Beware of Releases—Why It's Important to Think Before You Sign a Contract Modification
O, beware my lord, of releases; they are the green-eyed monsters which doth mock the contractors they feed upon.
— Iago (quoted loosely)
This hurts. During the course of performing a contract, a new requirement emerges or some conditions change that lead to a change in the contract. You, the contractor, submit a request for equitable adjustment (“REA”) that, after some tough negotiations, results in a reasonably good settlement—particularly since you and the agency decided that some aspects of the change would be worked out in the future because the full impact would not be clear until later.
The Contracting Officer pulls together the modification that lays out the agreed-upon equitable adjustment. You read it. Everything that you worked out is there, particularly the bottom line price. You sign it.
Fast forward now to the time when the heretofore unknown impacts fully ripen into a known cost. Knowing that you and the Contracting Officer had decided you’d work those things out later, you present a second REA. To your disappointment, chagrin (what have you), the Contracting Officer tells you that, uh, we didn’t agree to work any of this out later. Why you ask? The Government points to that throw-away boiler plate language that all of us see all the time—the general release—and issues a final decision that denies your REA. Here’s that language:
This modification represents full and complete compensation for all costs, direct, and indirect, associated with the work agreed to herein, including but not limited to, all costs incurred for extended overhead, supervision, disruption or suspension of work, and labor inefficiencies, and this change’s impact on unchanged work.
In consideration of this modification, agreed to herein as a complete equitable adjustment of the contractor’s proposal arising under or related to the change(s) identified above, the contractor hereby released the Government from any and all liability under this contract for further adjustment attributed to the contractor’s proposals.
Your head having exploded, you appeal to the Board of Contract Appeals asserting that you’re entitled to the adjustment for the unknown costs because you and the Contracting Officer agreed to defer this particular impact. You argue that the release shouldn’t bar your claim. The Government denies the agreement and simply points to the release language and argues that, no matter what you and the Contracting Officer might have discussed, you signed the modification that contained a general release; therefore, tough luck, see you next time. After looking at the language, The Board sides with the Government and denies your appeal.
The story I’ve just described is a massively simplified summary of a decision issued in April by the Civilian Board of Contract Appeals (“CBCA”). The Board denied an appeal because the Contractor had signed a contract modification with the above-quoted release language and there was insufficient evidence to justify overriding its terms. See Glen/Mar Construction v. Department of Veterans Affairs, CBCA No. 6904 (April 2, 2021).
This decision reminds me of an analogous, but different, case that my partner and I handled some ten years ago in which we successfully argued that, no, a general release did not bar our client’s request for a price adjustment under the Service Contract Act (“SCA”). The price adjustment sought compensation for the cost of severance payments to a number of unionized service employees who lost their jobs at the conclusion of a contract. The payments were made to workers who were not hired to work on the successor contract. See Appeals of ARCTEC Servs., ASBCA Nos. 56444, 56631, 57193, 2011-1 B.C.A. ¶34,743, (A.S.B.C.A. April 15, 2011) (“ARCTEC”).
If you’re not familiar with SCA price adjustments, here’s the gist. The SCA requires service contractors to pay covered employees a prevailing wage and provide certain benefits based on their job classifications in wage determinations (“WDs”) issued/approved by the Department of Labor. A collective bargaining agreement can serve as a WD. A contracting agency is supposed to ascertain whether there is a new or revised WD that would be applicable whenever a contract is solicited, awarded or extended “pursuant to an option clause or otherwise.” FAR 22.1007(b). The WD is binding only if it has been incorporated into the contract. A contractor may seek an adjustment to “the contract price, contract unit price labor rates, or fixed hourly labor rates . . . to reflect the Contractor's actual increase or decrease in applicable wages and fringe benefits to the extent that the increase is made to comply with” the new WD. FAR 52.222-43(d).
In ARCTEC, the contractor submitted a price adjustment request upon the exercise of an option for the prospective increase in the cost of wages and fringe benefits as required by the CBA that had been adopted by the Government as the applicable WD. Having reached agreement on the price adjustment for the option year, the contractor and the Contracting Officer executed a bilateral modification for the agreed-upon amount. The modification contained a release not unlike the one quoted above.
However, at the end of the option year, the contractor was not awarded a contract which had been recompeted. In typical circumstances, many, but not necessarily all, of a current service contractor’s employees will be hired by a successor contractor to work on the new contract. Those who aren’t hired have to find new jobs elsewhere. To protect the unionized workers from that outcome, the ARCTEC CBA provided a severance benefit that would be payable to any employee who was not hired by the successor.
Given that there was no way to predict whether the contractor would have severance payment liability or any knowledge about the amounts that would have to be paid, ARCTEC did not include severance pay in its prospective price adjustment proposal for the final option period. Rather, the contractor submitted a price adjustment request once the severance liability had been determined. The Contracting Officer rejected the request, in part, on the basis that the release in the SCA price adjustment modification for the final option period meant that the contractor had waived its right to be made whole for the severance payments.
On appeal to the ASBCA, the Government asserted that the broad all-encompassing language of the release barred the claim. The Board, however, rejected this argument and held that the release only applied to those items that were reasonably foreseeable and within the contemplation of the parties at the time the release was signed. Since the duty to pay severance, let alone the amount of the severance, remained entirely speculative at the time the release was executed, the Board essentially concluded that there was no way that severance could have been within the contemplation of the parties at the time the final option year price adjustment was negotiated. Moreover, the Board noted that the contract actually prohibited including any contingencies in price adjustments. Accordingly, the Board ruled that the release didn’t preclude the price adjustment.
At first, when I read the Glen/Mar decision, I wondered how that case could be right. There is no way that the unliquidated amount could be determined. It made sense to kick that can down the road. Therefore, how could that sum have been within the contemplation of the parties at that time. The short answer is that the entitlement was based on different provisions. However, it’s also significant that the contingency in Glen/Mar was known at the time of the release; whereas, the contingency in ARCTEC remained speculative at the time of the release and the contract prohibited it from being made part of an adjustment request until the cost was an “actual” cost. Given the Glen/Mar contingency was known, the Board stated the issue is whether “the conduct of the parties” such as ongoing negotiations about an aspect of a claim indicate that the release was not intended to bar those aspects of the claim that remained unresolved. Finding no such evidence, the CBCA held that the clear language of the release precluded the contractor’s claim. I can’t say that I agree with the outcome of the Glen-Mar case, but I do see the distinction (setting aside the fact that Glen/Mar was decided by the CBCA and ARCTEC was before the ASBCA).
But my thinking about these cases is all kind of academic because together they teach a common lesson. Beware of releases! That seemingly benign boilerplate is not toothless throw-away verbiage. Thus, when negotiating an REA, an SCA price adjustment, or some similar deal, consider whether there are any potentially expensive contingencies for which there might be no relief based on the language of the release. If so, try to negotiate a carve-out. If you don’t, you might find yourself in an on-your-heels position in which you have to rely on an exception to a general rule. You might win the argument, but perhaps you should try to prevent the argument.
Bottom line - stop and think before you sign a release.