Government Knowledge of Mistake Required to Establish a Mistake-Based Contract Reformation Claim

Construction and Procurement Law News, Q2 2016

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Recently, in Appeal of Lee’s Ford Dock, Inc., the Armed Services Board of Contract Appeals (ASBCA) denied a contractor’s claim for reformation of a lease agreement based on an alleged “mutual mistake” of fact. The ASBCA’s decision is noteworthy because, in denying the contractor’s claim, the ASBCA reiterated that, in order for a contractor to prevail on a mistake-based reformation claim, it must show that the government knew of the mistake at the time of the contract award.

The government and the contractor, Lee’s Ford Dock, Inc. (LFD), entered into a series of leases for commercial concession purposes at the Wolf Creek Dam-Lake Cumberland project in Kentucky. Of particular relevance here, the leases contained a clause that states:

RIGHT TO ENTER AND FLOOD

The right is reserved to the United States, its officer[s], agents, and employees to enter upon the premises at any time and for any purpose necessary or convenient in connection with Government purposes; to make inspections; to remove timber or other material, except property of the Lessee; to flood the premises; to manipulate the level of the lake or pool in any manner whatsoever; and/or to make any other use of the lands as may be necessary in connection with project purposes, and the Lessee shall have no claim for damages on account thereof against the United States or any officer, agent, or employee thereof.

Thereafter, in 2007, the government decided to lower the level of Lake Cumberland. The government’s decision in this regard was made in response to a series of reviews that found that the Wolf Creek Dam was at risk for failure if the current level of the Lake was maintained.

In 2013, LFD filed with the government a certified claim, seeking reformation of the lease based on an alleged mutual mistake of fact. According to LFD, “the very purpose of the Lease contract [was] frustrated by the … six-year drawdown of Lake Cumberland caused by the [government’s] decision to lower the Lake on January 19, 2007.” The government denied LFD’s claim, and LFD appealed the denial to the ASBCA.

In its Complaint, LFD sought reformation of the “RIGHT TO ENTER AND FLOOD” clause contained in the leases. The government filed a motion for summary judgment against LFD. After considering the parties’ arguments, the ASBCA sided with the government. At the outset of its analysis, the ASBCA set forth the standard for obtaining reformation based on a mutual mistake:

Reformation of a written agreement on the ground of mutual mistake is an extraordinary remedy, and is available only upon presentation of satisfactory proof of four elements: (1) The parties to the contract were mistaken in their belief regarding a fact; (2) That mistaken belief constituted a basic assumption underlying the contract; (3) The mistake had a material effect on the bargain; and (4) The contract did not put the risk of the mistake on the party seeking reformation.

The ASBCA also explained that the contractor must demonstrate that the government knew at the time of contract award that the contractor was mistaken about a material fact. The ASBCA stated: “[K]nowledge on the part of the silent party of the other party’s mistake is required for reformation.” The ASBCA stated:

There is no evidence that LFD . . . ever communicated to the government that it would not enter into the Lease if the dam was not in good condition. There is absolutely no evidence that LFD made the condition of the dam an issue during contract formation.

As noted above, the ASBCA’s recent decision Lee’s Ford Dock, Inc. is noteworthy because the ASBCA reiterated that, in order for a contractor to prevail on a mistake-based reformation claim, it must show – in addition to the four elements set forth above – that the government knew of the mistake at the time of the contract award.