Government Contracts Monitor
NCLN20 COFC Case Provides Cautionary Tale for Small-Business Contractors
September 1, 2011
A recent U.S. Court of Federal Claims (“COFC”) case is a veritable “horror story” of what can happen to a small-business contractor that is not fully ready to perform and that expects – perhaps based on its past experience with agency contracting personnel – that a “friendly” contracting officer (“CO”) will exhibit patience towards the contractor. Sadly, and notwithstanding the court’s conclusion that the Government improperly terminated the contractor’s security-guard contract, the contractor failed to obtain any meaningful relief.
The case is NCLN20, Inc. v. United States, No. 02-1282C (COFC July 21, 2011), which principally concerned NCLN20’s 2001 contract to provide security-guard services to the General Services Administration (“GSA”) in the State of Michigan. The GSA awarded the contract to NCLN20 on August 24, 2001, just days before the September 11, 2001, attacks on the World Trade Center. The contract was a potential $32,962,000 five-year indefinite-delivery, fixed-price requirements service contract for security guards and ancillary support.
Contract performance was troubled from the start: among other problems, NCLN20 lacked the required security-guard license and weapons permits and also claimed a mistake in bid. In addition, in the immediate aftermath of the September 11th attacks – and before contract performance was scheduled to commence on October 1, 2001 – the GSA added significant work (additional guards) to the contract. By September 20, 2001, the alternate administrative contracting officer (“AACO”) already had “grave doubts” about NCLN20’s readiness or willingness to perform the contract. (In a tragic coincidence, a GSA employee was shot and killed the next day in the lobby of the Federal Building in Detroit.) Based in part on the local authorities’ inability or refusal to register the requisite number of firearms within the short contract start-up period – and the GSA’s refusal to waive the requirement – the GSA terminated the contract for default on September 28, 2001, following a two-day “cure period.”
In October 2001, having already lost a protest at the GAO challenging the GSA’s refusal to permit a mistake-in-bid correction, NCLN20 filed a “complaint” with the GSA Office of Inspector General (“IG”) seeking a review of the default termination. In May 2002, the IG issued a report concluding that the GSA (1) failed to provide NCLN20 with a start-up period consistent with the contract terms, (2) did not provide NCLN20 with the ten-day cure period prescribed by the Federal Acquisition Regulation (“FAR”) before terminating the contract for default, (3) may have exposed the Government to increased costs by not exercising a valid Option to Extend Services clause, (4) did not provide the required advance notice of contract termination to the Small Business Administration, (5) may not have administered NCLN20’s mistake-in-bid claim in a manner consistent with the FAR, and (6) appeared to be inconsistent in its treatment of NCLN20 as compared to other guard-services contractors.
Buttressed by the IG report, NCLN20 filed a complaint at the COFC in September 2002. Following years of procedural skirmishing before the court, the DCAA issued an audit report in March 2007 concluding that NCLN20 had incurred net expenses of $46,856 as a result of the termination. The CO then converted the default termination to a termination for convenience. In 2009, the trial was suspended due to the poor health of NCLN20’s counsel, who had replaced its initial counsel in 2006. In a highly unusual move – and no doubt influenced by the explosive accusations in the case, including allegations of racial bias – the COFC judge attended the April 2009 deposition of the AACO “to ascertain the credibility and weight to be afforded this witness.” At the court’s request, the Government also submitted the confidential personnel files of the AACO and CO for an in camera review. The COFC issued its opinion on July 21, 2011 – almost ten years after the default termination and some time after NCLN20 had become unable to continue to fund the case.
Highlighting the dangers of requirements contracts, the court concluded that the GSA did not breach its implied duty of good faith and fair dealing by requiring NCLN20 to provide additional guards following the September 11th attacks without modifying the contract or increasing payments to NCLN20. The court likewise found that the GSA did not breach the duty by contributing to a delay in NCLN20’s start-up efforts. Turning its attention to the legality of the termination for default, the court concluded that the GSA’s default termination was improper because the GSA had failed to provide NCLN20 with the required ten-day cure period. Interestingly, the court rejected the Government’s contention that the default termination was justified based on NCLN20’s lack of a Michigan security-guard license, finding that the GSA could have ascertained NCLN20’s compliance prior to award and either failed to do so or waived the requirement. Accordingly, the court converted the September 28, 2001, default termination to a termination for convenience, essentially upholding the CO’s 2007 action and “ratifying” the IG report.
The court next examined NCLN20’s contention that the CO’s 2007 conversion of the default termination to a convenience termination was tainted by bad faith or clear abuse of discretion and was, thus, invalid. The court found no bad faith notwithstanding its findings that “the AACO was a difficult person, whose style of communication was inept, argumentative, and unprofessional” and that his dealings with NCLN20 “often were accusatory and condescending.” The court found, therefore, that NCLN20 was not entitled to lost profits.
So where does this leave the small-business contractor? After nearly nine years of litigation, NCLN20 – or what is now left of it – recovered its start-up costs of $46,856 with interest (plus interest on some delayed payments under a second contract). Here’s the message for contractors, particularly small ones: don’t overpromise, don't count on getting favorable treatment from the CO to relieve you of contract requirements, and remember that litigation – even if “successful” – may not result in a meaningful recovery.
John Howell is the attorney responsible for the content of this article.