C A S E COMMENTARY
BY ROBERT D. WITTE
Termination Settlement Authority
Army Missile Command (MICOM) contracted with Hughes Missile Systems Company (Hughes) for the delivery of a quantity of missile guidance sections and related cable assemblies for a firm fixed price. In January 1995, when Raytheon Company (Raytheon) had succeeded Hughes in the contract, MICOM terminated for convenience for the remaining portion of the hardware. All the cable assemblies had been delivered, along with half of the guidance sections. Termination implies price adjustment, to which Raytheon responded with claims ranging between $29.9 million and $95.8 million—depending on the theory of the relief. MICOM’s silence prompted Raytheon to appeal the price adjustment claim; on August 27, 1997, a contracting officer finding and decision (COFD) was also appealed. The COFD apportioned a loss on the contract between MICOM and Raytheon. The positions of the parties were separated by Raytheon’s termination claim of $41 million and the COFD’s claim of $13.5 million. In May 1998, a termination contracting officer (TCO) with 17 years of experience was assigned to resolve the disputes. In August 1998, in the context of the pending price adjustment appeals, the presiding judge of the Armed Services Board of Contract Appeals (ASBCA) directed the TCO to issue a COFD on the termination settlement claim by December 31, 1998. One week later, the TCO received an audit report from the Defense Contract Audit Agency (DCAA), which applied a $19 million loss adjustment to the settlement amount. DCAA recognized that the pending price adjustment appeals could “significantly impact” any loss adjustment. The TCO submitted this DCAA report to Raytheon for comment and response. On four of the five Raytheon price adjustment theories, there would be no loss to adjust. On January 15, 1999, the TCO issued a COFD that
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authorized all but $4 million of Raytheon’s final termination settlement proposal. No loss formula was applied. Supporting the COFD, the TCO pointed out a variety of errors in the DCAA loss computation—such as excessive estimate to complete, reversed amounts associated with delivered and undelivered units, and ignored information in the settlement proposal. The TCO concluded that a loss adjustment was neither required nor appropriate. On January 19, 1999, the parties entered into a settlement agreement, based on the TCO’s unilateral determination that involved the withdrawal of all pending appeals. The TCO’s lawyer advised that it be signed, even though he was not convinced of the inapplicability of the loss formula. In furtherance of the settlement, Raytheon moved to withdraw and dismiss the appeal on the termination claim. Implementation of the agreement was dependent on the board’s decision on the price adjustment appeals that was promptly forthcoming. Two years later, by unilateral modification in June 2001, the MICOM procurement contracting officer (PCO) withdrew the termination authority of the TCO and assumed that authority himself. He ruled that the January 15th COFD and the January 19th bilateral settlement agreement (both in 1999) were void, as they both failed to apply the loss formula provisions. Raytheon appealed, and the decision of the ASBCA is published as Raytheon Company, ASBCA 51652, 03-2 BCA 32, 337 (July 2003). From the TCO testimony at the hearing and the contemporaneous notes taken in the preparation of the TCO’s COFD, the board held that the TCO decision was made independently, based on TCO understanding of the facts and law. The board refrained from making findings on the correctness of that COFD. MICOM argued that Raytheon had misled the TCO in a
C A S E
C O M M E N TA RY
variety of ways. Raytheon exaggerated the number of engineering change proposals (ECPs) that were required to correct the technical data package (TDP). The TCO did not realize that most of the ECPs were at no cost or schedule impact. The TCO testified that those details were not effective. The TCO COFD was prompted by the losses caused by the apparent general defects in the TDP. MICOM argued that Raytheon’s lawyer misrepresented to the TCO that former authorized personnel had determined that loss adjustment could not be taken. The board found no material misrepresentations in the lawyer letter, nor in the number of changes required to correct defects in the TDP. The board noted that a loss adjustment was applicable, if it appeared that “the contractor would have incurred a loss had the entire contract been completed.” It held that the TCO was conscientious in the exercise of independent judgment. Where the government substantially contributes to increased cost, so that it is not possible to separate that portion of a loss from possible losses caused by the contractor, it is improper to apply a loss adjustment on termination. The TCO applied that rule, recognizing that there were unresolved price adjustments. The board refused to decide whether the TCO’s findings were correct. Instead, it held that the settlement agreement of July 19, 1999, was bilateral and supported by consideration on both sides. Raytheon had withdrawn its appeal and given up its claim to recover any amount in excess of the settlement. The board could not find that the settlement
was so egregious, lacking in rational basis, or so palpably illegal as to make it voidable at the election of MICOM. The board held that the parties were bound by the settlement agreement of January 19, 1999.
Lesson Learned
This is an example of the difficulty of dealing with a hydraheaded entity. Any of its authorities can say “no” to any arrangement, and all of those authorities, of which there are always many, must agree for a settlement to be binding. Here, the settlement agreement that ultimately bound the parties was effective for two years (January 1999 to June 2001). During that time, the parties proceeded as if it governed their relationship. Then out of the blue, MICOM declared it void, putting the parties to considerable additional expense and effort. Fortunately, most business is more efficiently performed, or else the whole process would grind to a labored shrieking halt. CM
About the Author
ROBERT D. WITTE is a senior partner in the firm of Witte & Lestz, P.C., White Plains, New York. One of the original members of NCMA, he is an Honorary Life Member, Fellow, Charles J. Delaney Memorial Award winner for his articles, and a member of NCMA’s South East Florida Chapter. NCMA’s Blanche Witte Memorial Award was founded in memory of his mother. Send comments on this article to cm@ncmahq.org.
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