Court Opinion

ID: 9495498
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:04:10.131274+00
Date Added: 2024-06-11T17:57:03.116657
License: Public Domain

PAULINE NEWMAN, Circuit Judge,
concurring in part, dissenting in part.
I concur in the judgment that the contract was subject to termination for inadequacies in connection with the lawn-mowing services. However, this decision raises another, far-reaching, issue.
My concern is with the court’s holding that a government agency’s error of law is the sole burden of the contractor, and that the government bears neither the responsibility for its error nor the obligation to correct it to a mutually acceptable alternative. Johnson Management has been assessed the full and costly consequences of the government’s error, an error raised after contract performance and invoked as an added penalty of the termination. The Board, affirmed by this panel, simply excises the assertedly illegal contract provision, thereby significantly changing the bargain. This result is as unjust as it is unsupportable in the law of government contracting.
The Board found that the contract provision concerning liquidation of advance payments is “contrary to law.” That provision was negotiated among the Department of Housing and Urban Development, the Small Business Administration, and Johnson Management, a minority-owned small business. The contract is captioned “TRIPARTITE ARRANGEMENT.” If the provision is in fact illegal — a matter open to substantial question- — it cannot simply be deleted by one of the parties, thereby imposing a major liability on the contractor, indeed a liability unrelated to the basis of the termination. The now-impugned contract provision is:
Liquidation of Advance Payments
The payments advanced under this contract will be considered liquidated upon submission of invoices marked as paid by the suppliers. Invoices shall be for the items listed in the Use of Advance Payments clause.
The panel majority couches the issue as whether Johnson is required to return un-liquidated advance payments; however, that is -inaccurate. Johnson does not dispute the obligation to return “the unliqui-dated balance of the advance payments,” as the majority recites. Nor does Johnson dispute the obligation to repay “any outstanding balance on advance payments that it had received,” as the majority also recites. Johnson disputes only the post-performance requirement that he repay the advance payments that were fully liquidated in accordance with the liquidation details in the contract.
The government states that the liquidation provision was adopted in error. However, the contract was negotiated for HUD by an experienced contracting officer and reviewed by HUD supervisory *1260authority and legal counsel, with full participation of the SBA. Johnson states, without contradiction, that “as the contract was negotiated it was understood that advance payments were part of the overall compensation to JMG in exchange for a slightly lower contract price.” The contract was performed for its initial one-year term without any challenge to the legality of this provision. No objection was raised to this provision when the contract was renewed. Only after dispute arose during the renewal term did the agency take the position that this provision was contrary to law. The Board agreed, stating that:
The contracting officer’s apparent agreement with JMG that the advance payments would be liquidated upon their withdrawal and expenditure for the necessary start-up equipment was an act beyond her scope of authority and contrary to law. Thus, to the extent that Contract Modification Number 1 and the memorandum provide for the liquidation of the advance payments without actual repayment or discharge of the debt, they are void ab initio and without binding effect on the Government.
99-2 BCA & 30,520 at 150,707. Ruling the provision “void ab initio,” the Board held that the government is not bound to comply with the provision. However, the Board held Johnson Management to all of the contract obligations, whatever their relation to the voided provision and to the balance of mutual consideration that inheres in every contract.
If the contracting officer indeed exceeded her authority and violated the law, it is improper to place on the contractor the full and sole burden of the government’s error. The remedy for unilateral mistake is not to absolve the side that made the mistake from responsibility for the consequences of its mistake, while placing the burden of the mistake on the innocent party. See United States v. Amdahl Corp., 786 F.2d 387, 393 (Fed.Cir.1986) (“in many circumstances it would violate good conscience to impose upon the contractor all economic loss from having entered an illegal contract”). The Restatement (Second) of Contracts '153 explains that the result of a unilateral mistake as to a basic assumption is that the contract becomes voidable if the mistaken party does not bear the risk of the mistake and (a) the mistake makes enforcement of the contract unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake. However, the contract here was performed, and voiding the contract is not an apt remedy for a services contract, for “[ajvoidance of a contract ideally involves a reversal of any steps that the parties may have taken by way of performance, so that each party returns such benefit as he may have received.” Restatement (Second) of Contracts '158 cmt. b (1981).
Precedent provides guidance with respect to government error, and illustrates remedies that do not impeach the integrity of contracts. For example, in Beta Systems, Inc. v. United States, 838 F.2d 1179, 1186 (Fed.Cir.1988) the court held that “[i]f the contract is in violation of the DAR ... then reformation is appropriate” to achieve compliance, not simply cancellation of the illegal provision. In New England Tank Industries of New Hampshire, Inc. v. United States, 861 F.2d 685 (Fed.Cir.1988) the court held that if the contracting officer violated a restriction against departing from the FAR, the contractor is entitled to relief. In cases where the government has acted illegally or in error, the courts have not denied remedy appropriate to the circumstances. For example, in USA Petroleum Corp. v. United States, 821 F.2d 622 (Fed.Cir.1987) the court invoked estoppel against the government’s *1261recovery of overpayments from the contractor, for the government remained silent while the contractor relied on the contract provision and “the contractor was not negligent and dutifully followed the terms of the contract.” Id. at 626. See also, e.g., LaBarge Products, Inc. v. West, 46 F.3d 1547, 1552-53 (Fed.Cir.1995) (contract not illegal despite violation of procurement regulations by government). In none of these cases was the offending provision simply expunged, changing the balance of the contract. See Prestex Inc. v. United States, 162 Ct.Cl. 620, 320 F.2d 367, 373 (Ct.Cl.1963) (“No one would deny that ordinary principles of equity and justice preclude the United States from retaining the services, materials, and benefits and at the same time refusing to pay for them on the ground that the contracting officer’s promise was unauthorized, or unenforceable for some other reason.”).
The government’s position is not supported by the cases on which it relies, which deal with situations where a government agent or employee gave erroneous advice. In Office of Personnel Management v. Richmond, 496 U.S. 414, 110 S.Ct. 2465, 110 L.Ed.2d 387 (1990), a benefits advisor misinformed Mr. Richmond about how his earnings would affect his annuity, and the Court held that despite his reliance on the misinformation he could receive no more annuity than the statute permitted. The Court stated, however, that “we need not embrace a rule that no estoppel will lie against the Government in any case in order to decide this case. We leave for another day whether an estoppel claim could ever succeed against the Government.” Id. at 423, 110 S.Ct. 2465. Similarly in Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380, 68 S.Ct. 1, 92 L.Ed. 10 (1947), where a farm agent misinformed a farmer about the insurance that the farmer bought from the government, the Court held that the farmer could receive no larger payment for crop losses than the law allowed. The case at bar, however, is not a matter of incorrect advice by an ill-informed clerk. This is a formal government contract, negotiated by experienced contracting officers, fully approved and executed by authorized officials, a contract that contained an explicit provision about liquidation of advance payments; a contract that had been performed for the entire contract year and well into the renewal year without any challenge to the legality of this provision.
When the government enters into commerce, it is bound by the rules of commerce. See Mobil Oil Exploration, Producing Southeast, Inc. v. United States, 530 U.S. 604, 607, 120 S.Ct. 2423, 147 L.Ed.2d 528 (2000) (“When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals.”) The government proposes on this appeal that although this contract provision was a mistake on its part, the government does not bear the consequences of its mistake. However, the laws of contract and the rules of fair dealing do not evaporate when the government is a party. When a contract provision becomes illegal, whether due to later-discovered error or statutory enactment, the party that produced the illegality is liable for the injury caused thereby. See, e.g., United States v. Winstar Corp., 518 U.S. 839, 910, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996).
My colleagues suggest that Johnson should have recognized the illegality of the provision at the outset, even though neither HUD nor the SBA, nor anyone in their agency review and approval process*1262es, recognized it.1 At most, this argument invokes a theory of mutual mistake involving HUD, the SBA, and the contractor. Further, it is incorrect that an agency cannot adjust the provisions of the FAR to particular circumstances, or that no departure is ever permitted. See 48 C.F.R. '1.402 (“Unless precluded by law, executive order, or regulation, deviations from the FAR may be granted as specified in this subpart when necessary to meet the specific needs and requirements of each agency.”); see generally John Cibinic, Jr. & Ralph C. Nash, Jr., Formation of Government Contracts 71-73 (3d ed.1998). The innocent party is entitled to consideration of the nature and source of the legal error, and if reformation is in fact needed the innocent party should not be worse off, after contract performance, than if a contract with different terms had been entered upon.
The HUD contracting officer and the SBA contracting officer are signatories of the now-criticized contract modification. They surely are chargeable with knowledge of whether the FAR permits this procedure concerning advance payments.2 Were the legal error as conspicuous as my colleagues state, the actions of these agency officials reflect not only serious incompetence but reckless disregard of duty. The panel majority, acknowledging that contracting officers may deviate from the FAR, faults Johnson for fading to prove that this contracting officer did not act without authorization. That burden is not on Johnson, for prim a facie the agency’s official action was authorized. Further, it is not disputed that all necessary approvals were obtained by both HUD and the Small Business Association.
As I have observed, the parties were not prohibited from adopting the challenged contract provision. The government cannot simply assert error and escape the consequences thereof. See Burnside-Ott Aviation Training Center, Inc. v. United States, 985 F.2d 1574, 1581-82 (Fed.Cir.1993) (explaining that OPM v. Richmond relates to statutory appropriations, and does not bar equitable estoppel or mutual mistake claims involving the United States). The panel majority’s cavalier treatment of the integrity of government contracts disserves the government as well as those who undertake to serve it.

. I take note that the dictionary definition and FAR clauses quoted by the panel majority do not appear in the contract. Also, this court's theory that the liquidation provision is plainly contrary to the FAR contradicts the government's position that the advance payments need not be repaid if the equipment is conveyed or if the contract had not been terminated for default.

. Contracting officer Cannon's testimony that she did not know what "liquidated” meant is, simply, incredible; Cannon was a senior professional, Director of the Contracting Division. Also, the contract was approved by HUD legal counsel, who presumably understood the meaning of "liquidated.”