In Meridian Engineering Co. v. U.S., 2019 WL 4594233, Case No. 11-492C (September 23, 2019), the U.S. Court of Federal Claims (“COFC”) decided a contractor was entitled to damages for cumulative delays on a construction project with the Army Corps of Engineers (“Government” or “Army”) to include costs due to flooding. Importantly, the court decided that multiple contract modifications containing mutual releases of liability did not bar the contractor’s claim based on the defense of “accord and satisfaction.”
An accord and satisfaction exists as a mutual agreement between the parties in which one pays or performs and the other accepts payment or performance in satisfaction of a claim or demand which is a bona fide dispute. This issue may arise in the context of modifications to the contract, as it did here.
When negotiating modifications with the Government, contractors should clarify what damages for what claims are being released, and expressly exclude damages that are not being released, if possible, such as for damages that have not been claimed or have not been incurred yet. Subcontractors should seek to be involved to protect their own potential claims.
The Project Modifications and Claim
The Army awarded Meridian a $5.8 million contract to complete a flood control project on the Chula Vista Channel in Nogales, Arizona (“Project”). Early in the project, the Army delayed in providing drawings and survey files to Meridian. This led to cumulative substantial delay that pushed the project schedule into the monsoon season, when heavy rains flooded the project.
During the contract, the Army issued multiple contract modifications. The Government relied on two of them to support its accord and satisfaction defense: one deleted work for a new access ramp (“R8”), and another addressed additional costs and delays “directly or indirectly attributable” to flawed survey data provided by the Army (“R17”). Both increased the contract price, extended the schedule, and included identical mutual releases of liability, which stated in part that
“this adjustment constitutes compensation in full … for all costs and markups directly or indirectly attributable for the change ordered, [and] for all delays related thereto … .” (Emphasis added.)
Despite these releases, the Army considered compensating Meridian for the flooding due to monsoon rains (“flood event”). For example, the Army denied a first Request for Equitable Adjustment (“REA”) for flooding after an initial consideration on the merits. Yet the Army also circulated internally a draft modification R33 that would have given partial merit to Meridian’s eventual flood-event claim
When Meridian submitted another, consolidated REA, which included compensation for the flood event, the Army acknowledged the REA and stated its intention to issue a decision on it. However, the Army did not respond to the REA or Meridian’s subsequent certified Contract Disputes Act (“CDA”) claim. Meridian filed suit in the Court of Federal Claims (COCF) on a deemed denial of its CDA claim.
Modifications did not Bar the Claim under Accord and Satisfaction
The Government argued Meridian’s claim for damages caused by flooding of the Project was barred by the defense of accord and satisfaction, which allegedly occurred through the two modifications discussed above. A valid accord and satisfaction defense has four recognized elements: (1) proper subject matter; (2) competent parties; (3) a meeting of the minds of the parties; and (4) consideration. O’Connor v. U.S., 308 F.3d 1233, 1240 (Fed. Cir. 2002); see also Meridian Engineering Co. v. U.S., 885 F.3d 1351, 1364 (Fed. Cir. 2018). Because the COFC had decided in favor of the Government on erroneous grounds, the Federal Circuit remanded the issue for reconsideration.
On remand, the COFC made an about-face on the Army’s accord and satisfaction defense. First, it found there was no meeting of the minds between the parties as to the flood-event claim because, as the court stated, it “continued to be negotiated after the releases were issued, as evidenced by [the Government’s internal preparation of] draft Modification R33, the Government’s request for and Meridian’s subsequent submission of an REA including a claim for flood events, and the Government’s subsequent consideration of that REA.” Thus, because the Government was considering compensating Meridian for its flood-related damages after issuing bilateral Modifications R8 and R17, it demonstrated that it did not view those damages as barred at the time.
The COFC found that Meridian’s flood-related claim was not within the subject matter of the releases in Modifications R8 and R17, because Meridian’s “flood-event damage claims arising in the future [were] simply too attenuated from the access ramp and survey delays to be within the subject matter of these releases.” (Emphasis added.) The court noted that a significant portion of the flooding happened after either of these modifications were issued, and the “releases do not explicitly cover flood damage that had not yet occurred and whose scope was not predicted.” (Emphasis added.)
Conclusion
This decision demonstrates that it is possible for modifications that include mutual releases of liability not to result in an accord and satisfaction of all delay-related claims. For example, if some types of damages have not been incurred or claimed, they may not be barred from future claims by release of liability language in modifications. After modifications are issued, if the Government considers compensating a contractor for certain costs or damages, evidence of that may defeat a defense of accord and satisfaction related to the same issue.
Avoid disputes like this by clarifying in any bilateral modification what claims are released and what are not. When negotiating a modification, consider whether the monetary value is providing compensation for a release of all claims within the scope of the release language. If a claim has not yet been asserted, or is ongoing, make clear whether that claim or potential claim is being released. Subcontractors must also remain aware of modification negotiations to ensure their own potential claims are not being released by the prime.