Going to War with the Navy . . . A Fair Fight?

Buckingham attorney John Swansinger offers the following analysis of a recent Court of Federal Claims decision:

Design/Build contractors beware.  Before you bid a federal design/build job you better have very sharp pencils and even sharper on-site experts.  Don’t trust the government’s pre-bid information and look closely for even a hint of a disclaimer.   If your assumptions are wrong, at least one courts says “IT’S ON YOU!”.

We are watching closely the progress of  Metcalf Construction Company, Inc. v United States Fed Cir. App. Case No. 2013-5041 (on appeal from U.S. Ct of Fed Cl. No. 07-CV-0777).

Metcalf, a well established, island hopping Hawaiian general contractor is in a legal odyssey with the United States Navy and, regrettably, a short-sighted United States Court of Federal Claims (CFC).  After a long pre-bid procedural struggle, Metcalf ended up winning a $49 million design/build job to construct Marine Housing in Hawaii.  Winning became losing.  The job ballooned to $76 million primarily because of unexpected site conditions related to the pure Hawaiian soil.  The CFC says Metcalf should have known of the site conditions before it started work and  is stuck with the $26 million associated with the differing site conditions.

Metcalf’s history was that of an highly reputable and successful contractor skilled in projects on the Hawaiian Islands.   Metcalf’s skills included familiarity with Hawaiian soil conditions.  The Navy’s specification for the job stated that soils near the project were slightly expansive. In the RFP process the Navy stated that the soil included Chlordane but that no remediation was required.

Says who? Upon commencing work, Metcalf became aware that the soil was more than “slightly” expansive. In fact, the experts agreed that the expansiveness of the soil was “moderate to high”.  Expansive soil equals cracked foundations and myriad problems. Thus, the Navy changed its opinion on the need to remediate the Chlordane in the soil and changed the specification. As a result, Metcalf was stuck with the long delay, additional geological analysis, and a change in the depth of construction.  Calls for a change order, right?

Not so fast. The Navy rejected Metcalf’s global claim seeking changes related to the soil, thus  sticking Metcalf with an additional $26 million in costs. The Navy refused to take responsibility for the difference in site conditions from spec.  Instead, the Navy shifted the risk of differing soil conditions to the unsuspecting and later, shocked, Metcalf.  Metcalf cried foul and sued in the CFC under the theory of breach of contract and breach of the duty of good faith and fair dealing. See, Metcalf Construction Co., Inc. v The United States 2011 WL 6145128 (Fed Cl. December 9, 2011).

How can Metcalf  be responsible for such dramatic variances in the Owner’s site conditions from specifications to actual, especially when the Owner represented the conditions to be one way and they turned out substantially different?  That risk is usually on the Owner.

The CFC ignored the duty of good faith and fair dealing and adopted an expansive interpretation of foreseeability.  Without regard to the scale of the differences in site conditions and misinformation, the CFC applied Int’l Tech Corp v. Winter, 523 F. 3d 1341 (Fed Cir. 2008) which established that  a contractor must prove four elements:

1. A reasonable contractor reading the contract documents as a whole would interpret them as making a representation of the site conditions….

2. The actual site conditions were not reasonably foreseeable to the contractor with the information available to the particular contractor outside the contract documents.

3. The particular contractor in fact relied on the contract representation.

4. The materials differed materially from those represented and that the contractor suffered damages as a result.

In determining that Metcalf (not the Navy) should have foreseen the problem, it didn’t matter that the Navy’s pre-bid information was wrong or misleading. As long as it had the broad disclaimer (for preliminary information only), Metcalf could not rely on any pre-bid information. The CFC further reasoned that Metcalf, because of its skill and expertise in the location and industry, was presumed to have assumed the risk of potential changes unique to the site.   Despite the misinformation the Navy gave Metcalf at the time of bid, the CFC determined that Metcalf had enough information in front of it, coupled with its own experiences, in order to have understood the soil issues prior to making its bid.  The CFC shifted the burden of obtaining all information related to the site to Metcalf.

For Metcalf, the Navy and the CFC have combined to hammer Metcalf with a multi-million dollar sandbagging operation.  If the CFC’s decision is upheld on appeal, this ruling is a game changer in federal design-build projects and possibly could destroy the concept entirely.