Free Cross Motion [Dispositive] - District Court of Federal Claims - federal

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 1 of 48

No. 05-1000 C (04-254C) (Consolidated) (Judge Block)

IN THE UNITED STATES COURT OF FEDERAL CLAIMS ENRON FEDERAL SOLUTIONS, INC., et al., Plaintiffs, v. THE UNITED STATES, Defendant.

PLAINTIFFS' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND PLAINTIFFS' OPPOSITION TO DEFENDANT'S MOTION TO DISMISS COUNTS THREE AND FOUR AND FOR SUMMARY JUDGMENT WITH REGARD TO PLAINTIFFS' (EFSI'S) COMPLAINT

Timothy J. Heffernan WATT, TIEDER, HOFFAR & FITZGERALD, L.L.P. 7929 Westpark Drive, Suite 400 McLean, Virginia 22102 Telephone 703/749-1000 Facsimile: 703/749-0699 Attorney for Liberty Mutual Insurance Co.

John J. Pavlick, Jr. VENABLE LLP 575 7th Street, N. W. Washington, D. C. 20004 Telephone: 202/344-4000 Facsimile: 202/344-8300 OF COUNSEL Charles R. Marvin, Jr. VENABLE LLP 575 7th Street, N. W. Washington, D. C. 20004 Telephone: 202/344-4000 Facsimile: 202/344-8300 Attorneys for Enron Federal Solutions, Inc.

Electronically Filed on June 2, 2006

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 2 of 48

TABLE OF CONTENTS Page TABLE OF CONTENTS...........................................................................ii TABLE OF AUTHORITIES........................................................................v PLAINTIFFS' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND PLAINTIFFS' OPPOSITION TO DEFENDANT'S MOTION TO DISMISS COUNTS THREE AND FOUR AND FOR SUMMARY JUDGMENT WITH REGARD TO PLAINTIFFS' [EFSI's] COMPLAINT............................................................1 PLAINTIFFS' BRIEF................................................................................2 STATEMENT OF THE ISSUES..................................................................2 STATEMENT OF FACTS..........................................................................2 ARGUMENT..........................................................................................8 I. Plaintiffs Are Entitled To Summary Judgment Requiring The Government To Pay EFSI For The Upgrades EFSI Made To The Fort Hamilton Utility Systems Under the Contract ..............................................................................8 A. Summary Judgment Is Appropriate......................................................10 1. The Material Facts Are Undisputed......................................................10 2. Where, As Here, The Terms Of The Contract At Issue Are Unambiguous, The Interpretation Of Those Terms Is Appropriate For Summary Judgment.......11 B. There Is No Legal Basis Upon Which the Government May Avoid its Obligation To Pay (Or Credit) EFSI For The Improvements To The Fort Hamilton Utility Systems Performed By EFSI Under The Contract....................................13 1. The Termination Liability Clause Requires The Government To Pay EFSI For The Improvements Made By EFSI To The Fort Hamilton Utility Systems Under The Contract .........................................................................................14 a. Use Of The Termination Liability Clause Was Both Authorized And Appropriate For This Contract...............................................................15 1) The FAR Did Not Prevent The Use Of The Termination Liability Clause Here....................................................................16

ii

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 3 of 48

2) The Contract Reflects The Parties' Intent That The Termination Liability Clause Would Be Used To Govern The Rights Of The Parties In The Event Of Early Termination........................................17 b. The Applicability And Terms Of The Termination Liability Clause Were Negotiated And Agreed To By The Parties....................................21 2. The Termination For Default Clause In The Contract Requires The Government To Pay EFSI For The Improvements Made And Services Provided By EFSI Under The Contract.............................................24 3. If, As The Government Itself Previously Argued, The Contract Was Required To Contain Clauses Appropriate For Construction, The Government Still Must Pay EFSI For The Improvements Made By EFSI To The Fort Hamilton Utility Systems Under The Contract................................................25 a. The Default Clause For Construction Requires The Government To Pay EFSI For The Utility Upgrades And Improvements.............................26 b. Other FAR Construction Clauses Require The Government To Pay EFSI For The Utility Upgrades Or Reflect That Requirement.....................28 II. Defendant Is Not Entitled To Summary Judgment On Counts I and II Of EFSI's Complaint..............................................................................................29 A. To Prevail In Its Motion For Summary Judgment, Defendant Must Demonstrate That There Are No Facts Or Legal Theories Upon Which EFSI Can Prevail......29 B. Defendant's Interpretation of the Termination Liability Clause Is Unreasonable And Insupportable..........................................................................30 C. Even If, Arguendo, Defendant's Interpretation Of The Termination Liability Clause Is Correct, EFSI Can Prevail Upon Other Theories Of Recovery Based On The Facts Pleaded By EFSI In Its Complaint..........................................31 III. This Court Has Jurisdiction Over EFSI's Alternative Quantum Meruit Claims Under The Implied-In-Fact Contract Exception....................................................32 A. This Court Has Jurisdiction Over Quantum Meruit Claims Based Upon An Implied-In-Fact Contract Between The Government And The Contractor.........32 1. This Court May Grant A Contractor Quantum Meruit Recovery Where The Underlying Contract Is Implied-In-Fact....................................................33

iii

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 4 of 48

2. This Court Has Recognized And Enforced Implied-In-Fact Contractual Terms Where An Express Contract Between The Parties Contains A Defective Clause....................................................................................34 B. EFSI's Alternative Quantum Meruit Claims Arise From An Implied-In-Fact Contract Under Which The Government Promised To Pay EFSI For The Utility System Upgrades If The Contract Was Terminated For Any Reason...............36 C. Alternatively, EFSI Should Be Allowed To Amend Its Complaint To Correct Any Deficiencies In Its Pleading...............................................................37 CONCLUSION......................................................................................37 NOTICE OF FILING...............................................................................40 APPENDIX.......................................................................Filed With Motion

iv

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 5 of 48

TABLE OF AUTHORITIES Page(s) CASES Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)...................................30 Arizona v. United States, 216 Ct. Cl. 221, 235-36, 575 F.2d 855 (1978)....................12 Atlas Corp. v. United States, 895 F.2d 745, 754 (Fed. Cir. 1990)............................34 Barrett Ref. Corp. v. United States, 242 F.3d 1055, 1060 (Fed. Cir. 2001).................34 Barron Bancshares, Inc. v. United States, 366 F.3d 1360, 1375-76 (Fed. Cir. 2004).....12 Brasseler, U.S.A. I, L.P. v. Stryker Sales Corp., 267 F.3d 1370, 1381 (Fed. Cir. 2001)...10 Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)........................................10 City of El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990).....................36 Coast Fed. Bank, FSB v. United States, 323 F.3d 1035, 1038 (Fed. Cir. 2003)............11 Digital Control, Inc. v. Charles Mach. Works, 437 F.3d 1309, 1313 (Fed. Cir. 2006).......................................................................................30 Flink/Vulcan v. United States, 63 Fed. Cl. 292, 298-99 (2004)...............................12 Fluor Enter., Inc. v. United States, 64 Fed. Cl. 461, 495-96 (2005).........................33 Foman v. Davis, 371 U.S. 178, 182 (1962)......................................................37 Forest Products Northwest, Inc. v. United States, 62 Fed. Cl. 109, 120 (2004)............32 Fortec Constructors v. United States, 760 F.2d 1288, 1291 (Fed. Cir. 1985)...............11 General Elec. Co. v. United States, 60 Fed. Cl. 782, 791 (2004).............................12 G.L. Christian and Assoc. v. United States, 160 Ct. Cl. 58 (1963).......................11, 25 Gold Line Ref., Ltd. v. United States, 43 Fed. Cl. 291, 294-95 (1999)..................33, 34 Hol-Gar Mfg. Corp. v. United States, 169 Ct. Cl. 384, 388, 351 F.2d 972, 975 (1965)...12

v

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 6 of 48

John C. Kohler Co. v. United States, 204 Ct.Cl. 777 (1974) .................................24 Kelley v. United States, 19 Cl. Ct. 155, 161 (1989).............................................12 King Fisher v. United States, 51 Fed. Cl. 94, 99 (2001).......................................12 Martin v. United States, 20 Cl. Ct. 738, 745 (1990)............................................12 Nicholson v. United States, 29 Fed. Cl. 180, 186 (1993).......................................10 Northrop Grumman Corp. v. United States, 50 Fed. Cl. 443, 459 (2001)...............12, 16 PBI Elec. Corp. v. United States, 17 Cl. Ct. 128, 137 (1989).................................27 PCL Constr. Serv., Inc. v. United States, 47 Fed. Cl. 745, 810 (2000)......................28 Perri v. United States, 340 F.3d 1337, 1343-44 (Fed. Cir. 2003)........................33, 35 Sea-Land Serv., Inc. v. United States, 213 Ct. Cl. 555, 567, 553 F.2d 651, 658 (1977)...12 S. Cal. Edison v. United States, 58 Fed. Cl. 313, 321 (2003).................................11 Sweats Fashions, Inc. v. Pannill Knitting Co., 833 F.2d 1560, 1562, 1567 (Fed. Cir. 1987)......................................................................................10 Trauma Serv. Group v. United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997)..............36 United States v. Amdahl, 786 F.2d 387, 393 (Fed. Cir. 1986).................................33 Urban Data Sys., Inc. v. United States, 699 F.2d 1147, 1154 (Fed. Cir. 1983)........33, 34 Webster Univ. v. United States, 20 Cl. Ct. 429, 432 (1990)...................................10 STATUTES 28 U.S.C. § 1491 (2000)...........................................................................32 REGULATIONS FAR 31.111(a)(5)....................................................................................28 FAR 36.101(c)..........................................................................................25 FAR 41.101..........................................................................................16

vi

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 7 of 48

FAR 41.501(d).......................................................................................16 FAR 41.501(d)(4)...................................................................................16 FAR 49.404(d)..................................................................................28, 29 FAR 49.404(e).......................................................................................29 FAR 49.404(e)(1)....................................................................................29 FAR 49.404(e)(3)....................................................................................29 FAR 49.406..........................................................................................29 FAR 49.504(c)(1)....................................................................................25 FAR 52.232-5...................................................................................26, 28 FAR 52.232-5(f)....................................................................................28 FAR 52.241-3(a)......................................................................................3 FAR 52.241-10...................................................................5, 6, 14, 15, 17, 20 FAR 52.249-2....................................................................................6, 20 FAR 52.249-8.......................................................................6, 11, 14, 24, 31 FAR 52.249-8(f)....................................................................................24 FAR 52.249-10....................................................................11, 14, 25, 27, 31 FAR 52.249-10(a)..............................................................................27, 28 EFAR 652.241-10...................................................................................14

RULES RCFC 12(b)(1).......................................................................................32 RCFC 15(a)...........................................................................................37 RCFC 56(c)...........................................................................................29 FED. R. CIV. P. 56(c)................................................................................29

vii

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 8 of 48

SECONDARY SOURCES 11 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE 3D ¶ 56.11[8] (3d ed. 2006).........................................................................................31

viii

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 9 of 48

IN THE UNITED STATES COURT OF FEDERAL CLAIMS ENRON FEDERAL SOLUTIONS, INC., ) et.al., ) ) Plaintiffs, ) ) v. ) ) UNITED STATES OF AMERICA, ) ) Defendant. )

No. 05-1000C (04-254C) (Consolidated) (Judge Block)

PLAINTIFFS' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND PLAINTIFFS' OPPOSITION TO DEFENDANT'S MOTION TO DISMISS COUNTS THREE AND FOUR AND FOR SUMMARY JUDGMENT WITH REGARD TO PLAINTIFFS' (EFSI'S) COMPLAINT ________________________________________________________________________ Plaintiffs, Enron Federal Solutions, Inc. ("EFSI") and Liberty Mutual Insurance Co. ("Liberty Mutual"), by and through undersigned counsel, for the reasons stated in the attached brief, respectfully request that this Court deny both the Government's Motion to Dismiss Counts 3 and 4 of EFSI's Complaint ("MTD") and the Government's Motion for Summary Judgment with regard to EFSI's Complaint ("MSJ"). Plaintiffs also respectfully request that this Court grant summary judgment in favor of Plaintiffs on the issue of the Government's obligation to pay for the capital improvements and upgrades made by EFSI to the utility systems at Fort Hamilton, New York, prior to the termination for default of the contract under which plaintiff made such capital improvements and upgrades. As demonstrated in the attached brief, there is no genuine issue of any material fact with respect to this issue and plaintiffs are entitled to judgment on this issue as a matter of law.

1

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 10 of 48

PLAINTIFFS' BRIEF Statement of the Issues Does the contract between EFSI and the Government provide a mechanism for EFSI to receive compensation for the substantial improvements made by EFSI to the Fort Hamilton utility systems prior to the Government's termination of the contract for default? Does this Court have jurisdiction over EFSI's alternative claims for recovery based on quantum meruit where those claims arise from an implied-in-fact contract between EFSI and the Government with respect to payment for improvements to the Fort Hamilton utility systems in the event of a termination of an express contract for any reason? Statement of Facts On January 22, 1999, the United States Army Corps of Engineers ("Army" or "Government") issued Solicitation No. DAC51-99-R-0006 ("Solicitation") seeking proposals from potential contractors to own, upgrade or replace as necessary, operate and maintain the electrical, natural gas, potable water, and wastewater utility systems ("Utility Systems") at the United States Army Garrison, Fort Hamilton, New York. The Solicitation was issued as part of the Government's initiative to privatize certain Government-owned utility systems. Complaint1, ¶ 4; Answer, ¶ 4; Complaint, Exhibit 2 (Contracting Officer's Final Decision ("COFD") at 1; Government's Appendix to Dispositive Motion ("Govt. App.") at 3-4, 6.
1

Unless otherwise identified, all references to "Complaint" and "Answer" refer to the Complaint and Answer filed by the parties in COFC No. 05-1000C. Reference to the Answer filed by the Government in COFC No. 04-254C, which was consolidated with this case on February 27, 2006 by Order of this Court, is specifically identified. 2

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 11 of 48

EFSI submitted its technical proposal in response to the Solicitation on July 28, 1999. On August 27, 1999, EFSI submitted its Final Proposal Revision, reconfirming EFSI's July 27, 1999, Technical Proposal and submitting EFSI's Cost Proposal. Complaint, ¶ 6; Answer, ¶ 6; Govt. App. at 11, 18; Plaintiffs' Appendix ("Plaintiffs' App.") at 3-4. On December 2, 1999, the Government entered into Utilities Privatization Contract No. DACA51-00-C-0001 ("Contract") with EFSI and expressly incorporated EFSI's proposal into the Contract. Complaint, ¶ 7; Answer, ¶ 9; Govt. App. at 18-19. Under the terms of the Contract, EFSI was required to upgrade the Utility Systems as necessary by making the capital improvements required to meet standards listed in the Contract. The Contract required EFSI to commence all utility distribution system upgrades or replacements at the beginning of the Contract term, and to operate and maintain the Utility Systems for a period of up to ten (10) years, commencing March 1, 2000. Complaint, ¶ 8; Answer, ¶ 9; Complaint, Exh. 2 (COFD) at 1; Govt. App. at 4-5; Plaintiffs' App. at 7 (Contract, ¶ I.84 - FAR Clause 52.241-3(a)). Under the Contract, EFSI agreed to fund agreed-upon capital improvements necessary for acquiring, maintaining and operating the Utility Systems. EFSI was also required to fund the cost of expansion or upgrade of these systems as a capital investment, which was to be recovered by EFSI over the contract period. Complaint, ¶ 9 (first two sentences); Answer, ¶ 9; Govt. App. at 6 (Contract, ¶ H.1). In return, the Contract provided that title to the utility systems would pass from the Government to EFSI. Complaint, Exh. 1, Attachment 1 at 2, 5 (EFSI's Certified Claim); Plaintiffs' App. at 7-8. In its Cost Proposal, EFSI estimated that the required capital improvements and

3

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 12 of 48

upgrades would cost $11,616,000 to implement. Complaint, ¶ 9 (third sentence); Answer, ¶ 9; Plaintiffs' App. at 16-17. In return for EFSI's capital improvement work and operations and maintenance services, the Government promised to pay EFSI a fixed price of $25,377,637.62, as modified, in monthly installments over the term of the Contract. Complaint, ¶10 (first sentence); Answer, ¶ 10; Govt. App. at 19. Under the Contract, each of the Government's scheduled monthly payments included a separately calculated fixed amount that would, over the term of the contract, amortize EFSI's price for its capital improvements and upgrades of the Utility Systems including interest. EFSI proposed, and the Government agreed to pay, a price of $11,616,000 for the upgrades, payable in such monthly installments over ten years, at an annual interest rate of 8%. Complaint, ¶ 10 (second sentence); Answer, ¶ 10; Govt. App. at 4-5, 8 (Contract, ¶¶ B.2.1 through B.2.5, ¶ H.3.2); Plaintiffs' App. at 16-17 (Portion of EFSI Cost Proposal stating price terms for upgrades). Under paragraph B.2.1 of the Contract, this component of the Government's payment obligation was identified as the Annual Initial Upgrade, and defined as The Contractor's initial capital investment price, amortized over a desired period at an annual interest rate, for system improvements to comply with utility standards and any other required/requested services (mapping, unique services, etc.), or new utility distribution system design, construction, installation and applicable required tax payments on the upgraded components. It is anticipated that the natural gas, potable water and wastewater utility distribution systems will need either major capital repair or complete reconstruction to comply with modern, stringent Industry Standards. All utility distribution system upgrades or replacements shall be completed by the end of the first year of the contract. Govt. App. at 4 (Contract, ¶ B.2.1).

4

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 13 of 48

Should the Contract be terminated prior to the end of its term, the Contract established the relative rights and obligations of the parties. The Contract, ¶ C.4.7, Disposition Upon Expiration or Termination, provided that Upon expiration or termination of this contract, the Government shall have the option to negotiate a sole source contract with the Contractor or reacquire the facilities as described in Section H. Reacquisition of the utility facilities will be performed only when it is determined to be in the best interest of the Government....The Contractor's unrecovered investment will be determined as set forth in Paragraph H.8, Termination Liability. See also Termination for Default, Termination for the Convenience of the Government, and Termination Liability, in Section I, Contract Clauses. Complaint, ¶ 11 (first and second sentences); Answer, ¶ 11; Plaintiffs' App. at 6 (Contract, ¶ C.4.7). In Paragraph ¶ H.8, Termination Liability, the Contract provided that "The termination liability of the parties with respect to the provision of electric, natural gas, potable water and wastewater utility service under this contract shall be based upon FAR 52.241-10 Termination Liability (Feb 1995). See Section I, Contract Clauses." Complaint, ¶ 11 (second sentence); Answer, ¶ 11; Govt. App. at 10 (Contract ¶ H.8). Federal Acquisition Regulation ("FAR") Clause 52.241-10, Termination Liability (Feb. 1995) provided that: (a) If the Government discontinues utility service under this contract before completion of the facilities cost recovery period specified in paragraph (b) of this clause, in consideration of the Contractor furnishing and installing at its expense, the new facility described herein, the Government shall pay termination charges, calculated as set forth in this clause. (b) Facility cost recovery period. The period of time, not exceeding the term of this contract, during which the net cost of the new facility shall be recovered by the Contractor is ______ months. [Insert negotiated duration.]

5

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 14 of 48

(c) Net facility cost. The cost of the new facility, less the agreed upon salvage value of such facility, is $_______. [Insert appropriate dollar amount.] (d) Monthly facility cost recovery rate. The monthly facility cost recovery rate which the Government shall pay the Contractor whether or not service is received is $_____. [Divide the net facility cost in paragraph (c) of this clause by the facility's cost recovery period in paragraph (b) of this clause and insert the resultant figure.] (e) Termination charges. Termination charges = $____. [Multiply the remaining months of the facility's cost recovery period specified in paragraph (b) of this clause by the monthly facility cost recovery rate in paragraph (d) of this clause and insert the resultant figure.] (f) If the Contractor has recovered its capital costs at the time of termination there will be no termination liability charge. Complaint, ¶ 12; Answer, ¶ 12, FAR 52.241-10. The Contract incorporated by reference FAR 52.249-8, Termination for Default (Fixed-Price Service and Supply) (April 1984). Complaint, Exh. 1 (EFSI's Certified Claim) at 7; Plaintiffs' App. at 19 (Contract, ¶ I.46). EFSI's proposal was incorporated into the Contract by the Government without modification. Complaint, ¶ 13 (first sentence); Answer, ¶ 13; Govt. App. at 19. EFSI's proposal, and thus the Contract, included the following condition: "[i]n the event the contract is terminated, the Contractor shall be granted compensation for its capital costs in accordance with FAR 52.241-10 (Termination Liability) and for all of its other costs in accordance with FAR 52.249-2 (Termination for Convenience)." Complaint, ¶ 13 (first sentence); Answer, ¶ 13; Plaintiffs' App. at 18 (EFSI proposal page). By November 2001, EFSI had substantially completed all of the capital improvements and upgrades of Ft. Hamilton's potable water, natural gas and electric distribution systems, and had completed portions of the capital improvements and upgrades on the storm and wastewater/sewer system as required by the Contract. Complaint, ¶ 15; Answer, ¶ 15; Answer (No. 04-254C), ¶ 17. In his Contracting

6

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 15 of 48

Officer's Final Decision denying EFSI's certified claim, the Contracting Officer admitted that "EFSI's performance during the first year of contract performance was successful and in conformance with all contract requirements. EFSI's progress on capital improvements during this time was either on or ahead of schedule." Complaint, Exhibit 2 (COFD) at 2. From April 2000 through December 2001, EFSI provided operations and maintenance services for the Utility Systems. Complaint, ¶ 18 (first sentence); Answer, ¶ 18. As of December 3, 2001, the Government has paid EFSI only $4,225,102.24 under the Contract. Answer, ¶¶ 17, 18. On December 21, 2001, EFSI filed a petition for reorganization under Chapter 11 of U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. Complaint, ¶ 22; Govt. App. at 20. On February 26, 2002, the Government terminated the Contract for default. Complaint, ¶ 24; Answer, ¶ 24; Govt. App. at 20-22. On April 15, 2005, EFSI submitted to the Government a certified claim seeking payment under the Contract of the amounts due to EFSI for the capital improvements and upgrades made by EFSI to the Utility Systems and for the operation and maintenance of those systems. In its claim, EFSI demanded payment in the amount of $10,476,801, less a Remaining Work credit, plus applicable interest. Complaint, ¶ 31 (first two sentences); Answer, ¶ 31; Complaint, Exhibit 1 (EFSI's Certified Claim). By letter dated August 11, 2005, the Government issued the COFD, denying EFSI's claim for payment of the majority of the amount due to EFSI for the capital improvements/upgrades made by EFSI to the Fort Hamilton utility distribution systems. Complaint, ¶ 32 (first two sentences); Answer, ¶ 32; Complaint Exhibit 2 (COFD). In the

7

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 16 of 48

COFD, the Government conceded that the Government owes EFSI the amount of $211,262.95 for its November 2001 invoice, which includes the monthly amount for amortization of the Utility Systems improvements and upgrades and an amount for the Operations and Maintenance services for November 2001. Notwithstanding the Government's admission of liability, the Government refused to pay EFSI for that invoice until "it is decided whether EFSI or Liberty has a priority claim to those retained funds." Exhibit 2, unnumbered page 4. Complaint, ¶ 33 (first three sentences); Answer, ¶ 33; Complaint, Exhibit 2 (COFD) at 6. ARGUMENT I. Plaintiffs Are Entitled To Summary Judgment Requiring The Government To Pay EFSI For The Upgrades EFSI Made To The Fort Hamilton Utility Systems Prior To Termination Of The Contract For Default. Over the course of this dispute concerning EFSI's entitlement to payment for the millions of dollars of capital upgrades and improvements EFSI made to the Government's utility systems at Fort Hamilton, the Government has taken a "defense-indepth" approach, erecting a series of analytical "fortifications" in its attempt to deny EFSI any recovery for that work. The interpretive sleight of hand underlying the positions taken to date by the Government in this dispute, however, can neither conceal nor overcome the fact that the Government's refusal to pay EFSI for the work is directly contrary to the fundamental principles of law and equity with which this Court and other Government contract dispute resolution forums have long determined the relative rights and obligations of parties whose contract has been terminated. Once this dispute is examined in the light of these principles, it becomes evident that contrary to the

8

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 17 of 48

Government's argument, it is the Government, not EFSI, that seeks a windfall as a result of this situation. By this motion, EFSI seeks the recognition and application by this Court of a fundamental principle permeating the law of Government contract terminations: "You get what you pay for - you pay for what you get." As demonstrated below, this fundamental principle, reflected throughout the FAR and in the case law interpreting the FAR, applies regardless of the type of work performed, the method of termination (e.g., termination for convenience of the Government or for default), or the basis of claim (express contract or contract implied-in-fact). Moreover, the facts necessary to support the application of this fundamental principle under these circumstances are undisputed. The Government promised to pay EFSI for capital upgrades and improvements to its utility systems at Fort Hamilton. EFSI constructed and installed the upgrades and improvements, the Government took possession of those upgrades and improvement, and, to this very day, continues to use those upgrades and improvements for its own benefit. The Government, however, has simply and stubbornly refused to "pay for what it got." Where, as here, neither the facts, nor the law or its application are ambiguous, one would not expect to require the intervention of this Court to resolve such a basic and incontrovertible issue. Intervention appears to be necessary, however, to focus the Government's attention upon the only issue actually separating the parties - the precise quantification of the amount owed to EFSI for the substantial capital upgrades and improvements EFSI made to the Government's property before the termination of EFSI's contract.

9

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 18 of 48

A. Summary Judgment Is Appropriate. A party will prevail on a motion for summary judgment if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). "An issue is genuine only if, on the entirety of the record, a reasonable jury could resolve a factual matter in favor of the non-movant, ... while the materiality of the fact is determined by reference to applicable legal standards." Nicholson v. United States, 29 Fed. Cl. 180, 186 (1993) (citing Webster Univ. v. United States, 20 Cl. Ct. 429, 432 (1990); Sweats Fashions, Inc. v. Pannill Knitting Co., 833 F.2d 1560, 1562, 1567 (Fed. Cir. 1987)). "[A] motion for summary judgment may be granted when, drawing all reasonable factual inferences in favor of the non-movant, the evidence is such that the non-movant can not prevail." Brasseler, U.S.A. I, L.P. v. Stryker Sales Corp., 267 F.3d 1370, 1381 (Fed. Cir. 2001). 1. The Material Facts Are Undisputed. As demonstrated in the parties' Proposed Findings of Uncontroverted Facts, there is no dispute between the parties with respect to any material facts which are relevant to the resolution of the issue presented in this motion, e.g. the existence of a valid contract or the content of the relevant clauses that are expressly contained within that contract. There is also no dispute concerning the content of the clause(s) that the Government has asserted should be incorporated into the Contract by operation of law (i.e., FAR construction clauses). Indeed, in the COFD and in the Government's MSJ, the Government's primary position has been that certain terms contained within the Contract, i.e., the Termination Liability clause and FAR clause 52.249-8, Default - Supplies and Services, are to be

10

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 19 of 48

given no legal effect. In its MSJ, the Government asserts that the Termination Liability clause in the Contract, a clause which establishes the methodology by which EFSI would be reimbursed for its work upgrading the Fort Hamilton utility systems should the Contract be terminated prior to its term, is ineffective under these circumstances. See MSJ at 11-14. In its COFD denying EFSI's certified claim, the Government also argued that the Default clause in the Contract, FAR 52.249-8, Default - Supplies and Services, is inappropriate for use in these circumstances. The Government argued that by operation of law, the appropriate default clause for this work was FAR 52.249-10, Default Construction. See COFD at 5-6 (citing G.L. Christian and Assoc. v. United States, 160 Ct. Cl. 58 (1963)). The Government then argued that under its interpretation of FAR 52.249-10 and the risk allocation provisions in the Contract, EFSI forfeits any right to payment for millions of dollars worth of improvements and upgrades EFSI made to the Fort Hamilton utility systems under the Contract. See COFD at 5-8. Each of these arguments presents legal issues regarding the interpretation of the terms of the Contract, and are properly resolved through a motion for summary judgment. 2. Where, As Here, The Terms Of The Contract At Issue Are Unambiguous, The Interpretation Of Those Terms Is Appropriate For Summary Judgment. Interpretation of the terms of a Government contract is a matter of law. See Fortec Constructors v. United States, 760 F.2d 1288, 1291 (Fed. Cir. 1985). To interpret a contract, this Court must "`begin[] with the language of the written agreement,'" S. Cal. Edison v. United States, 58 Fed. Cl. 313, 321 (2003) (quoting Coast Fed. Bank, FSB v. United States, 323 F.3d 1035, 1038 (Fed. Cir. 2003)), and give to the contract language "that meaning that would be derived from the contract by a reasonable [sic] intelligent

11

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 20 of 48

person acquainted with the contemporaneous circumstances." Hol-Gar Mfg. Corp. v. United States, 169 Ct. Cl. 384, 388, 351 F.2d 972, 975 (1965). Furthermore, "an interpretation [that] gives a reasonable meaning to all parts [of a contract] will be preferred to one which leaves a portion of it useless, inexplicable, inoperative, void, insignificant, meaningless, superfluous, or achieves a weird and whimsical result." Northrop Grumman Corp. v. United States, 50 Fed. Cl. 443, 459 (2001) (quoting Arizona v. United States, 216 Ct. Cl. 221, 235-36, 575 F.2d 855 (1978)). When a contract's terms are unambiguous, resort to extraneous information to aid interpretation is unnecessary, see Flink/Vulcan v. United States, 63 Fed. Cl. 292, 298 (2004) (citing Sea-Land Serv., Inc. v. United States, 213 Ct. Cl. 555, 567, 553 F.2d 651, 658 (1977), cert. denied, 434 U.S. 1012 (1978)), and a court may construe an unambiguous writing at the summary judgment stage. See Flink/Vulcan, 63 Fed. Cl. at 299 (citing Martin v. United States, 20 Cl. Ct. 738, 745 (1990); Kelley v. United States, 19 Cl. Ct. 155, 161 (1989)). Ambiguous contract provisions are those that are susceptible to multiple interpretations. See Barron Bancshares, Inc. v. United States, 366 F.3d 1360, 1375-76 (Fed. Cir. 2004). To demonstrate an ambiguity, however, a party must do more than merely proffer two different interpretations of a contract provision. See General Elec. Co. v. United States, 60 Fed. Cl. 782, 791 (2004) (quoting King Fisher v. United States, 51 Fed. Cl. 94, 99 (2001)). As the next section demonstrates, there is no dispute between the parties with respect to any material fact that would affect the proper interpretation of the Contract terms at issue under the principles followed by this Court.

12

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 21 of 48

B. There Is No Legal Basis Upon Which the Government May Avoid Its Obligation To Pay (Or Credit) EFSI For The Improvements To The Fort Hamilton Utility Systems Performed By EFSI Under The Contract. The single issue upon which EFSI seeks summary judgment in this cross motion is whether the Government may shirk its obligation to pay (or to credit) EFSI for the utility upgrade work EFSI performed under the Contract, which the Government received and continues to use and enjoy to this day. In its MSJ, the Government has attempted to justify the windfall it seeks by improperly and unreasonably narrowing the focus of its analysis to a single phrase of a single clause in the Contract at issue, while at the same time ignoring the remaining terms of the Contract with which that phrase must be interpreted. In its MSJ, the Government implicitly invites this Court to ignore the longrecognized obligation of the Government, an obligation grounded solidly in both fairness and the law, to pay for services, goods, and other work items that have been provided by a defaulted contractor when those goods, services, and other work items met the requirements of the contract and were received and enjoyed by the Government. This fundamental obligation is embodied not only in numerous provisions and clauses in the FAR, but also in the substantial and consistent body of federal government contract case law establishing the responsibilities of contracting parties, and in the exception that the Government itself has identified to the usual rule that recovery by a contractor under quantum meruit is outside the jurisdiction of this Court. As demonstrated below, the Government's refusal to recognize any obligation to pay or otherwise credit EFSI for the Fort Hamilton utility upgrade work is insupportable. The Government is obligated to compensate EFSI for the Fort Hamilton utility upgrade

13

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 22 of 48

work performed by EFSI prior to the termination of the Contract under any of four approaches: 1) by operation of the Termination Liability clause expressly included in the Contract (Clause 652.241-102) ; 2) by operation of the Default clause expressly included in the contract (FAR 52.249-8); 3) by operation of the construction provisions, including the Default clause (FAR 52.249-10), that the Government itself has argued must be read into the Contract through invocation of the Christian doctrine; or 4) under the terms of an implied-in-fact contract for payment of these costs upon early termination of the contract for any reason. Although the amount of payment due to EFSI from the Government might vary based on the specific approach used, the obligation of the Government to pay EFSI for the work arises regardless of the legal basis actually utilized. By this Motion, EFSI only requests that this Court confirm the instant application of the unremarkable, and until this case, uncontroversial proposition that the Government must pay for work performed under a contract, even when the contract is terminated for the contractor's default, when, as here, it has received, utilized, and enjoyed the benefits of that work. Each of the approaches based upon the express Contract between the parties is discussed in detail below. 1. The Termination Liability Clause Requires The Government To Pay EFSI For The Improvements Made By EFSI To The Fort Hamilton Utility Systems Under The Contract. In its MSJ, the Government argues that a prefatory phrase in FAR 52.241-10 (the Termination Liability clause), the same clause that was expressly included in the terms of

Amendment 0003 of the Solicitation added clause 652.241-10 ­ Termination Liability (Feb 1995) to Section I. See Plaintiffs' App. at 21-23. The addition of a "6" in the number of the clause appears to have been a typographical error. See Contract, ¶ H.8. 14

2

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 23 of 48

the Contract by the Government, and the same clause that was expressly referenced in the Technical Proposal that EFSI submitted and the Government incorporated into the Contract, renders the clause ineffective in these circumstances. See MSJ at 11. Notably, the Government has not argued that since the guidance contained in the FAR concerning the circumstances under which the clause should be used were different from the circumstances in this case, the parties could not agree to use the clause, more specifically, the methodology contained within the clause, to govern their respective rights in the event of a termination of the Contract prior to the end of the time period on which the price (and the payment stream) was calculated. As demonstrated below, the terms of the Contract and the contemporaneous actions of the parties prior to and at contract award require the rejection of the Government's interpretation, and the argument based on that interpretation. a. Use Of The Termination Liability Clause Was Both Authorized And Appropriate For This Contract. Paragraph H.8 of the Contract incorporates the Termination Liability clause, FAR 52.241-10. Contract, ¶ H.8. In its MSJ, the Government's argument that the Termination Liability clause is inapplicable in these circumstances relies upon the prefatory language of subparagraph (a) of the clause: "(a) If the Government discontinues utility service under this Contract before completion of the facilities cost recovery period ...." MSJ at 11. Based solely on that language, the Government asserts that the Contract must be interpreted to restrict the use of the clause to only the specific situation in which the Government has no requirement for additional utility services. See id. As demonstrated below, the Government's interpretation, and the argument based on that interpretation, fails for two reasons: 1) the FAR does not restrict the use of the

15

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 24 of 48

clause as does the Government's litigation position; and 2) the Government's proffered interpretation would render other clauses in the Contract "useless, inexplicable, inoperative, void, insignificant, meaningless, [or] superfluous" and would "achieve[] a weird and whimsical result." Northrop Grumman Corp. v. United States, 50 Fed. Cl. 443, 459 (2001). 1) The FAR Did Not Prevent The Use Of The Termination Liability Clause Here. Guidance pertaining to use of the Termination Liability clause is contained in FAR Part 41. The FAR defines the term "termination liability" as "a contingent Government obligation to pay a utility supplier the unamortized portion of a connection charge and any other applicable nonrefundable service charge as defined in the contract in the event the Government terminates the contract before the cost of connection facilities has been recovered by the utility supplier." FAR 41.101. Under FAR 41.501(d), the Termination Liability clause is used "when payment is to be made to the contractor upon termination of service in conjunction with or in lieu of a connection charge upon completion of the facilities." FAR 41.501(d)(4). Rather than establishing an absolute prerequisite for use of the clause, however, the prescriptive FAR clause actually provides the contracting officer with flexibility in the method(s) to be used for payment to a contractor for capital improvements made to Government utility systems. Neither the FAR nor the Contract limits or defines the term "termination of service" as used in this context. Moreover, the reference to a connection charge in FAR 41.501(d)(4), merely lists another method by which a contractor could be compensated for its capital improvements upon termination. Thus, the reference is irrelevant to this analysis. Finally, FAR 41.501(d) does not contain any provision that

16

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 25 of 48

would preclude the parties from agreeing, as they did, to use the Termination Liability clause in this Contract to establish the methodology to calculate the payment due to the contractor for the unamortized portion of its capital upgrade price upon the termination or expiration of the Contract. 2) The Contract Reflects The Parties' Intent That The Termination Liability Clause Would Be Used To Govern The Rights Of The Parties In The Event Of Early Contract Termination. The express terms of the Contract reflect the parties' agreement to use the Termination Liability clause if the Contract ended before its term. Paragraph H.8 Termination Liability, states directly: "The termination liability of the parties with respect to the provision of electric, natural gas, potable water and wastewater utility service under this contract shall be based upon FAR 52.241-10 Termination Liability (Feb 1995). See Section I, Contract Clauses." Contract, ¶ H.8 (emphasis added). This clause also fails to limit the type of termination to which the Termination Liability clause applies. Further, it clearly indicates that the methodology for calculating the termination liability will be "based upon" FAR 52.241-10. Moreover, other Contract terms are meaningful, operative, and consistent only if the Termination Liability clause is interpreted to be applicable regardless of the type of contract termination. First, the Contract clauses invoking the Termination Liability clause do not limit the scope or circumstances of its applicability in the manner urged by the Government. Paragraph C.4.7 Disposition Upon Expiration or Termination, provides that Upon expiration or termination of this contract, the Government shall have the option to negotiate a sole source contract with the Contractor or reacquire the facilities as described in Section H. Reacquisition of the

17

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 26 of 48

utility facilities will be performed only when it is determined to be in the best interest of the Government. . . . The Contractor's unrecovered investment will be determined as set forth in Paragraph H.8, Termination Liability. See also Termination for Default, Termination for the Convenience of the Government, and Termination Liability, in Section I, Contract Clauses. Contract, ¶ C.4.7 (emphasis added). Indeed, if the Termination Liability clause were to be applied as suggested by the Government, the reference to the three Section I clauses would be rendered meaningless, or at best redundant. The only reasonable interpretation is that the Termination Liability clause will be used to pay the contractor's unrecovered capital investment regardless of the circumstances under which the contract is ended, whether by expiration or any type of termination. Second, paragraph B.2.1 of the Contract provides that a component, called the Annual Initial Upgrade, of the monthly payment to be made by the Government consists of the contractor's initial capital investment price for system improvements, amortized over the contract term at an annual interest rate, and divided into 120 equal "installments." Contract, ¶ B.2.1, Plaintiffs' Proposed Findings of Uncontroverted Fact ("PFUF"), ¶ 10. The use of the concept of amortization, rather than the concept of a service payment, indicates that the amount being paid under the Annual Initial Upgrade component was a debt presently owed by the Government to the contractor for the performance of the system upgrades, but to be paid over the contract term. Moreover, the accrual of interest on this debt is consistent with this characterization. If the price of the upgrades was not a debt presently owed by the Government to EFSI, there would have to be some other basis upon which the payment of interest could be justified. Third, application of the Termination Liability clause to govern payment of EFSI's unamortized capital investment in the utility system upgrades is consistent with

18

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 27 of 48

other provisions of the Contract which establish or reflect EFSI's ownership interest in, and right to compensation for the work. Under the Contract, title to the utility systems was to pass to EFSI at, or shortly after award. PFUF, ¶ 6. Paragraph C.4.7 reflects that the Government, upon expiration or termination of the Contract, would decide whether to reacquire the utilities from EFSI. Thus, under the Contract, the Government would be required to determine a value at which it would reacquire title to the utility systems from EFSI, regardless of the reason for, or type of contract termination. The Termination Liability clause, which paragraphs C.4.7 and H.8 invoke without limitation of the type of termination of the Contract, provides the methodology for that determination. The use of the Termination Liability clause in the instant circumstances is also completely consistent with the risk structure established by, and reflected in the Contract. EFSI proposed to assume "all of the financial risk associated with delivering reliable service." Plaintiffs' App. at 10 (EFSI Final Cost Proposal, ¶ 1.1, p. 3). For example, the specific financial risks EFSI undertook included the risk of obtaining sufficient funding to perform the upgrades in the first year of the contract ("Capital/Financing"), the risk that the improvements might cost EFSI more to make than it had anticipated when it priced them in its fixed-price proposal ("Cost Control"), and the risk that over the course of the contract term the market interest rate might vary from the interest rate EFSI used to calculate the price of those improvements ("Interest Rate Changes"). See Plaintiffs' App. at 10 (EFSI Final Cost Proposal, ¶ 1.1, p. 3 (Figure 1. Risks Transferred)). No provision of either EFSI's Technical Proposal or the Contract puts EFSI's capital investment in the utility at risk of forfeiture to the Government if EFSI does not compete the entire term of the Contract. On the contrary, as demonstrated throughout this Section I, the Contract,

19

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 28 of 48

which includes EFSI's proposal, protects EFSI's right to payment for its upgrades and improvements to the Fort Hamilton utility systems under these circumstances. In its Final Technical Proposal, EFSI expressly stated that "[i]n the event the contract is terminated, the Contractor shall be granted compensation for its capital costs in accordance with FAR 52.241-10 (Termination Liability) and for all its other costs in accordance with FAR 52.249-2 (Termination for Convenience)." See Plaintiffs' App. at 18 (EFSI Cost Proposal, Final Proposal Revision, Proposal Assumptions and Clarifications). The Government expressly agreed to the specific terms of EFSI's proposal, including the provisions in EFSI's Technical Proposal invoking the Termination Liability clause in the event of termination for any reason, by incorporating EFSI's Final Technical and Price Proposals into the Contract without modification or limitation. See SF33, Solicitation, Offer and Award, Contract No. DACA51-00-C-0001, December 2, 1999, Continuation Sheet, page 1A, Government App. at 19. There could have been only one logical purpose for the parties' actions: to provide an agreed-upon methodology to pay EFSI for its capital upgrades and improvements if the extended payment schedule period contained in the Contract was shortened as a result of termination of the Contract. There is absolutely no evidence in EFSI's Technical Proposal, or in any other provision of the Contract, that either EFSI or the Government expected that EFSI's capital investment in the utility systems at Fort Hamilton would be forfeited by EFSI to the Government should the Contract be terminated for any reason prior to the end of its term. The contemporaneous intentions of both the Government and EFSI with respect to early termination of the Contract for any reason are reflected expressly and

20

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 29 of 48

unambiguously by the Government's inclusion of the Termination Liability clause in the Contract, by EFSI's statement in its Final Proposal of its reliance upon the operation of that clause upon early termination, and by the Government's express incorporation of EFSI's proposal into the Contract. Moreover, EFSI's interpretation of the scope of the Termination Liability clause is consistent with other provisions and the overall risk structure of the Contract. The contrary positions taken by the Government since this dispute has arisen do not and cannot reconcile these express contract provisions. Indeed, there is neither an express indication, nor even a hint, in the Contract documents or elsewhere that EFSI agreed to forfeit its right to reimbursement for the capital improvements it performed under the Contract if the Contract were terminated early under any circumstances, or that the Government expected it to do so. b. The Applicability And Terms Of The Termination Liability Clause Were Negotiated And Agreed To By The Parties. In its COFD, the Government argued that the Termination Liability clause would only apply if the parties had "negotiated" the terms to be inserted into the blank portions of the clause and that the parties had failed to do so. COFD at 3-4. The Government's argument, which is based solely on parenthetical statements in the body of the Termination Liability clause, unduly restricts the definition of "negotiation" and ignores the fact that the information necessary to fill in the blanks of the clause was negotiated and agreed by the parties. Indeed, based on the provisions of the Contract and the information contained in EFSI's Final Proposal, which the Government incorporated into the Contract, there was no need for the parties to negotiate further with respect to either the formula that would govern the payment that would be due to EFSI under the

21

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 30 of 48

Termination Liability clause in the event of early termination of the Contract or the data that would be used to complete that formula. In its Final Proposal, EFSI identified the price of the improvements it proposed to make to the Fort Hamilton utility systems on a fixed price basis ($11,616,000), applied a financing charge (interest) at a rate of 8% per annum, and extended the Government's payments over the term of the Contract (10 years). See Plaintiffs' App. at 16-17. This resulted in a monthly price of $140,932 (annual payment of principal and interest for the utility system upgrades in the amount of $1,691,180) and the timeframe over which it expected the Government to pay for those improvements. See id. at 16. Essentially, these terms constituted EFSI's "negotiating position" with the Government concerning termination liability. As demonstrated below, EFSI's proposal, which was accepted by the Government and incorporated into the Contract, provided all of the information necessary to complete the blanks in paragraphs (b), (c) and (d) of the Termination Liability clause. The last remaining portion of the clause, paragraph (e), could not be completed until the date of termination was known. (b) Facility cost recovery period. The period of time, not exceeding the term of this contract, during which the net cost of the new facility shall be recovered by the Contractor is _____ months. (To be negotiated). EFSI proposed, and the Government accepted a cost recovery period coextensive with the term of the contract. Thus, the entry for this paragraph is 120 months. (c) Net facility cost. The cost of the new facility, less the agreed upon salvage value of such facility, is $_____. (To be determined). Under the Contract, the Government agreed to pay EFSI a firm-fixed price for the utility system upgrades and replacements. At the conclusion of the Contract, title to the utilities was to pass back to the Government, obviating the need to assess or deduct

22

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 31 of 48

salvage value of the facility. After termination of the Contract, the Government took possession and control of the upgraded utility systems and is currently using those systems. Therefore, no salvage value will accrue to EFSI and there is no need for a salvage value adjustment. As a result, the "Net facility cost" is the price the Government agreed to pay EFSI for its installation. Thus, the entry for this paragraph is $16,911,800. (d) Monthly facility cost recovery rate. The monthly facility cost recovery rate which the Government shall pay the Contractor whether or not the service is received is $ _____ . (Subparagraph c divided by subparagraph b). By simple mathematics, the entry for this paragraph is $140,931.67. (e) Termination charges. Termination charges = $ ____. (The remaining months of the facility's cost recovery period (subparagraph (b)[)] multiplied by subparagraph (c)[sic][)].3 This paragraph could only be completed after the date of termination of the contract became known. In this case, the last payment the Government made to EFSI was for October 2001. There were 101 months remaining in the term of the Contract. Thus, by simple mathematics, the Government owes EFSI the amount of $14,234,098.67. Some adjustment of this entry is required, and would have been required regardless of the type of termination, to subtract interest that was included in the facility price under paragraph (c) of the clause, but unearned as of the date of contract termination. Use of the amount of unamortized principal in paragraph (c), as reflected in the certified claim, would provide the appropriate recovery amount under the Termination Liability clause formula.

3

Notwithstanding the literal language of the clause, to complete this entry at contract termination, the remaining months of the period in subparagraph (b) should be multiplied by subparagraph (d). 23

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 32 of 48

By awarding the Contract to EFSI and incorporating EFSI's Technical proposal into the Contract, the Government accepted the "negotiation position" EFSI asserted in that proposal. Consequently, if there is any requirement for "negotiation" between the parties as a prerequisite to the effectiveness of the Termination Liability clause, that requirement was satisfied through the actions of the parties in the events that resulted in the execution of this Contract. 2. The Termination For Default Clause In The Contract Requires The Government To Pay EFSI For The Utility Systems Improvements Made And Services Provided By EFSI Under The Contract. The Contract contains FAR 52.249-8, Default (Fixed-Price Supply and Service). Under the terms of that clause, the Government is required to pay EFSI for the improvements made by EFSI to the Fort Hamilton utility systems and the operations and maintenance services provided and invoiced by EFSI under the Contract. See FAR 52.249-8(f). Specifically, FAR 52.249-8(f) provides that Government is to pay the contractor for accepted supplies and services, notwithstanding the contractor's default. Under the undisputed facts of this case, it is not necessary to establish that the Government formally accepted the utility systems upgrades and the operations and maintenance services provided and invoiced by EFSI. The facts establish that the Government, by its actions, has impliedly accepted both the utility systems upgrades and improvements that were performed by EFSI under the Contract, as well as the operations and maintenance services that were provided by EFSI. See John C. Kohler Co. v. United States, 204 Ct. Cl. 777 (1974) (Government held to have impliedly accepted boiler and was required to bear loss from boiler explosion where Government had custody of and operated boiler over prolonged period of time); Complaint, Exh. 1 (EFSI's Certified

24

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 33 of 48

Claim) at 9-11. Additionally, the Government has admitted in its COFD that EFSI is entitled to full payment under the Contract for its unpaid November 2001 invoice, but is delaying that payment until it is determined whether payment of the retained balance must be made to EFSI or to Liberty Mutual Insurance Company. Complaint, Exh. 2 (COFD), at 6. Consequently, the Government is liable to EFSI under both Counts I and II on this basis. 3. If, As The Government Itself Previously Argued, The Contract Was Required To Contain Clauses Appropriate For Construction, The Government Still Must Pay EFSI For The Improvements Made By EFSI To The Fort Hamilton Utility Systems Under The Contract. In its COFD, the Government argued that this Contract required segregable construction services and thus required the contracting officer to include construction clauses for the construction work. See COFD at 5 (citing FAR 36.101(c)). According to the Government, the Contract was required to include the default clause appropriate for construction, i.e., FAR 52.249-10, Default (Fixed-Price Construction) (the "Default Construction clause"). See COFD at 5; FAR 49.504(c)(1). Consequently, the Government argued, that clause will be incorporated into the Contract by operation of law, regardless of the contracting officer's failure to include the clause in the contract. See COFD at 5 (citing G.L. Christian and Assoc. v. United States, 160 Ct. Cl. 58 (1963)). Thus, the Government has argued, for the portion of the Contract requiring construction services, i.e., the upgrades and improvements to the Fort Hamilton utility systems performed by EFSI under the contract, the default clause appropriate for construction is applicable. Under the Default - Construction clause, the Government continued, there is no express provision mandating that EFSI be paid for work performed before the default.

25

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 34 of 48

COFD at 5. Thus, the Government argued, were the Contract to be enforced as selectively redrafted by the Government, upon termination of the Contract for default, EFSI would forfeit any right to payment for construction it actually performed prior to the termination, despite the fact that the construction was substantially complete. COFD at 5. The Government's argument fails for two reasons. First, even if the Default Construction clause is incorporated into the Contract, the courts have recognized a defaulted contractor's right to payment or credit for work that was performed prior to the termination. Consequently, if the inclusion of the clauses appropriate for construction is actually required under the Christian doctrine, as the Government argued in its COFD, those clauses provide yet another basis supporting EFSI's claim for payment for the utility upgrade and improvement work. Second, if the Christian doctrine requires the incorporation of the Default - Construction clause into this Contract, it also requires the inclusion of other related construction clauses, including FAR 52.232-5, Payments Under Fixed-Price Construction Contracts (the "Payments clause"). Under that clause, EFSI would be entitled to payment for the completed work. Each of these issues are addressed below. a. The Default Clause For Construction Requires The Government To Pay EFSI For The Utility Upgrades And Improvements. The Government's reliance upon the Default - Construction clause in its COFD to avoid its obligation to pay EFSI for utility upgrade and improvement work performed prior to the date of the termination of the Contract is misplaced. Even if the clause is incorporated into the Contract under the Christian doctrine, this Court has long recognized the right of a defaulted construction contractor to payment for the contract

26

Case 1:05-cv-01000-LB

Document 19

Filed 06/02/2006

Page 35 of 48

value of work performed prior to the termination, offset only by the costs to the Government caused by the default, e.g., the costs of completing the work. Under the express terms of FAR 52.249-10, the Government may terminate the contractor's right to proceed with the work (or separable portion of the work) that has been delayed due to the fault of the contractor. See FAR 52.249-10(a). Termination of the contractor's right to proceed does not extinguish the contractor's right to payment (or to a credit against any liability for damages to the Government in the Government's efforts to complete the work) for work performed by the contractor prior to the default. See PBI Elec. Corp. v. United States, 17 Cl. Ct. 128, 137 (1989) ("While the default termination clause allows the Government to use unpaid progress payments or retainage to offset excess reprocurement costs, it does not release the Government generally from its obligation to the contractor for the contract value of work completed to the date of termination."). "[P]rogress payments due for work completed prior to termination of the right to proceed shall be used for the purpose of liquidating the liability of the contractor and his surety to the Government .... [I]f no damages resulting from the default are proven, any unpaid progress payments due on work performed prior to termination must go to