Federal Circuit Affirms Ebola Cost Recovery Case with Potential COVID Implications
The Federal Circuit recently affirmed,1 without opinion, a Civilian Board of Contract Appeals (CBCA) decision2 involving epidemic-related costs. The CBCA decision arose from a different disease outbreak than we are experiencing today: the 2014 Ebola crisis in Sierra Leone. In that decision, the CBCA held that a contractor with a Firm Fixed Price contract could not recoup the extra costs arising from the pandemic, including shut down. Given its context involving costs arising from a pandemic, it could implicate disputes arising from COVID-19 costs that may be the subject of dispute in the coming years.
In 2013, the Department of State (DoS) awarded Pernix Serka Joint Venture (Pernix Serka) a Firm Fixed Price contract for a rainwater capture and storage system in Freetown, Sierra Leone. The contract limited Pernix Serka’s recovery for excusable delays, as defined in FAR 52.249-10, to “time, not money.” The excusable delays clause gave “epidemics” and “quarantine restrictions” as examples of excusable delays.
The Ebola epidemic reached Sierra Leone during contract performance. Pernix Serka asked the DoS for guidance on whether to cease or delay performance. The DoS refused to direct Pernix Serka and stated that “the decision for your people to stay or leave for life safety reasons rests solely on your shoulders.” Ultimately, Pernix Serka decided to withdraw its personnel from Sierra Leone.
After the disease abated, Pernix Serka submitted a Request for Equitable Adjustment (REA) for the increased time and cost to complete the project and the additional health services it provided its personnel. The DoS granted the time extensions, but refused to pay the requested costs.
The CBCA ruled for the DoS, citing the principle that Firm Fixed Price contracts place the risk of increased cost of performance on the contractor. It also did not find an exception to the principle under the cardinal change or constructive change doctrines. The CBCA held that the cardinal change doctrine did not apply, because the government’s inaction and the Ebola outbreak did not change the nature of the contract; it only increased the cost of performance. The CBCA held that the constructive change doctrine did not apply because the government was not obligated to change the contract, nor did the government make any changes to the contract.
The Federal Circuit affirmed the decision on appeal. Because the court affirmed without an opinion under Federal Circuit Rule 36, however, the decision does not have precedential effect.
Implications for COVID-19
Although the Federal Circuit’s decision is not binding, it does potentially signal the Federal Circuit’s thinking on future excusable delay cases involving pandemics. There is little guidance for recovery under Firm Fixed Price contracts during times of a pandemic or other events resulting in contract shut downs. See Dynamics Research Corp., ASBCA No. 53788, 04-2 BCA ¶ 32,747; Raytheon STX Corp. v. Dep’t of Commerce, GSBCA No. 14296-COM, 00-1 BCA ¶ 30,632. Although many agencies have put protocols in place, the government has not fully addressed the question of adjustments under Firm Fixed Price contracts for increased costs arising from work shutdowns. And, with the passage of time, subsequent contract audits may result in challenges to cost recovery or REAs seeking recovery after the full impact of the COVID-19 pandemic is known.
*Michael Gwinn contributed to this Advisory. Mr. Gwinn is a graduate of the University of Virginia School of Law and is employed at Arnold & Porter's Washington, DC office. Mr. Gwinn is admitted only in Virginia. He is not admitted to the practice of law in Washington, DC.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.