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Oles Morrison

Supreme Court Denial Highlights Risk to Contractors of Rule Giving Deference to Agency’s Interpretation of Regulations

By on March 29, 2018 | Posted in Legislative and Regulatory Developments

Since at least 1945, the U.S. Supreme Court has upheld the unique ability of government agencies to create binding, unwritten interpretations of their own regulations. What is most troubling about this is that the agency can make or amend its regulations during the course of a contractor’s performance.  This government interpretation is binding on the contractor and the contractor may not be entitled to additional compensation if its cost of performance is increased by such amended interpretation.  A bitter pill for contractors, the Supreme Court recently refused to reconsider this principle on March 19, 2018, in Garco Construction, Inc. v. Robert M. Speer.

The principle is known as the Seminole Rock deference and requires courts to give “controlling weight” to how a government agency interprets its own regulations. Significantly, the agency’s interpretation does not need to be “the best” reading of the regulation and is valid as long as it is not “plainly erroneous or inconsistent with the regulation.” Contractors must beware that in practice, the Seminole Rock deference permits agencies to “unilaterally modify a contract by issuing a new clarification with retroactive effect.” 

The inequitable effect of the Seminole Rock deference was fully apparent in Judge Thomas’ dissent to the U.S. Supreme Court’s recent denial of review in Garco Construction, Inc. v. Robert M. Speer. Garco Construction was contracted by the Army Corps of Engineers to construct housing at Malstrom Air Force Base in Montana. Garco’s contract with the Corps required it to comply with all base access policies. When Garco bid the project, the base access policy at issue only required employees to be screened through a “wants and warrants” check—i.e., employees would be granted base access if the individual had no wants or warrants.

During construction, the base “adopted an interpretation of its access policy that read ‘wants and warrants’ to include ‘wants or warrants, sex offenders, violent offenders, those who are on probation, and those who are in a pre-release program.” After which, the base denied access to certain employees of Garco’s subcontractor, apparently causing the subcontractor to incur additional costs to find “qualified” employees. Garco’s claim for an equitable adjustment based on the agency’s modified interpretation was denied, and Garco’s appeal to the ASBCA was similarly denied with the U.S. Court of Appeals affirming the ASBCA’s decision and the U.S. Supreme Court refusing to hear the case.

In his dissent to the Supreme Court’s denial of certiorari, Judge Thomas stated concern that the Seminole Rock deference as applied to Garco “frustrates the notice and predictability purposes of rulemaking, and promotes arbitrary government.” It is important to keep in mind that the deference only applies to regulations outside the contract—thus, an ambiguity within the contract itself is generally construed against the government as the party responsible for drafting the contract (unless the contractor knew or should have known that the ambiguity existed before bid).

The Seminole Rock deference creates an additional risk in bidding government projects that needs to be accounted for by contractors and proactively addressed during contract performance.

Image Courtesy of Flickr (licensed) by Matt Wade