Govt’s Failure to Grant REA Can Constitute Breach of Contract

Aron C. Beezley and Sarah Sutton Osborne | Buildsmart

The U.S. Court of Appeals for the Federal Circuit, in BGT Holdings LLC v. United States, recently held that the government does not have the discretion to deny a contractor’s request for equitable adjustment (REA) under Federal Acquisition Regulation (FAR) 52.245-1 (Government Property) where the conditions specified in that clause are present and the contractor is able to show financial loss. As discussed below, the Federal Circuit’s decision in this regard is a welcome development for government contractors because the court’s basic reasoning extends to all FAR clauses that direct that the government “shall” or “must” consider or make an equitable adjustment if the conditions set forth in the applicable FAR clause are present.

The Facts

BGT Holding LLC filed a complaint with the U.S. Court of Federal Claims alleging, among other things, that the U.S. Navy breached its contractual duty to provide BGT an equitable adjustment after failing to deliver government-furnished equipment (GFE) that the Navy had agreed to deliver to BGT. The Court of Federal Claims dismissed BGT’s complaint, finding that BGT’s claim in this regard was precluded by the terms of the contract. BGT then filed an appeal with the U.S. Court of Appeals for the Federal Circuit.

On appeal, the Federal Circuit specifically addressed BGT’s claim that the Navy breached FAR 52.245-1 by failing to provide an equitable adjustment for the Navy’s non-delivery of GFE. The Federal Circuit noted that two subsections of FAR 52.245-1 govern GFE non-delivery by the government. First, under subsection (d)(3)(i), the contracting officer “may, by written notice, at any time — (A) Increase or decrease the amount of government-furnished property under this contract.” In such a case, subsection (d)(3)(ii) directs that the contracting officer “shall consider an equitable adjustment.” Second, under subsection (d)(2)(i), if the GFE “is not delivered to the Contractor by the dates stated in the contract, the Contracting Officer shall … consider an equitable adjustment.”

The government argued on appeal that BGT’s claim under subsection (d)(2)(i) is untenable because the contracting officer was required only to “consider BGT’s request for an equitable adjustment — not to grant the adjustment to BGT.” (emphasis added). Under the government’s theory, the phrase “shall consider” gave the contracting officer discretion to grant or deny an equitable adjustment and imposed no duty to grant an adjustment, even if BGT could prove financial loss due to the government’s non-delivery of the GFE.

The Federal Circuit, however, rejected the government’s argument, stating:

We reject the government’s interpretation of the term “shall consider” because it would produce absurd results under the government property clause. . . . To illustrate, assume that the committed GFE in this case had a total value nearing $5 million, well over half of the contract price of $8.25 million. See J.A. 24-25. If the Navy had withdrawn all GFE, as the contract allows, it would be implausible to posit that the Navy’s only obligation would be merely to “think over” BGT’s request for an equitable adjustment before denying it. It is dubious, to say the least, that the drafters of the FAR’s government property clause, 48 C.F.R. § 52.245-1, envisioned that the government would essentially have an unfettered right to withdraw promised GFE from a contract without consequence.

The Federal Circuit went on to state:

The correct interpretation of “shall consider” in this contract setting does not give the government absolute discretion, but instead holds the government to a duty of good faith and reasonableness. . . . Moreover, the FAR demands that the contracting officer exercise impartiality, fairness, and equitable treatment when considering requests for equitable adjustments. See 48 C.F.R. § 1.602-2 (“Contracting officers shall . . . (b) Ensure that contractors receive impartial, fair, and equitable treatment; . . . .”). The government’s interpretation of “shall consider” would invite subversion of that responsibility.

Accordingly, the Federal Circuit vacated the dismissal of BGT’s claim that the Navy breached its duty to provide an equitable adjustment after it failed to deliver the GFE. The Federal Circuit directed that, on remand, the Court of Federal Claims “must determine whether BGT is entitled to an equitable adjustment as fair compensation for the failure to deliver those GFE items.”

The Takeaway

The Federal Circuit’s decision in BGT Holdings LLC v. United States highlights the government’s duty of good faith and reasonableness in addressing government contractors’ REAs. Where the FAR makes equitable adjustment available as relief to a contractor facing certain conditions, the government does not have the discretion to ignore a contractor’s request for adjustment and, instead, has a duty of good faith and reasonableness not only to consider but grant such relief where due.

This is a welcome development for contractors because the Federal Circuit’s reasoning discussed above extends to all FAR clauses that direct that the government “shall” or “must” consider or make an equitable adjustment if the conditions set forth in the applicable clause are present. Accordingly, we will likely see contractors rely on the Federal Circuit’s holding in BGT Holdings LLC to argue that the government committed a breach of contract by failing to grant the contractor an equitable adjustment under a variety of clauses. For instance, the Federal Circuit’s basic reasoning may apply to the following FAR clauses, each of which states that the contracting officer shall make an equitable adjustment when certain conditions are present:

  • FAR 52.204-2 (Security Requirements)
  • FAR 52.233-3 (Protest After Award)
  • FAR 52.236-2 (Differing Site Conditions)
  • FAR 52.242-14 (Suspension of Work)
  • FAR 52.242-15 (Stop-Work Order)
  • FAR 52.243-1 (Changes — Fixed-Price)
  • FAR 52.243-2 (Changes — Cost-Reimbursement)
  • FAR 52.243-4 (Changes)
  • FAR 52.243-5 (Changes and Changed Conditions)
  • FAR 52.246-20 (Warranty of Services)

A Consequential Ruling: Florida Supreme Court Rejects Recovery of Consequential Damages in First-Party Breach of Contract Actions

John David Dickenson, Chad A. Pasternack and Alexandra Schultz | Property Insurance Law Observer

In first-party breach of insurance contract actions, the parties oftentimes dispute whether the policyholder may seek damages that are not explicitly provided for in the policy, with the policyholder arguing such indirect damages flow from the alleged breach of contract. By doing so, policyholders blur the lines between breach of contract actions and bad faith actions. The Florida Supreme Court recently considered this issue in Citizens Property Insurance Corp. v. Manor House, LLC,[1]  and held that “extra-contractual, consequential damages are not available in a first-party breach of insurance contract action because the contractual amount due to the insured is the amount owed pursuant to the express terms and conditions of the insurance policy.”

Manor House arose from a Hurricane Frances insurance claim filed by an owner of apartment buildings. Citizens issued payments totaling approximately $1.9 million. Approximately nineteen months after the loss, Manor House’s public adjuster asked Citizens to reopen the claim. After reopening the claim, Citizens made additional payments and continued its adjustment. Several months after reopening the claim, Citizens’ field adjuster informally estimated the actual cash value of the loss at approximately $5.5 million and the replacement cost value at $6.4 million.

At around the same time, there was a change in ownership at Manor House. The new owner demanded Citizens pay the “undisputed” amount of $6.4 million and demanded appraisal. Citizens sought documentation regarding the new owner’s authority to act on behalf of Manor House, as well as other documentation such as invoices and contracts for work in progress. Manor House then filed suit seeking, amongst other things, extra-contractual damages related to rental income that it allegedly lost due to delay in repairing the apartment complex based on Citizens’ “procrastination in adjusting and paying the Manor House claims.”[2]

The trial court granted Citizens’ motion for partial summary judgment regarding the lost rental income. On appeal, the Fifth District reversed, concluding that “the trial court’s ruling ignores the more general proposition that ‘the injured party in a breach of contract action is entitled to recover monetary damaged that will put it in the same position it would have been had the other party not breached the contract.”[3] The Fifth District concluded that consequential damages are available in breach of insurance contract actions, provided that the damages “were in contemplation of the parties at the inception of the contract” and can be proven “with reasonable certainty.”[4]

The Florida Supreme Court reversed the Fifth District’s decision, agreeing with the trial court that the parties must rely on the express terms and conditions of the insurance policy, which, in this case, did not provide for lost rental income coverage. The Court reiterated that under Florida law, courts are to give effect to the intent of the parties as expressed by the policy language, rather than the “reasonable expectations” of the insured. Accordingly, “extra-contractual consequential damages are not available in a first-party breach of insurance contract action because the contractual amount due to the insured is the amount owed pursuant to the express terms and conditions of the policy.”[5] For a policyholder to obtain extra-contractual consequential damages, it must pursue and prove bad faith under Florida Statutes § 624.155.

Manor House affirms a simple principle: the terms and conditions of the insurance policy govern disputes over coverage.  In a first-party property breach of contract case, the only remedies “contemplated” by the parties are those set forth in the policy’s express terms.


[1] Citizens Prop. Ins. Corp. v. Manor House, LLC, No. SC19-1394, 2021 WL 208455 (Fla. Jan. 21, 2021).

[2] Id. at *2.

[3] Manor House, LLC v. Citizens Prop. Ins. Corp., 277 So. 3d 658, 661 (Fla. 5th DCA 2019).

[4] Id.

[5] Manor House, 2021 WL 208455, at *2 (Fla. Jan. 21, 2021).

Comparative Breach of Contract – The New Benefit of the Bargain in Construction?

Steven Hoffman, Esq. | Florida Construction Law News

Ask most Florida Construction Law practitioners, and you will likely hear that liability may not be apportioned in “pure” breach of contract cases via the Comparative Fault Act, section 768.81, Florida Statutes (the “Act”).  If a material breach is a “substantial factor” in causing damages, the breaching party must answer for all damages that were reasonably contemplated by the parties when they formed the contract.  Claimants argue that matters of contract should be governed strictly by the agreement, and risk can be controlled by negotiated terms, including waivers and limitations.  Defendants complain that construction projects are collaborative, multi-party affairs, and strict application of contract principles leads to harsh results for relatively minor comparative fault for the same or overlapping damages.

The notion of apportioning purely economic loss contract damages based on comparative fault is not new.  Since April 2006, Florida has been a “pure” comparative fault jurisdiction with limited exceptions.  Prior to the amendment, tort liability for non-economic damages was purely comparative, but liability for economic damages was typically a combination of joint and several liability with an additional exposure based on comparative fault.

With the 2006 amendment, the Florida Legislature recognized that liability for all damages caused by “negligence” should be borne by a defendant based on its share of fault compared to other parties and non-parties contributing to the loss.  But application of the doctrine was rare in construction cases with no personal injury or damage to property other than the subject of the contract.

In an unreported decision, the U.S. Court of Appeals for the Eleventh Circuit upheld the application of the Act to allow a general contractor to reduce its exposure to the purchasers of a new home by apportioning fault to two non-parties – a developer who sold a new residence to a plaintiff and plaintiff’s construction lender.  Millette v. Tarnove, 435 F. App’x 848, 853-55 (11th Cir. 2011).  However, that decision has no precedential value.

The plaintiff’s weapon-of-choice was dicta tucked away in a footnote in a Florida Supreme Court decision, where the court commented that “Centex-Rooney is a breach of contract action, and thus section 768.81 is inapplicable.”  Gouty v. Schnepel, 795 So. 2d 959, 965 n.3 (Fla. 2001) ( citing Centex-Rooney Constr. Co. v. Martin Cty., 706 So. 2d 20 (Fla. 4th DCA 1997)).  The Gouty case had nothing to do with construction.  But, in the absence of contrary authority, trial judges would often refuse to apportion fault for breach of contract claims in construction cases, relying on the discretion afforded them under the Act to determine the “substance of [the] action.”

Fourteen years later, we have our first appellate decision applying comparative fault in a construction claim for economic losses.  In Broward County, Florida, v. CH2M Hill, Inc., and Triple R Paving, Inc., 4D18-3401, 2020 WL 4197936 (Fla. 4th DCA July 22, 2020), the Fourth District Court of Appeal answered the following questions in a construction defect claim:

WHETHER SECTION 768.81(3) APPLIES TO A BREACH OF CONTRACT ACTION AGAINST AN ENGINEER FOR BREACHING A DUTY OF CARE PROVISION, THUS QUALIFYING THAT ACTION AS A “NEGLIGENCE ACTION” PURSUANT TO SECTION 768.81(1)(c).

AND, WHETHER IN SUCH A CASE, SECTION 768.81(3) CAN EXTEND TO OTHER PARTIES’ BREACH OF CONTRACT CLAIMS, WHERE THOSE OTHER PARTIES ARE NOT PROFESSIONALS UNDER SECTION 768.81(1)(c), BUT WHOSE CAUSES OF ACTION ARE NECESSARILY INTERTWINED WITH THE BREACH OF CONTRACT CLAM AGAINST THE ENGINEER.

The Fourth District Court answered “yes” to both questions.

This case involved the defective design and construction of Taxiway C at the Fort Lauderdale-Hollywood International Airport.  Broward County hired engineering firm CH2M Hill, Inc. (“CH2M”) to design the taxiway in conformance with FAA specifications requiring new taxiways to have a useful service life of twenty years.

The County also contracted with: 1) Triple R Paving, Inc. (“Triple R”) as prime contractor to build the project; 2) URS Corporation (“URS”) as Program Manager to provide on-site representation and over-all management; and 3) Bureau Veritas North America (“BV”) as materials testing and construction inspector, including density testing of the base and subgrade layers beneath the Taxiway’s asphalt surface layer.

Shortly after Taxiway C opened to traffic, the County noticed rutting (i.e., indentations in the surface of Taxiway C), that ultimately led to the redesign and reconstruction of Taxiway C, costing the County millions of dollars.  The County refused to pay Triple R further for its work because its damages, including the cost to repair the failed taxiway, far exceeded any money due under the prime contract.

Triple R sued the County for breach of contract and violation of the Local Government Prompt Payment Act, alleging that the County withheld payment owed to Triple R.  Triple R also brought a claim against CH2M for professional negligence.  The County brought a counterclaim against Triple R for breach of contract and a crossclaim against CH2m for breach of contract and indemnification.  The County also brought claims for breach of contract and indemnification against URS and BV, which both settled at mediation.

Triple R and CH2M each raised affirmative defenses of comparative fault, arguing that fault should be apportioned under section 768.81 among the parties and non-parties, including URS and BV.  Ultimately, the trial court found that Triple R and CH2M breached their contracts with the County, and their breaches were direct and proximate causes of the redesign and reconstruction of Taxiway C.  Further, the trial court found that non-party URS was substantially in breach of its contract with the County and at fault for the Taxiway C damages.

The trial court allocated relative fault to URS, Triple R, and CH2M as follows: (1) 60% to URS; (2) 25% to Triple R; and (3) 15% to CH2M.  The County appealed, arguing that comparative fault is not applicable to breach of contract cases. Instead, contract law governed and required that breaching parties be held jointly and severally liable for the plaintiff’s damages because the separate breaches caused a single, indivisible injury.  The Fourth District Court of Appeal affirmed the judgment.

APPLICABLILITY OF SECTION 768.81

Section 768.81(1) states that “[e]xcept as specifically provided, this part applies to any action for damages, whether in tort or contract.”  § 768.71(1), Fla. Stat. (2018) (emphasis added).  Section 768.81(3) requires apportionment of damages in a “negligence action,” and subsection (1)(c) defines “negligence action” as:

without limitation, a civil action for damages based upon a theory of negligence, strict liability, products liability, professional malpractice whether couched in terms of contract or tortor breach of warranty and like theories.  The substance of an action, not conclusory terms used by a party, determines whether an action is a negligence action.

(emphasis added).

The Fourth District concluded that a “negligence action” includes professional malpractice, citing the Florida Supreme Court’s decision in Moransais v. Heathman, 744 So. 2d 973, 976 (Fla. 1999) (individual engineers performing professional services for the firm have a duty to the firm’s clients to exercise reasonable professional care).

A professional must render services according to a standard of care used by similar professionals in the community under similar circumstances.  Where a professional services contract provides for a heightened standard of care, such as designing a taxiway in accordance with FAA standards, then the quality of performance must comport with the contractual terms.  See Sch. Bd. of Broward Cty. v. Pierce Goodwin Alexander & Linville, 137 So. 3d 1059 (Fla. 4th DCA 2014); see also CH2M Hill Se., Inc. v. Pinellas Cty., 698 So. 2d 1238 (Fla. 2d DCA 1997).   The gravamen of the County’s action against CH2M was that it failed to adhere to the FAA’s heightened standard of care as required by its contract.  Though the County’s claims were “couched in terms of contact,” the “substance of [the] action” sounded in negligence.

Perhaps more surprisingly, the Fourth District upheld the apportioned award against the contractor.  Though a general contractor is not a professional under section 768.81(1)(c), section 768.81(3) requires a court to “enter judgment against each party liable on the basis of such party’s percentage of fault.”  Applying “a holistic approach to analyzing the complaint,” it found that the contract action against Triple R fell under the umbrella of the “negligence action.”  Because Triple R was to perform the contract according to CH2M’s specifications, the causes of action were “necessarily intertwined.”

The Fourth District distinguished BRE/Cocoa Beach Owner, LLC v. Rolyn Cos., Inc., 2012 WL 12905849 (M.D. Fla. 2012), in which the trial court held that section 768.81 did not apply to a breach of contact action against Rolyn, the general contractor, because it was not a “professional” like CH2M.

The Fourth District harmonized the “substantial factor” test for contract actions with the contributing proximate cause test for tort actions.  Because fault lies at the heart of both claims, apportionment is consistent with holding a defendant liable for the damages that reasonably flow from a breach of contract.

WHAT’S NEXT?

Just how far will this decision reach into the sacrosanct chambers of contract law?  The better question may be: Wwhat is so sacred about contract law to justify exposing a breaching party to damages disproportionate to its fault relative to contributing to others who caused the same loss?  Because contract damages are judged by the reasonable expectations of the parties when contracting, should those expectations reflect an evolving social policy of responsibility proportionate to relative fault?

A breach of the performance requirements in design and construction contracts inherently requires performance to be measured against an agreed standard of conduct.  From that perspective, does the argument of a meaningful distinction between liability for “pure” breach of contract and “pure” comparative fault tort claims based on performance standards become sophistry?

Is the benefit of the bargain between owner and contractor or architect joint and several liability?  Or is the more reasonable expectation that contracting parties be held accountable in relation to comparative fault?

Construction is a complex process from design and planning through completion.  Owners, designers, contractors, and suppliers are necessarily intertwined in the effort and dependent on each other simply to complete the job.  The quip, “in construction, it’s about time, price, and quality – pick any two,” is a wry observation that reasonable expectations should be tempered by experience, and experience teaches that construction is a compromise between vision and execution.

Judgment for Breach of Contract Reversed as Trial Court Should Have Granted Leave to Amend Complaint For Bad Faith

Michael Velladao | Lewis Brisbois

In Eghtesad v. State Farm Gen. Ins. Co., 51 Cal.App.5th 406 (June 29, 2020), the California Court of Appeal reversed the trial court’s entry of judgment in favor of State Farm General Insurance Company (“State Farm”) based on an order sustaining a demurrer without leave to amend regarding a complaint filed by Nader Eghtesad. Mr. Eghtesad, representing himself, filed a form complaint checking a box for breach of contract. The complaint alleged two paragraphs contending that State Farm had acted in bad faith and concealed benefits due under a policy issued to a former tenant who rented space in a building owned by Eghtesad. Eghtesad was an additional insured under the tenant’s policy. In that regard, the building was damaged during the time that the building was rented and Eghtesad tendered a claim under the State Farm policy contending that he was an additional insured pursuant to the terms of the lease with the tenant. According to Eghtesad, State Farm advised him that he could only make a claim for slander against the former tenant and that coverage was not afforded for his property damage claim.

After Eghtesad filed his form complaint, State Farm demurred to the complaint and argued that it did not state facts supporting a cause of action for breach of contract. Ultimately, the trial court agreed with State Farm and entered an order sustaining the demurrer without leave to amend, such that a judgment was entered in State Farm’s favor. Due to health reasons, Eghtesad was never able to file an opposition to the demurrer, despite two extensions of time provided by the trial court intended to allow Eghtesad time to retain counsel and to recover from injuries sustained as a result of an automobile accident.

In reversing the trial court’s entry of judgment, the Court of Appeal found that the complaint alleged sufficient facts, such that the trial court should have issued an order allowing time for Eghtesad to file an amended complaint. Essentially, the Court of Appeal found that the trial court abused its discretion by refusing to allow Eghtesad to file an amended complaint alleging breach of contract, fraud, and bad faith.

Delay Days for Liquidated Damages May Be Apportioned Where Permitted by Contract

Geoff F. Palachuk | Lane Powell

Overlapping delays partly caused by a contractor and partly by an owner — known as concurrent delays — typically nullify the assessment of liquidated damages in a breach of contract dispute. But a contractor generally will be held liable for liquidated damages if the contractor cannot establish proof of concurrent or owner-caused delays affecting the critical path. Where the parties’ contract provides for the allocation of fault for delays, a trier of fact must analyze each delay day in order to apportion fault. In Lake Hills Investments, LLC v. Rushforth Construction Co., Inc., Division One of the Washington Court of Appeals clarified the rule for apportionment of liquidated damages, and held that factfinders can apportion delay days for liquidated damages between the contracting parties, where allowed by contract, depending on each party’s respective fault for causing delays.

The court in Lake Hills examined a jury’s assessment and apportionment of liquidated damages by the owner (Lake Hills) against the contractor (AP) for a project in Bellevue. The project was constructed in several phases. AP did not timely complete the project, with delays ranging from 300-500 days for multiple phases.

At trial, Lake Hills sought to assess liquidated damages of $2,500 per day for delays on each phase that were caused by the conduct of AP or its agents. The jury instruction at issue allowed the factfinder to excuse AP for any delays that AP, alone, did not cause. Although the law typically requires that a general contractor like AP carry the burden of proving such delays were the fault of concurrent or owner-caused delays, the jury instruction provided AP with a negative burden of proof focused on contractor-caused delays.

The court of appeals acknowledged that negative phrasing. Without addressing the issues related to each party’s respective burden of proof, however, the court reasoned that the parties’ contract allowed apportionment of delays. The court determined that liquidated damages could be assessed under the contract by “examining each day of delay, identifying the cause of delay, and adding or subtracting delay days based on the conduct of each party and its agents.” The court adopted the modern rule of “a ‘strong majority’ of jurisdictions” that a factfinder can apportion liquidated damages between the contracting parties, where allowed by contract, depending on the relative allocation of fault in causing those delays.

The jury was instructed to excuse AP from any delay days “not solely caused by AP.” But the court of appeals determined that instruction did not reflect the parties’ contract. The court reasoned that “[t]he instruction let the jury excuse AP from any day of delay caused by anything other than itself, including its own agents.” The jury instruction also did not account for any delays caused by AP’s agents, subcontractors, material suppliers, consultants, etc., which normally constitute delays attributable to the general contractor. The trial court provided the narrower and negatively-phrased jury instruction, and the jury ultimately found “AP was not the ‘sole’ cause of 90 percent of the delay on the project.”

The court of appeals held the instruction “misled the jury without misstating the law,” but the court also determined that Lake Hills suffered no prejudice. Notwithstanding the appellate court’s ruling on this issue, the case was ultimately reversed and remanded for a new trial on other grounds. 

The lesson from this case is that delay days may be apportioned to the contracting party found at fault for the cause of delay. That rule had not been clarified by the Washington appellate courts for nearly two decades. However, the decision in Lake Hills also should not change a contractor’s burden of proof at trial. In order to overcome or nullify the assessment of liquidated damages during trial, a contractor must establish proof of either concurrent or owner-caused delays that affect the critical path. Delays that affect the critical path extend the overall length of construction. Only then, where the delays are attributable to such concurrent or owner-caused delays, a factfinder may apportion delay days to determine the proper assessment of liquidated damages.