Release Language in Contracts, and Its Importance

Construction and Procurement Law News, Q4 2016

Firm Alert

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The Armed Services Board of Contract Appeals (“ASBCA”) recently denied a motion for summary judgment, filed by the U.S. Army Corps of Engineers (“Corps”), in which the Corps argued that the contractor’s execution of an earlier bilateral modification containing release language precluded the contractor’s subsequent claim for increased costs. Although the ASBCA denied the Corps’ motion, Appeal of Speegle Constr. nonetheless serves as an important reminder to contractors that release language in contract modifications must not be an afterthought and that, instead, contractors must carefully review and craft release language, or otherwise try to protect themselves in a change order.

The contract at issue was for design-build services in connection with a Corps hurricane repair project in Mississippi. After commencing performance, the contractor discovered changes were required to the fire suppression system. The parties entered into negotiations to implement the changes, and reached an agreement on all terms except the 122% field overhead rate that the contractor proposed on behalf of one of its subcontractors. Accordingly, the Corps issued a unilateral modification, applying a 10% field overhead rate for the subcontractor, but not granting the contractor a time extension.

Subsequently, the parties executed a bilateral modification, which extended the contract completion date, but provided no price adjustment. The bilateral modification included a release, which stated that the contractor “hereby releases the Government from any and all liability under this contract for further equitable adjustments attributable to such facts or circumstances giving rise to the proposed adjustment.”

Thereafter, the contractor submitted a request for an equitable adjustment (“REA”), seeking $132,248 based upon a revised, 74.19% overhead rate for its subcontractor. The Corps denied the REA, and the dispute eventually ended up before the ASBCA.

Before the ASBCA, the Corps filed a motion for summary judgment, arguing that the bilateral modification included an unambiguous release, and that “[n]o reservation of rights or exclusions were included in the release language.” In response, the contractor argued “that the intent of the parties, and thus the scope of the release [] did not include the overhead issues as evidenced by the language of the release and the parties’ actions leading to execution of the modification.” After considering the parties’ arguments, the ASBCA denied the Corps’ motion, finding that, a reading of the bilateral modification “reveals the release language to be ambiguous as to the scope of the release language.”

Although the contractor ultimately survived the Corps’ motion for summary judgment, this case nonetheless serves as an important reminder that contractors must be attentive when reviewing – and precise when drafting – release language contained in contract modifications. As the old saying goes, “an ounce of prevention is worth a pound of cure.” In federal government contracts, reservations of rights are frequently agreed to and included within bilateral modifications, so contractors should develop an agreed reservation of rights. This is not necessarily the case with state and local government contracts or with private contracts. One must seek early legal advice about signing change orders on such contracts, where the change order contains broad waiver and release language AND where the parties may have resolved only direct costs and time, but not delay costs or future impacts.