Government Contracts Monitor

NAVAIR Responsible for DESC Price Increases Unrelated to Market Fluctuations

April 24, 2013

Sometimes one federal agency is responsible for claims related to price increases and the actions of another federal agency.  One such situation is found in Raytheon Missile Systems Company, ASBCA No. 57594 (March 18, 2013), where the Armed Services Board of Contract Appeals recently sustained an appeal involving a nearly two-fold price increase in the cost of JP-10 fuel.

Raytheon Missile Systems Company (“Raytheon”) had a contract with the Naval Air Systems Command (“NAVAIR”) for Tomahawk Cruise missiles.  The contract required Raytheon to provide “new” JP-10 fuel for the Tomahawk missiles – a change from Raytheon’s prior contract under which NAVAIR had furnished all JP-10 as Government Furnished Property.  “JP-10 is a high-density, synthetic hydrocarbon liquid propellant used to launch all U.S. Navy and Air Force cruise missiles.” There is no commercial market for JP-10 fuel and the only place where Raytheon could acquire such fuel was from the Defense Energy Support Center (“DESC”).  Historically, DESC attempted to insulate the price of JP-10 fuel from market fluctuations, so there was no perceived market risk of significant price increases.  Raytheon, in its contract with NAVAIR, effectively assumed the (historically low) risk of market fluctuations in the price of JP-10 fuel.

In 2003, DESC entered into a new supply contract with Dixie Chemical Company (“Dixie”) that effectively made Dixie the exclusive manufacturer of JP-10 in the United States.  All Department of Defense entities and their contractors were left with one source for JP-10, DESC which got its complete supply of JP-10 from Dixie.  As part of its sole source contract with Dixie, DESC required Dixie to create an on-site storage facility for JP-10.  To fund the construction of the storage facility and the purchase of 100,000 gallons of JP-10 to fill the new storage facility, DESC raised the price of
JP-10 from $13.09 per gallon to $25.00 per gallon between FY 2007 and FY 2010.  The price returned to $15.75 in FY 2011.  Raytheon submitted a timely certified claim for nearly $4 million based on the non-market related increased fuel costs.  NAVAIR denied the claim and Raytheon appealed.

The ASBCA held that DESC’s decision to increase the price of JP-10 should be imputed to NAVAIR because there is a significantly close relationship between DESC and NAVAIR based on DESC’s status as the exclusive “purchasing agent” for fuel for the Department of Defense.  The Board went on to hold that while Raytheon assumed the risk of market price increases, Raytheon did not assume the risk of the nearly two-fold price increase related to the construction and stocking of a 100,000 gallon storage facility.  In effect, the ASBCA held that DESC/NAVAIR specifically targeted Raytheon (and other users of JP-10) to reappropriate a benefit guaranteed by contract and effectively breached NAVAIR’s implied duty of cooperation and noninterference.  The ASBCA then remanded the case to determine the amount of Raytheon’s damages.

 

Michael J. Schrier is the attorney responsible for the content of this article.