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    Business Law Legal Research Blog

    BUSINESS LAW: Boiler-Plate Federal "Requirements Contract" Ruled Nonbinding and Unenforceable

    Posted by Gale Burns on Tue, May 24, 2011 @ 15:05 PM

    May 25, 2010

    Charlene Hicks, Senior Attorney, National Legal Research Group

    Most ordinary citizens who enter into written contracts with the federal Government take for granted the fact that such agreements are valid and enforceable.  Horn v. United States, No. 07-655 C, 2011 WL 1663598 (Fed. Cl. May 3, 2011), however, sounds a resounding warning against such blithe assumptions.

    Jullie Horn is a dental hygienist who entered into a written contract with the U.S. Federal Bureau of Prisons (the "BoP") in 2005 to provide dental hygiene services at an Illinois federal prison.  The contract stated that Horn would provide a maximum of 1,560 one-hour dental hygiene sessions over the term of the agreement, at the unit price of $32 per session.  Horn was awarded the contract for the fixed price of $49,920.

    In accordance with Federal Acquisition Regulations ("FAR") 52.216-21, the contract specifically designated itself as a requirements contract and stated that the "quantities of supplies or services specified in the Schedule are estimates only."  2011 WL 1663598, at *1.  The agreement further provided that if the Government's requirements did not result in orders equivalent to the maximum number of sessions in the Schedule, "that fact shall not constitute the basis for an equitable price adjustment."  Id.

    One month after Horn was awarded the contract, the BoP dental supervisor informed her that BoP would no longer utilize her services but would instead obtain the services of an in-house dental hygienist.  Id. at *2.  At that time, Horn had completed only 130 one-hour sessions, which was approximately 8% of the contract estimate.  Id.  Horn submitted a claim to the BoP contracting officer, alleging that the early termination of the agreement constituted a material breach of contract.  Id.  The BoP disagreed, taking the position that it was not bound by the estimated number of hours provided in the contract.

    In response, Horn filed a breach-of-contract action in the U.S. Court of Federal Claims, seeking damages for lost wages of over $30,000 plus interest.  The Government filed a motion for summary judgment, which was granted by the court.  Id.

    In so ruling, the court first determined that despite the express contract language incorporating the boilerplate FAR provision and designating the agreement as a requirements contract, no enforceable requirements contract actually existed.  "[T]he plain language of the contract is misleading."  Id. at *4.  As a general rule, a requirements contract involves the conferral of an exclusive right upon the contractor to perform a given service at a fixed price and for a fixed duration.  Id.  The contract between Horn and the BoP, however, lacked the required element of exclusivity.   Id.  Rather, the contract provided that the BoP would utilize Horn's services only in the event that the BoP could not fulfill its need for dental hygiene services in-house.  Id.  Although it appeared that "both parties entered into the contract with the intent to form a requirements contract, that fact cannot overcome the plain language of the contract."  Id. at *5.

    Next, the court ruled that Horn's contract was unenforceable as an indefinite-quantities contract.  Id.  One essential element of such a contract is that the agreement must expressly state a minimum quantity of supplies or services to be purchased.  Id.  Because Horn's contract lacked a minimum-quantity term, the contract lacked consideration and mutuality.  Id. at *5-6.  Accordingly, the contract was unenforceable.  Id. at *6.

    Although the contract between Horn and the BoP was unenforceable at its inception, the court allowed Horn to retain the compensation she had already received for the 130 hours of services she actually rendered.  Id.  Given the lack of an enforceable contract, however, Horn was not entitled to recover any additional costs or lost profits.  Id.

    As an aside, the court lamented the unfortunate fact that "the Government has continued to use this standard form document that appears to the non-legal reader as a binding contract, but is in fact not."  Id.  The court found it "particularly troublesome" that even the Government officials with whom Horn dealt "did not seem to understand the document's lack of enforceability."  Id.  According to the court, the Government has been on notice since 1929 that "this type of contractual language created an unenforceable instrument. . . .  Yet . . . these FAR provisions are still rendering contracts unenforceable and unsuspecting contractors are being denied the opportunity to pursue what may be meritorious claims."  Id. The court went on to opine that "[i]n the future, the Government's contracting offers should make [the] point much clearer [that this kind of agreement is not a requirements contract] and disclose the fact that this type of agreement is not a legally binding contract."  Id.

    Although the Horn court explicitly acknowledged the inequities resulting from its decision, the court insisted upon interpreting the contract and the applicable law in a narrow, inflexible manner.  This reading does not portend well for potential future employees and contractors who wish to enter into services contracts with the federal Government.  Through its continued use of legally unenforceable service provisions, the Government may have what amounts to absolute discretion to terminate the services of such persons at will.

    Even so, it may be noted that Horn is at odds with other decisions from the Court of Federal Claims.  In several instances, the court has construed similar form clauses as "limited form" requirements contracts, wherein the court implies a term of good faith into the contract.  This implied term precludes the Government from expanding its in-house capabilities during the contract period at the expense of the contractor.  See, e.g., District of Columbia v. Org. for Envtl. Growth, Inc., 700 A.2d 185, 200-02 (D.C. 1997); Appeal of Dynamic Sci., Inc., ASBCA No. 29510, 85-1 BCA ¶ 17,710, 1984 WL 13911.  In these cases, the court has recognized that the "limitation of the requirement to that portion that the Government did not choose to meet from its own capabilities did not render the promise illusory particularly because the Government was precluded from expanding its capabilities during contract performance at the expense of the contractor." Id.

    Topics: legal research, Charlene Hicks, business law, federal requirements contracts, Federal Acquisition Regulations (FAR), breach of contract claim, minimum quantity or services, nonbinding contract

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