Donald H. Rumsfeld, Secretary of Defense v. Applied Companies, Inc.

DYK, Circuit Judge,

concurring in part and dissenting in part

In the present contract the government undertook two relevant obligations: (1) to purchase its actual requirements from the plaintiff and (2) to accurately estimate its requirements. There was no breach of the first obligation, but the majority holds that the second obligation was breached because the government, either in bad faith or negligently, provided an incorrect estimate. I am in full agreement with the majority so far. Having found that the second obligation was breached, however, the majority unaccountably denies the plaintiffs claim for lost profits for the admitted breach. The measure of damages the majority uses is unsupported by our precedent and contrary to the general law of contracts. Moreover, it leaves the contractor largely uncompensated for the breach and provides almost no incentive for the government to avoid such breaches in the future. I respectfully dissent.

The majority cites no case in which there was a bad faith or negligent misrepresentation in a requirements contract but lost profits were denied. In Everett Plywood & Door Corp. v. United States, 190 Ct.Cl. 80 , 419 F.2d 425 (Ct.Cl.1969), Crown Laundry & Dry Cleaners, Inc. v. United States, 29 Fed. Cl. 506 (Fed.Cl.1993), Cactus Press/Power Enterprises, Inc., GPOB-CA 20-99 (Bd. Contract App. Jan. 31, 2001), and HKH Capitol Hotel Corp., ASBCA No. 47 ,575, 98-1 B.C.A. (CCH) ¶ 29,548, at 146,467, 1998 WL 34784 (Jan. 26, 1998), cited by the majority as support for denying lost profits, ante at 1328, the plaintiffs did not seek lost profits for a *1331 governmental misrepresentation. Thus, those opinions’ silence as to the possibility of lost profits recovery for misrepresentation is completely without significance.

In Everett Plywood the plaintiff contracted with the Forest Service to purchase timber on a parcel of government land for a price that would decrease over time, so that the plaintiff would pay less per unit for the timber the more timber it cut and purchased. 419 F.2d at 427. The government negligently misrepresented how much timber was on the parcel so that the plaintiffs average cost per unit was higher than it had contemplated. Id. at 429. The plaintiff sought a price adjustment, and our predecessor court awarded the difference between the per unit price the contractor had to pay for the timber it cut and the effective price per unit it would have paid for the timber if the contractor had been able to cut the quantity estimated by the Forest Service. Id. at 433. There is no indication that the plaintiff sought lost profits, and the opinion does not discuss or even mention a lost profits issue.

In none of the other cited cases involving negligent misrepresentation did the contractor seek lost profits. In Crown Laundry, the contractor sought only equitable adjustment of the contract, and the parties stipulated the actual dollar amount of damages at the outset were the contractor to prevail. 29 Fed.Cl. at 514 . Likewise, in Cactus Press, the contractor sought only equitable adjustment of the contract price. The same is true of HKH Capitol Hotel Corp. 98-1 B.C.A. ¶ 29,548 at 146,471. The equitable adjustment sought by the contractors in those cases appears to have consisted mainly of increased costs associated with the unexpected volume. But in Crown Laundry the amount of damages was not disputed, and in neither Cactus Press nor HKH Capitol Hotel Corp did the Board find that the contractor was entitled to an equitable adjustment. 1 Those cases therefore did not reach the question of what measure should be used. The statements in each case that equitable adjustment of the contract price was available to the contractor (if it could establish that it was harmed by a negligently prepared bid) simply restated the claim asserted by the contractor. Those statements were not addressed to lost profits and have no bearing on lost profit recovery. 2

Without a controlling precedent, this court “applies] ordinary principles of contract construction and breach.” United States v. Winstar Corp., 518 U.S. 839, 871 , 116 S.Ct. 2432 , 135 L.Ed.2d 964 (1996) (plurality opinion); accord Lynch v. United States, 292 U.S. 571, 579 , 54 S.Ct. 840 , 78 L.Ed. 1434 (1934) (“rights and duties” of government contract “are governed generally by the law applicable to contracts between private individuals.”). The majority must recognize that there is no controlling precedent in this area, as it observes that “[n]o case has been cited to us in which, under a requirements contract, a contractor was allowed to recover anticipa *1332 tory profits as damages for a breach of contract resulting from negligently prepared estimates,” ante at 1327 -1328, and then it cites no case in which, in that situation, lost profits have been denied. Accordingly, we must look to the general law of contracts.

As the majority recognizes, the rule in this area is that lost profits are available to the non-breaching party, assuming foreseeability. As we have said,

“One way the law makes the non-breaching party whole is to give him the benefits he expected to receive had the breach not occurred.” Glendale Federal Bank FSB v. United States, 239 F.3d 1374, 1380 (Fed.Cir.2001) (citing Restatement (Second) of Contracts § 344(a)(1981)). A party’s expectation interest is the “interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed.” Restatement (Second) of Contracts § 344(a)(1981). Expectation damages are recoverable provided they are actually foreseen or reasonably foreseeable, are caused by the breach of the promi-sor, and are proved with reasonable certainty.

Bluebonnet Sav. Bank, F.S.B. v. United States, 266 F.3d 1348, 1355 (Fed.Cir.2001) (emphasis added). The leading authorities on contract agree that the normal measure of damages includes lost profits. As it was put in the First Restatement of Contracts, “compensatory damages will be given for the net amount of the losses caused and gains prevented, in excess of savings made possible.” Restatement (First) of Contracts § 329 cmt. a (1932). See also Arthur Linton Corbin, Corbin on Contracts § 992 (Interim ed.2002) (quoting First Restatement with approval); Restatement (Second) of Contracts § 347 (1981).

To determine how to calculate the gains prevented by Defense Logistics Agency’s (“DLA”) breach, we should look to breach of warranty cases. If DLA had warranted to Applied Companies, Inc. (“Applied”) that the requirements contract would provide 120,000 cylinders’ worth of work, damages would be awarded to compensate the contractor for the benefit of the expected bargain, not for the value of the contract as it was without the misrepresentation. For example, the Uniform Commercial Code provides, “The measure of damages for breach off warranty is the difference ... between the value of the goods accepted and the value they would have had if they had been as warranted.” UCC § 2-714(2) (1989). This is in keeping with the rule that “[o]rdinarily, the damages recoverable for a breach of contract are measured on the basis of the value of the promised performance.” Corbin, supra, § 1030 (emphasis added).

To be sure, in this case there was, in effect, only a warranty that the requirements were properly estimated; the quantity ordered could have been higher or lower. But such uncertainty, contrary to the majority’s assertion, does not bar recovery. Athough we have not specifically addressed the lost profits issue, we have repeatedly recognized that when the government allows bidding on either requirements or indefinite quantities contracts, it is reasonable and foreseeable for contractors to rely on government estimates. Medart, Inc. v. Austin, 967 F.2d 579, 581 (Fed.Cir.1992) (“[Pjresumably contractors rely on the [government’s] proffered estimates in formulating their bids, so the government must act in good faith and use reasonable care in computing its estimated needs”); Clearwater Forest Indus., Inc. v. United States, 227 Ct.Cl. 386 , 650 F.2d 233, 239 (Ct.Cl.1981) (“[A] prospective purchaser should reasonably be expected to base his operating plans and cost estimates on [government estimates]”); Womack v. United States, 182 Ct.Cl. 399 , 389 *1333 F.2d 793, 801 (1968) (“Assuming that the bidder acts reasonably, he is entitled to rely on Government estimates as representing honest and informed conclusions”). Indeed, it is the very purpose of quantity estimates to induce such reliance; otherwise, as our predecessor court said, the estimate would be “surplussage at best or deception at worst.” Womack , 389- F.2d at 801.

Where such reliance is reasonable, “[i]f a reasonable probability of damage can be clearly established, uncertainty as to the amount will not preclude recovery.” Ace-Federal Reporters, Inc. v. Barram, 226 F.3d 1329, 1333 (Fed.Cir.2000) (quoting Locke v. United States, 161 Ct.Cl. 262 , 283 F.2d 521, 524 (1960)). In circumstances in which the breach destroyed all value and made recovery under the contract impossible, courts have measured the value of the contract right at the time of the breach. Corbin, supra, § 1030; E. Allen Farns-worth, Farnsworth on Contracts § 12.15 (2d ed.1998). So too, at the time the government made the contract with Applied, it was worth something definite, of which the government’s estimate was highly probative. Alternatively, recovery could be based on other evidence of the contract value — how Applied valued the contract when it was signed, for example, or how other, similarly situated companies valued requirements contracts. See Farnsworth, supra, § 12.15. Taking into account expected variations from the estimate, the Board should award lost profits based on the amount of likely purchases given the estimate. It is particularly inappropriate for the majority to foreclose lost profit damages at this stage, before Applied has even had the opportunity to present evidence on the matter.

The majority holds that an award of lost profits would overcompensate Applied because, had the government disclosed its actual requirements, Applied would have either “submitted a bid” on the contract as it was or “declined to bid on the contract and thus made no profit at all.” Ante at 1328. In short, the majority contends, it would have been impossible for Applied to recover the profits on this contract, because even absent the breach, Applied “would not have expected to sell, and it would not have sold, 120,000 cylinders.” Ante at 1328. But that characterization removes the misrepresentation from the measure of damages, as if it had never happened. The famous Bristol Seed case, treated by Corbin, provides an illustration of the majority’s approach. Corbin, supra, § 1026 (describing White v. Miller, 71 N.Y. 118 , 1877 WL 12100 (N.Y.1877)). In that case, the buyer purchased seed from a seller who warranted that it was fit for human consumption. It was in fact mixed seed only good for animal feed. The buyer was due damages based on the difference between the value of the seed as warranted and the value of the actual seed, including lost profits. Id. Under the majority’s theory of damages, however, the buyer could not recover expected profits because there would not have been any; the seed was unfit for human consumption.

Here the contractor assumed the risk that the government’s requirements would actually be less than the estimate; the contractor did not assume the risk that the government’s requirements estimate would be deliberately or negligently misstated. The majority’s measure of damages thus effectively erases the breach. Far from “convert[ing] the contract ... to one in which DLA guaranteed Applied a certain level of business,” as the majority asserts, ante at 1328, awarding lost profits merely reflects the general measure of damages.

The consequence of today’s decision is that the government may misrepresent its requirements with impunity so long as the contractor suffers no increase in costs. *1334 That seems to me to be bad policy as well as bad law. I respectfully dissent.

. In Cactus Press, the Board rejected the contractor's claim because it was untimely. In HKH Capitol Hotel Corp., the contractor's claim was barred because the contractor did not seek clarification of a patent ambiguity in the contract relating to the estimate. 98-1 B.C.A. ¶ 29,548 at 146,472

. Equally inapplicable, so far as computation of damages is concerned, are the diversion cases, when lost profits recovery is allowed because the government has improperly diverted orders to other sellers. Ante at 1325-1327 (discussing Ace-Federal Reporters, Inc. v. Barram, 226 F.3d 1329 (Fed.Cir.2000); Tomcello v. United States, 231 Ct.Cl. 20 , 681 F.2d 756 (1982); Locke v. United States, 151 Ct.Cl. 262 , 283 F.2d 521 (1960)).