How a reservation of rights can affect the outcome of a dispute on a government contract

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Contractors and contracting officers are often asked to make tough decisions about issues that arise in the course of a complex government contract. Decisions that change the scope of work, the schedule, or the cost of the work must be documented so that the work can proceed. In a perfect world, the parties would execute a bilateral contract modification that addresses and resolves any potential future disputes.

But what about the more likely scenario—when the contractor and the government agree on some issues but not all of them? It may be more simply said than done, but these are situations that call for the parties to prepare a release that is tailored to the specific issues they agree on and excludes the disputed matters. If no change order is being executed, it may be necessary for one of the parties to issue a formal “reservation of rights.”

Two recent decisions show how a party’s approach to reserving their rights can affect their position in later litigation. The decision in T.H.R. Enterprises, Inc. v. United States, No. 20-558C (Fed. Cl. June 8, 2022) involved a contract for renovation work at Langley Air Force Base. The contractor submitted three claims—one claim each for work in Building 355, Building 584, and Building 586. The parties eventually executed a settlement agreement. The settlement agreement included a preamble section that identified only the claims on Building 355 and 586. But it also included a general release clause stating that the contractor intended to release “any and all claims, demands, liabilities, actions, causes of action, damages, expenses and obligations whatsoever.” The contractor argued that the omission of the Building 584 claim from the preamble made it clear that the release was not intended to affect it. Citing the broad language of the release, the court rejected that argument. In the court’s view, the Building 584 claims could have been preserved only with an appropriately limited release or by additional contract language stating specifically that both parties intended to exclude the Building 584 claims from the broad release.

A timely reservation of rights yielded a different result in GSC Constr., Inc. v. Secretary of the Army, No. 21-1803 (Fed. Cir. May 2, 2022). This case involved task order contract for the design and construction of two supply warehouses and bulk storage buildings at Fort Sill, Oklahoma. Disputes arose during performance as to the responsibility for scope changes and delays, and the Air Force eventually terminated the contract for default because the contractor failed to make sufficient progress toward the completion of the work. The contract specified a February 2014 completion date, and the default termination was issued in June 2014. In its appeal of the default termination, the contractor argued that the government waived the contractual completion date and thus forfeited its right to terminate the contract for default by allowing the contractor to continue working past the contractual completion date. Both the Armed Services Board of Contract Appeals and the Federal Circuit Court of Appeals rejected that argument because the government took steps to make clear that it intended to reserve its rights. In its communications with the contractor, the contracting officer had “’expressly and repeatedly’ stated that it did not ‘condone any delinquency’ or forfeit any rights under the contract.”

In case there is any doubt about the lessons that can be drawn from these cases, it is that parties to government contracts must avoid making assumptions about how a court will understand the facts in litigation on disputes that arise in the course of complex government contract. Time devoted to making sure that a release reflected in a routine contract modification matches the scope of the parties’ agreement or crafting a letter setting forth a reservation of rights is well worth it.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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