declaratory relief sought would be that the contractor would obtain monetary damages, then the claim is in essence a monetary one and the contractor must seek a sum certain in its claim. The Court held that the contractor’s claim was a monetary one, and since it failed to include in its claim a sum certain, there was no valid claim submitted to the Contracting Officer and therefore the Court had no jurisdiction over the contractor’s cardinal change claim.

The teaching point from this part of the decision is that when submitting a claim where your ultimate goal is to receive monetary relief, you should also include your best good faith estimate of your damages, which can be later modified to fit the proof. Failure to include the sum certain can result in your claim being subsequently dismissed at the federal court or board of contract appeals level for lack of jurisdiction.