Opposition Brief — United States v. Granite Construction Co., 113 S. Ct. 965 (1993) (No. 92-545)

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QUESTION PRESENTED

The courts and contract appeals boards have long

held that owners, both public and private, have the

right to demand strict compliance with the specifi-

cations for a construction project. These tribunals,

however, have uniformly recognized an exception to

the right to strict compliance where the nonconform-

ing work or product installed in the construction proj-

ect meets or exceeds the owner’s needs, and the cost

of removal and replacement is so out of proportion

to the resulting benefit as to amount to economic

waste. Under these circumstances the owner may not

require complete removal and replacement, but in-

stead receives a price reduction for the diminution in

value.

The question in this case is whether the Federal

Circuit prop--'!y applied the ‘‘economic waste”’ prin-

ciple to a federal construction contract so as to relieve

a contractor of liability for the disproportionate cost

of replacing installed nonconforming material that met

er exceeded the government’s needs.

ii

TABLE OF CONTENTS

QUESTION PRESENTED. ..........cc...cccccccsscccsseoeseeces

ITE IR MEIEITE. sircpessssnichiesignsnniestonsenintihadcnteanueettabiaons

SUMMARY OF ADMGUIRRICE wnccosiniscornasssssansenesiscss

RRISUMEEINE ovcissiccssnsnsnsasictacingeiieinladiobomininrsssiguans

A.

Longstanding Principles of Federal Pro-

curement Law Support the Federal Cir-

cuit’s Application 1 gre Economic Waste

DOCKED scietutsanscanncnsninenianadmiiaiaiaaiiiene

. The Federal Circuit’s Application of the

Economic Waste Doctrine is Consistent

With the Terms of the Contract ............

. No Provision of the Procurement Regu-

lations Repudiates the Common Law

Principle of Economic Waste ..................

The Federal Circuit’s Decision Will Not

Encourage Contractors To Base Their

Bids On Nonconforming Products ..........

. Adoption Of The Economic Waste Doc-

trine Will Not Encourage Litigation ......

. The Federal Circuit’s Decision Will Not

Discourage the Use of Uniform

SSIGITUGOOUN: ssivinsecccusaicilacnbeibieae tiiaccnntvnn

. The Government Can Write the Economic

Waste Exception Out of the Standard

—— Without the Aid of this

NIT scccninesnnesdcncicnstellamiemanieanemmaiaiaa Daas

CORTRsEFGIET | stnivs-ssonsasinssksnccaccomiep apieeiimeaenunaniad

APP ERIE. By scrncennisssicceneicnmnanaianadianes

12

15

19

22

23

24

26

la

ili

TABLE OF AUTHORITIES

CASES Page

Arnold M. Diamond, Inc., 73-2 B.C.A. (CCH) 4

SN iibciinliabchbsbieriesasiptbiclacilieiepaiciibigsibaibciedileiaadidetlones 11

Boyle v. United Technologies Corp., 487 U.S. 500

(1988), reh’g denied, 489 U.S. 1047 (1989) ..... 16

Calfon Constr., Inc. v. United States, 18 Cl. Ct. 426

(1989), affd, 923 F.2d 872 (Fed. Cir. 1990) .. 9,19

City of Milwaukee v. Illinois, 451 U.S. 304

CIEE ductiiiabineninnistnitanndabahinbalgncadienaibdntimiaumanenatnidabaans 16

Continental Ill. Nat’l Bank and Trust Co. v. United

States, 101 F. Supp. 755 (Ct. Cl.), cert. denied,

ED A oalkg. Se SNR sackets dtiessciaaeentnnaTlonncin 9,18-19

DK’s Precision Machining and Mfg., 90-2 B.C.A.

Ce Pah ae I ct eccrigletehieealhs iia ia seica Rial See hieid 25

Eller Constr., Inc., 83-2 B.C.A. (CCH) 4 16,560... 11,15

Farwell v. United States, 148 F. Supp. 947 (Ct. Cl.

G.L. Christian & Assocs. v. United States, 312 F.2d

418 (Ct. Cl.), reh’g denied, 320 F.2d 345 (Ct.

Cl.), cert. denied, 375 U.S. 954, 170 Ct. Cl.

902, cert. denied, 382 U.S. 821 (1965) ........... 18

Gadsden v. United States, 78 F. Supp. 126 (Ct. Cl.

RGR: wiriscarcisinsihtnnicsienvlnkeisiemacitiesidlelihbniniaberioianns 8

George A. Fuller Co. v. United States, 69 F. Supp.

I Gi BIE aisissninitthseninnnpasieniatiiliiidicatiniemsan 14

H.L.C. & Assocs. Constr. Co. v. United States, 367

Fk Sette Salis. OOD weienstennsninciinncoiomnn 10,15,19,24

Hoel-Steffen Constr. Co. v. United States, 684 F.2d

SE iris. Sty STEED sxentensencinitadsinaaianten Etaeeiakieninn 13

Hunter Ditch Lining, 91-2 B.C.A. (CCH)

BUFO ‘Levkccksetirnnscnicqitencuindaeibaiosblabicbalidiemnbasaes 11

International Verbatim Reporters, Inc. v. United

Staton, BAC Ce. VAD GERD ccsivcsscnsckisrescsctecics 13

iv

Table of Authorities Continued

Page

Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 129

Dole: Se EID nieetiintinaiaibe vignadashditiaaaadaiinn 9,10,11,17

Klein v. United States, 285 F.2d 778 (Ct. Cl.

SUD xchsaiecsccaitiicaceedadietadieaicnialaaaitibagiisiad cei 25

Lewis-Nicholson, Inc. v. United States, 550 F.2d 26

Os aes: PTD Acceesdsdicesteseneneicdscsteanlecesinsibacacaaaecaadirebictiens 14

McDonnell & Douglas Corp. v. United States, 670

Pe Bie Gere Ge: RI iti dicktcincctdeettetisitnactiesn 18°

Northern Helex Co. v. United States, 455 F.2d 546

(Ct. Cl. 1972), on further proceedings, 524 F.2d

707 (Ct. Cl. 1975), cert. denied, 429 U.S. 866

(1976), on further proceedings, 6384 F.2d 557

(tS BRO a RE UR en ee 10

Pacific W. Constr., Inc., 86-2 B.C.A. (CCH)

SRL EETE -icoicaseiiliicessmiadintiicedaiasinindabicistiea les aiielia de ie atc 11

PBI Elec. Corp. v. United States, 17 Cl. Ct. 128

REIT Sixcihahsesvesdiscidainisbetentthaidaidpiacealesscaeeicsliadla alsin hel eel 14

Ripley v. United States, 223 U.S. 695 (1912) ........ 8

Ronald A. Torncello and Soledad Enters., Inc. v.

United States, 681 F.2d 756 (Ct. Cl. 1982) .... 18

S.S. Silberblatt, Inc. v. United States, 483 F.2d 1314

CE Ha PI Wissessnincnnsiaiahataieinatieset ei cae. 11

Santa Fe Eng’rs., 81-1 B.C.A. (CCH) ¢ 14976 ..... 20

Schlesinger v. United States, 390 F.2d 702 (Ct. Cl.

BTU seiliihthanhcnsacininsemnninkeutinncniadidainie ld iiicnenss. 13

Schweigert, Inc. v. United States, 388 F.2d 697 (Ct.

Rds: IEE Winastsishicsanibstaiakdelalicthdaaadibbaaapl bad sadsupen 25

Singleton v. Wulff, 428 U.S. 106 (1976) ................ 16

Southwest Marine Corp., 91-1 B.C.A. (CCH) |

SORE: wicvnvsnissstsmiaeeniensendidainietstienimeimia add tices adit 18

Toombs & Co., Inc., 91-1 B.C.A. (CCH) § 23,403 .. 11,15

Table of Authorities Continued

Page

Troupe Bros., Inc. v. United States, 643 F.2d 719

AR, CR. FORD icicaiccseccencicee aa 11

United States v. American Bar Endowment, 477

die WO CHIOE ssitectnssasiebaiiadiciieedatea tase a. 24

United States v. Bass, 472 F.2d 207 (8th Cir.), cert.

dented, 412 U.S. OBB CAGTB) ovccccevcnciscsecateceracese 21

United States v. Bornstein, 361 F. Supp. 869 (D.

N.J. 1973), aff'd in part and rev'd in part, 504

F.2d 368 (8rd Cir. 1974), rev’d on other

grounds, 423 U.S. 303, vacated without opin-

von, 580 F.2d 964 (8rd Cir. 1976) oo... 21

United States v. Goodyear Tire and Rubber Co., 493

U.S. 182 (1989), reh’g denied, 493 U.S. 1095

CRIED <incscccsscenciesubecieieboaiiae tenet een 24

United States v. Hill, cert. granted, 112 S. Ct. 1758

(ZIPS skisincssvccsansdesthbeabacssainalaaeaee mean. 24 .

Valley Asphalt Corp., 74-2 B.C.A. (CCH) 4 |

OE DIE ETRE CL RIOR 11,15 |

STATUTES AND REGULATIONS d

Contract Disputes Act of 1978, 41 U.S.C. 601- )

EAD stciahiinsniidlninbalnschentoisiggeanaiaia ties ama ea SE 15

41. UR OE cae eee 22 3

False Claims Act, 31 U.S.C. 3729 (civil) ..........0.. 21

False Claims Act, 18 U.S.C. 287 (criminal)............ 21

False Statements Act, 18 U.S.C. § 1001 ............... 21

BG TER We : ccninsscsimsiieddedtiisseninncaniceameiean

26 U.S.C. 511

26 U.S.C. 512

26 U.S.C. 513

26 U.S.C. 902

Table of Authorities Continued

Page

Federal Acquisition Regulation, 48 C.F.R. (1992):

Ft. i:

IE SD ktdidtens dndcsntasinni ean 18

I SEE wcniissnckensessnancdestcienaneenaneeniamnaiadn 16

I IIT ksssciknsicccaccsasnseeeeinsnes 9

I vncuksckccsnsseneiuaitanatbaataniin sieaniibies 9

IS i cciickaccrsccdiniesncensecmieeannainainins 9

Se SUE sic uti vickscertinicnisiekleueameepdatesiaiaetel 14,15,25

I TD vctinvcenusistncccsanciientamaiaiialibliens 25

I BED siccisinisnsothncgustidisceeadaiatieamaaios 25

MISCELLANEOUS

Annotation, Modern Status of Rule as to Whether

Cost of Correction or Difference in Value of

Structure 1s Proper Measure of Damages for

Breach of Construction Contract, 41 A.L.R.4th

DER CD bikctinchntadsitssccchacncnsacnancedaann 9

RESTATEMENT (SECOND) OF CONTRACTS (1981)

I TE tai sscesecdecapahhentctinncinednicaieleaiioaate 9

Section 348 comment C ............ccccccccccccscccscesses 9

R. Bednar, H. Braude, J. Cibinic, Jr., G. Ginsburg,

J. Margulies, R. Nash, Jr., D. Patin, and A.

Stephenson, Construction Contracting, 804-10

CRI Tes. BI acicneshesbneiisidetiachbstaiebeiatttnaaaii as 12

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1992

No. 92-545

UNITED STATES OF AMERICA,

Petitioner

1.

GRANITE CONSTRUCTION COMPANY,

Respondent

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Federal Circuit

BRIEF FOR GRANITE CONSTRUCTION COMPANY

IN OPPOSITION

STATEMENT

During construction of a lock and dam for the Corps

of Engineers (‘Corps’), it was discovered that

respondent, Granite Construction Company’ (‘‘Gran-

ite’), had mistakenly installed waterstop in the con-

crete that did not conform exactly to the contract

‘ Granite Construction Company is the party in interest in this

case. Granite has no parent company and no subsidiaries that

are not wholly owned.

specifications. Nevertheless, the embedded waterstop

exceeded the project design safety factors some

twenty fold and could withstand forty times the water

pressure that would exist at the project. The non-

conforming waterstop was, therefore, far stronger

than the project required. The contracting officer di-

rected that all nonconforming waterstop be chipped

out of the concrete and replaced regardless of cost.

The government refused to give any consideration to

the adequacy of this waterstop or make a technical

evaluation of the need to remove and replace the

waterstop. Refusing even to consider repair of the

existing installation, the Corps demanded “‘strict com-

pliance” with the waterstop specification. The replace-

ment was very costly, and Granite submitted a claim

to recover its costs. The United States Court of

Appeals for the Federal Circuit determined that the

Corps acted arbitrarily and capriciously. It adopted

the longstanding concept of economic waste and found

that the Corps’ directive to remove and replace the

waterstop resulted in economic waste for which the

government was liable.

1. This case involves a lock and dam project near

Aberdeen, Mississippi constructed by Granite under a

contract with the Corps of Engineers. The concrete

lock was constructed in blocks (‘monoliths’) which

were 30 feet wide, 42 feet long, and 60 feet high.

Granite was required to embed a polyvinyl chloride

waterstop in the vertical joint between the concrete

monoliths in order to prevent water leakage through

the joints. (Pet. App. 2a). The specified waterstop was

not designed specifically for this project. Rather, the

Corps used a uniform specification that had been de-

veloped for use on all Corps projects. It was designed

a 8 EU I A ER A RE TS OE

3

for use under much more severe conditions than would

be encountered at the Aberdeen Lock and Dam. (Pet.

20-21, Pet. App. 63a-64a, 78a).

Granite purchased all the waterstop for the project

from Vimco Concrete Accessories (‘Vimco”) for

$5,752.80. Vimco obtained the material from Saf-T-

Grip Specialties (““STG’”’), which in turn obtained the

material from Alpha Extruders (“Alpha”). (Pet. App.

Ta-8a, 21a).

The contract specifically required the Corps to test

every 200 linear feet of waterstop to confirm that it

met the specifications. (Pet. App. 6a-7a, 10-13a). Both

parties understood that the Corps, and not Granite,

was responsible for all testing of the waterstop, as

evidenced by the Corps area engineer’s memorandum

stating that testing of the waterstop was the sole

responsibility of the government. (Pet. App. 11a). The

Corps tested one pre-delivery sample of the waterstop

submitted by Granite. Granite later forwarded certi-

fications provided by its second tier supplier, STG,

stating that the waterstop shipped to the job would

be from the same lot as the original samples. The

Corps elected not to test every 200 linear feet of

waterstop as the specification required but did not

inform Granite of this decision. Granite assumed that

the Corps had continued to test the waterstop before

installation as required by the contract. (Pet. App.

8a-9a).

The Corps subsequently decided to test the water-

stop after approximately 10% of it had been installed

in the lock concrete. It found that the waterstop

tested 13% below the tensile strength and ultimate

elongation specifications. Based on the test results,

the Corps directed Granite to remove and replace the

+

embedded waterstop. (Pet. App. 9a-10a, 13-16a).

Granite requested that the Corps provide the design

criteria and calculations for the waterstop so that

Granite could hire a consultant to determine whether

the embedded waterstop was adequate for its in-

tended purpose. (Pet. App. 13a-14a). The government,

however, refused to provide the design criteria, stating

that it would consider nothing less than perfect com-

pliance with the specified waterstop quality require-

ments. Without making any technical evaluation, the

Corps directed that the alanis be chipped out of

the concrete and replaced. (Pet. App. 10a, 13a-16a).

Granite removed and replaced the waterstop as di-

rected at extraordinary cost. In order to remove the

waterstop, Granite had to chip the waterstop out of

the concrete walls and replace it with new waterstop.

(Pet. App. 14a-15a, 21a-22a, 81a). At trial, which was

confined to the issue of liability, the government con-

ceded that the cost of removing and replacing the

waterstop exceeded $400,000. Granite presented evi-

dence that the total cost resulting from removal and

replacement of the waterstop was approximately $3.8

million. The original cost of the waterstop, fully in-

stalled, was $5,752.80. (Pet. App. 21a).

2. Granite pursued its claim before the Corps of

Engineers Board of Contract Appeals on the bases

that (1) the Corps failed to perform the required test-

ing under the contract and was liable for the addi-

tional costs resulting therefrom, and (2) the Corps’

demand to remove and replace the installed water-

stop, without any technica! evaluation, was improper

because the waterstop was more than adequate for

its intended purpose, and removal constituted eco-

nomic waste. Five years after the trial, and without

5

participation of the trial judge, who had retired, the

Board rejected Granite’s claim. One judge dissented.

(Pet. App. 3a-4a).

The Board majority found that the contract placed

the primary responsibility for testing of the waterstop

on the contractor. The Board majority further deter-

mined that the Corps had an absolute right to demand

strict compliance with the contract and did not have

to consider the adequacy of the embedded waterstop.

(Pet. App. 3a-4a).

The dissent found that the Corps -was liable for its

failure to test in accordance with the contract pro-

visions. The dissent also concluded that the Corps

acted arbitrarily and capriciously in directing com-

plete removal and replacement of the embedded

waterstop without any technical evaluation, and was

liable for the resulting cost. (Pet. App. 3a-4a; 101a-

103a).

3. The United States Claims Court affirmed the

Board’s decision. It concluded that the contract gave

the government the right to test but did not impose

a duty to test. (Pet. App. 43a-44a). The court also

found that the government, “like any other party to

a contract, is entitled to receive that for which it

contracted and had a right to accept only goods that

conform to the specifications.” (Pet. App. 46a). While

_ the court recognized that there were limitations of

reasonableness to the strict compliance doctrine, it

‘rejected the concept of economic waste. (Pet. App.

47a-49a).

4. The Court of Appeals for the Federal Circuit

determined that the government was solely respon-

sible for testing the waterstop, and was therefore

6

liable ‘‘for performance delays attributable to an un-

reasonable failure to conduct periodic testing of the

waterstop. ” (Pet. App. 12a). It found, however, that

in light of the supplier’s certifications it could not say

that the Corps acted unreasonably in forgoing testing

of the waterstop. It therefore concluded that the gov-

ernment should not be held accountable for its un-

timely testing. (Pet. App. 12a-13a).

On the economic waste issue, the court concluded

that the only reasonable finding of fact that could be

made on the record was that the embedded waterstop

was adequate for its intended purpose. It noted that

the margin of safety was twenty times greater than

required for the project, and that it could withstand

water pressure forty times greater than would ever

occur. (Pet. App. 16a-18a). It noted that the govern-

ment made no technical evaluation of the adequacy

of the nonconforming waterstop and offered no tes-

timony that it was not fully adequate. The court con-

cluded that the Corps acted arbitrarily and

capriciously in refusing even to consider any repair

proposal that did not require total removal and re-

placement of the embedded waterstop. (Pet. App. 15a-

16a). Accordingly the court found that the require-

ment to remove and replace the embedded waterstop

constituted economic waste. (Pet. App. 21a-22a). It

pointed out that the concept of economic waste had

long been established at common law, had been ap-

plied by the federal boards of contract appeals in

numerous cases involving government contracts, and

had been cited by the Court of Claims. (Pet. App.

20a-21a).

The court also pointed out that under clause GP-

10(b) of the contract, the contractor was required to

- i Me =

re a wait satel

7

replace nonconforming material ‘‘unless in the public

interest the government consents to accept such ma-

terial or workmanship with an appropriate adjustment

in the contract price.”’ (Pet. App. 15a). As a result,

it concluded that the government had the discretion

to accept the nonconforming waterstop and “was re-

quired under- GP-10 to consider the public. interest

when deciding whether to replace’ the waterstop.

(Pet. App. 15a). The court found that ‘‘the only real

criterion used by the Corps in directing the removal

and replacement of the waterstop was strict compli-

ance with the specifications.” (Pet: App. 16a). The

Corps refused to consider whether it was in the best

interest of the government to leave the waterstop in

place and accept a credit. This, the court determined,

was arbitrary and capricious. (Pet. App. 16a).

SUMMARY OF ARGUMENT

The United States Court of Appeals for the Federal

Circuit exists in part to provide a single forum to

hear appeals of government contract cases. In this

case, in light of all the facts and its expertise in the

law and realities of the government contracting proc-

ess, that specialized court held that the contracting

officer could not arbitrarily and capriciously require

the contractor to tear out completed construction at

extraordinary expense to replacé $5,750 of material

that exceeded petitioner’s needs, because to do so

amounted to economic waste.

The decision below does not warrant review by this

Court. It poses neither a conflict in the lower courts

nor a conflict with a decision of this Court. It does

not raise an important question of federal law. Rather,

this is a highly unusual case, involving both an ab-

solute failure by the contracting officer to exercise

the discretion entrusted to him and extraordinary

waste resulting from that failure. The Federal Cir-

cuit’s application of the ‘‘economic waste’’ principle

to the facts of the case is correct on the merits. The

decision provides no opportunity for contractors to

manipulate the bidding process, nor does it interfere

with the government’s use of uniform specifications.

Moreover, petitioner has a prospective remedy that

does not require the aid of this Court, 1.e., the uni-

lateral power to prescribe an appropriate clause in

future contracts.

ARGUMENT

A. Longstanding Principles of. Federal Procurement

Law Support the Federal Circuit’s Application of the

Economic Waste Doctrine

Contracting parties expect their partners to exer-

cise contract rights in a manner that is reasonable

and not arbitrary or capricious. Accordingly, the

courts and boards of contract appeals regularly re-

solve disputes with reference to mature federal com-

mon law “implied duties” or notions of “substantial

performance”, not spelled out in the contract, but

founded in common sense and reasonable commercial

expectations. Taken together these principles estab-

lish a set of generally-understood ‘‘ground rules’’ for

the interpretation of contract terms. Because these

ground rules exist to give effect to the parties’ pre-

sumed intent, they apply equally whether the contract

language is negotiated by the parties or mandated by

regulations.

2 Ripley v. United States, 223 U.S. 695, 701-2 (1912); Gadsden

v. United States, 78 F. Supp. 126, 128 (Ct. Cl. 1948).

No one disputes that the rule of strict compliance

in the law governing construction contracts between

private parties is tempered by an “economic waste”’

exception.’ Respondent disagrees with petitioner’s as-

sertion that the decision below newly introduces the

concept to government construction contracts. (Pet.

13-14). On the contrary, the principle of substantial

performance, of which ‘‘economic waste”’ is a species,

is well established in that law.‘ Moreover the rec-

8 Jacob & Youngs, Inc. v. Kent, 230 N.Y, 239, 129 N.E. 889

(1921); RESTATEMENT (SECOND) OF CONTRACTS §§ 241

and 348 comment c (1981); Annotation, Modern Status of Rule

as to Whether Cost of Correction or Difference in Value of Struc-

tures is Proper Measure of Damages for Breach of Construction

Contract, 41 A.L.R. 4th 131 (1985).

‘In construction (as opposed to supply) contracts the principle

is particularly vital and provides that in some circumstances

substantial performance will be deemed equivalent to full per-

formance. For example, the standard clauses entitled “COM-

MENCEMENT, PROSECUTION, AND COMPLETION OF

WORK” (FAR 52.212-3) and “LIQUIDATED DAMAGES” (FAR

52.212-5) provide for liquidated damages to accrue if the con-

tractor has not completed the work by the established completion

date. The courts and boards have, however, interpreted these

clauses to mean that liquidated damages will not accrue if the

contractor’s work is “substantially complete.’ Continental III.

Nat’l Bank and Trust Co. v. United States, 101 F. Supp. 755

(Ct. Cl.), cert. denied, 343 U.S. 963 (1952). Similarly, courts and

boards have generally held that an oral (or other “‘constructive’’)

notice of intent to assert a claim under the “CHANGES” clause

(FAR 52.243-1) is sufficient despite the clause’s stated require-

ment of written notice. See, Calfon Constr., Inc. v. United States,

18 Cl. Ct. 426 (1989), aff'd, 923 F.2d 872 (Fed. Cir. 1990). The

rationale is to avoid a forfeiture of an otherwise valid claim

when the government has not been prejudiced by the lack of

written notice. The principle also applies fo the government’s

obligation to pay. The contractor may not abandon the work

Ss agit Sr Cla A eather ise Swe ea aration i

ee aT

pret kes RT?

10

ognition of an “‘economic waste’’ principle per se goes

back at least twenty-six years and has been applied

when the facts have been compelling enough to justify

its use.

The relatively young Federal Circuit has not had

occasion to consider the economic waste principle un-

til this case, but its predecessor, the Court of Claims,

confronted the issue in H.L.C. & Assocs. Constr. Co.

v. United States, 367 F.2d 586 (Ct. Cl. 1966).

Petitioner has mischaracterized the holding in H.L.C.

in stating that “the Court of Claims [in H.L.C.] held

that the doctrine of economic waste should not apply

in government contract disputes.’’ (Pet. 14). Instead,

the court there denied relief because the facts did not

support a finding of economic waste.' The fact that

unless the government’s default is ‘“‘material.’’ See Northern

Helex Co. v. United States, 455 F.2d 546 (Ct. Cl. 1972), on

further proceedings, 524 F.2d 707 (Ct. Cl. 1975), cert. denied,

429 U.S. 866 (1976), on further proceedings, 634 F.2d 557 (Ct.

Cl. 1980).

5 In H.L.C. the contractor sought to recover the cost of being

directed to replace two-conductor wire, known to be noncon-

forming when installed, with three-conductor wire, arguing that

they were equally suited to the government’s needs. The Court

of Claims described the ‘economic waste” doctrine and quoted

from Judge Cardozo’s opinion in Jacob & Youngs v. Kent, 230

N.Y. 239, 129 N.E. 889 (1921) The court held: “Our conclusion

is that the requisite ingredients for the test of substantial per-

formance—forfeiture and economic waste—are not present in this

case, and that the doctrine of substantial performance is there-

fore inapposite.” H.L.C., 367 F.2d at 600. Petitioner’s reliance

on other cited Court of Claims decisions is also misplaced. Far-

well v. United States, 148 F. Supp. 947, 949 (Cl. Ct. 1957)

supports respondent’s position. Farwell installed nonconforming

but adequate copper tubing in part of a building. For the in-

stalled material, the government received a credit for only the

11

the court discussed economic waste without disap-

proving its application to government contracts can

fairly be read not as a rejection of the principle but

as an endorsement.

The economic waste exception has been recognized

by the boards of contract appeals at least since 1974,

when it was applied in Valley Asphalt Corp., 74-2

B.C.A. (CCH) { 10,680. With the exception of the

difference in cost between the conforming and nonconforming

material, exactly the remedy respondent originally sought. With

respect to the uninstalled material, the court held that the gov-

ernment had a right to demand strict compliance. S.S. Silber-

blatt, Inc. v. United States, 433 F.2d 1814 (Ct. Cl. 1970) did

not involve an allegation of economic waste, but was based on

a finding that the government’s action in demanding removal

and replacement was “manifestly reasonable under the circum-

stances.” Jd, 433 F.2d at 13823. In Troupe Bros., Inc. v. United

States, 643 F.2d 719 (Ct. Cl. 1980) the contractor did not allege

economic waste. It argued that the fact that there was no

engineering justification for certain work supported his inter-

pretation that the work was not part of the contract. Id. at 722-

23.

*In Arnold M. Diamond, Inc., 73-2 B.C.A. (CCH) 4 10,359,

at 48,925, the board held that the government could not order

replacement of nonconforming concrete at contractor’s expense

when repair would bring it into compliance. On the facts of

Eller Constr., Inc., 83-2 B.C.A. (CCH) ¢ 16,560, at 82,367-68,

the board determined that removal of nonconforming concrete,

rather than repair, was appropriate, citing Valley Asphalt and

Jacob and Youngs v. Kent. See also, Pacific W. Constr., Inc.,

86-2 B.C.A. (CCH) ¢ 18,816, at 94,824 (board endorsed economic

waste doctrine but denied relief on the facts); Toombs & Co.,

Inc., 91-1 B.C.A. (CCH) ¢ 23,403, at 117,482-33 (board found in

favor of contractor based on economic waste); and Hunter Ditch

Lining, 91-2 B.C.A. (CCH) ¢ 23,678, at 118,565 (board cited

economic waste analysis as appropriate but denied appeal based

on contractor’s failure to establish the fact of economic waste

12

Board and Claims Court in this case, no court or

board has ever rejected the legal doctrine of economic

waste in a government contract case.

The economic waste issue has come up infrequently

in government contracts cases, but not for lack of

precedent. Its infrequent appearance is rather because

the doctrine operates in the realm of factual extremes

(e.g., demand to replace completed work despite high

cost and without significant benefit) that simply do

not arise often in practice.

B. The Federal Circuit’s Application of the Economic

Waste Doctrine is Consistent With the Terms of the

Contract

The Federal Circuit did not derive the principle of

economic waste from the ‘“‘public interest’’ proviso in

GP-10, as petitioner suggests. (Pet. 9, 16). Rather,

the court determined that the common law doctrine

of economic waste imposed an implied restraint on

what it held to be ‘‘arbitrary and capricious” behavior

by the contracting officer. (Pet. App. 16a).

This is not to say that GP-10(b) does not, by its

own terms, require the contracting officer to consider

economic waste in the “‘repair vs. replace” analysis.

GP-10(b) provides:

The contractor shall, without charge, seaciases

any material or correct any workmanship

found by the Government not to conform to

the contract requirements, unless in the pub-

lic interest the Government consents to ac-

or suitability of the as-built project). See also, R. Bednar, H.

Braude, J. Cibinic, Jr., G. Ginsburg, J. Margulies, R. Nash, Jr.,

D. Patin, and A. Stephenson, Construction Contracting, 804-10

(Ist Ed. 1991).

13

cept such material or workmanship with an

appropriate adjustment in contract price.

(Pet. App. 29a).

The first part of GP-10(b) gives the government the

usual right to require correction or replacement of

nonconforming work. The remainder of the clause

provides that the government has the discretion, con-

sistent with the public interest, to accept noncon-

forming work with a price reduction. The public

interest is broad enough to include considerations of

economic waste, as there can be no public interest in

causing resources to be squandered or a contractor

to suffer damage for no reason.

The parties agree that GP-10 gives the government

the discretion to accept nonconforming work with an

appropriate credit. (Pet. 17). Petitioner, however, ar-

gues that the right to exercise discretion necessarily

implies a right to exercise that discretion arbitrarily,

unless the contract language states otherwise. (Pet.

16-17). This argument reverses the common law pre-

sumption that contracting parties do not intend a

grant of discretion to justify arbitrary behavior unless

that intent is expressed clearly. When the contract

entrusts discretion to the contracting officer, the of-

ficer has an implied duty to: 1) actually exercise that

discretion, Schlesinger v. United States, 390 F.2d 702

(Ct. Cl. 1968), and 2) exercise that discretion in a

way that is not arbitrary and capricious. Hoel-Steffen

Constr. Co. v. United States, 684 F.2d 848 (Ct. Cl.

1982); International Verbatim Reporters, Inc. v.

United States, 9 Cl. Ct. 710 (1986). Thus, regardless

of whether the measure of discretion is “good faith,”

‘substantial performance,” “public interest,” or “‘eco-

nomic waste,” the contracting officer breached his

14

duty in not exercising any discretion whatsoever. That

default was an independent and sufficient basis for

the court to have decided the liability issue in

respondent’s favor.’

In support of its argument that GP-10() gives it

an unreviewable right to accept or reject noncon-

forming work, petitioner cites the ‘Value Engineering

Incentive” clause (GP-66) of the contract and its cur-

rent version, ‘“Value Engineering-Construction” (FAR

52.248-3). (Pet. 13, n. 10). Under the value engineer-

ing clauses the contractor may suggest cost-saving

specification changes and split the cost savings with

the government if the proposal is accepted. Until the

proposal is accepted, the contractor must proceed with

the contract as written. The clauses do not address

after-the-fact removal and replacement of noncon-

forming work.

The value engineering clauses reserve for the gov-

ernment the ultimate determination of what the con-

tract specifications will say. Having provided the

opportunity for contractors to offer value engineering

suggestions, the government did not want to confront

7 The dissenting member of the Corps of Engineers Board of

Contract Appeals panel would have decided the case in

respondent’s favor based, inter alia, on the contracting officer’s

failure to exercise any repair vs. replace discretion. (Pet. App.

108a). The court might also have cited, as the dissenting member

of the board did (Pet. App. 102a), the implied duty of any con-

tracting party to act reasonably and in good faith with respect

to the exercise of its contract rights. This implied duty has gone

by various names, including ‘implied duty to cooperate,” PBI

Elec. Corp. v. United States, 17 Cl. Ct. 128 (1989), and “implied

duty not to hinder’ performance, George A. Fuller Co. v. United

States, 69 F. Supp. 409 (Ct. Cl. 1947); Lewis-Nicholson, Inc. v.

United States, 550 F.2d 26 (Ct. Cl. 1977).

ye eg STP eS ee i: gil an ee

15

disputes over whether the rejection of a suggestion

was or was not reasonable. Accordingly, the value

engineering clauses, unlike GP-10, give contractors

fair warning that the government’s value engineering

decisions are unreviewable. Subparagraph (eX) of the

current clause provides in part:

The contracting officer’s decision to accept

or reject all or part of any [Value Engi-

neering Change Proposal] shall be final and

not subject to the Disputes clause or other-

wise subject to litigation under the Contract

Disputes Act of 1978 (41 U.S.C. 601-618).

(App., infra, la-6a). If the government had wanted

an unreviewable right to order removal and replace-

ment of nonconforming work, regardless of economic

waste considerations, it would have used the same

language in GP-10.

In the twenty-six years since the H.L.C. decision,

the government has had ample opportunity to modify

GP-10 if it felt that the courts or boards were mis-

construing the clause. The government has amended

GP-10 since the Granite/Corps of Engineers contract

was signed, but the language dealing with correction

of nonconforming work was left alone. (Pet. 10-11,

nn. 8, 9). The fact that the operative language has

not been changed signals to the community of con-

tractors that the government has been satisfied with

such decisions as H.L.C., Valley Asphalt, Toombs, and

Eller. °

C. No Provision of the Procurement Regulations Re-

pudiates the Common Law Principle of Economic

Waste

Petitioner makes the argument, not made at any

prior stage of this case, that procurement regulations

16

bar a court from applying federal common law prin-

ciples to ‘qualify’ petitioner’s assertedly unqualified

right to demand strict compliance.* (Pet. 10, 15-16).

Even assuming that the right were in fact unqualified

by the wording of the clause itself, a contention that

respondent disputes,* the argument is flawed in sev-

eral respects.

Petitioner concedes that the federal courts have

power to craft federal common law rules to govern

government contracts. See, Boyle v. United Technol-

ogies Corp., 487 U.S. 500, 504 (1988), reh’g denied,

489 U.S. 1047 (1989). No more in dispute is the prin-

ciple that federal common law must give way to con-

flicting federal statutes, City of Milwaukee v. {llinois,

451 U.S. 304, 314 (1981), or valid regulations. This

case does not test either principle.

Petitioner first reaches to elevate a definition of

“specification” (48 C.F.R. § 10.001) to the status of

a regulation in conflict with the federal common law

doctrine of economic waste. (Pet. 16). In fact, the

definition has no bearing on the economic waste doc-

trine. As a fuller text makes clear, the definition

merely directs government contracting officers to

avoid “gold-plating’”’ when developing contract spec-

ifications: “Specifications shall state only the Govern-

ment’s actual minimum needs . . . .”” (emphasis added).

*The government’s failure to raise this argument below has

deprived this Court of the expert view of the Federal Circuit

regarding the proper role of federal common law principles in

interpreting mandatory clauses such as GP-10. Accordingly

petitioner’s argument should be deemed waived. Singleton v.

Wulff, 428 U.S. 106, 120-21 (1976).

* Section B, supra.

;

i

E

j

!

at

17

Nothing in this definition purports to govern how a

court should deal with completed work that in fact

meets the government’s minimum needs where its

replacement would be economic waste.

Petitioner then argues that the language of GP-10,

mandated by regulation, clearly conveys an intent that

the contracting officer’s discretion is unreviewable and

that the Federal Circuit has thwarted that intent by

‘importing’ a common law principle of economic

waste. (Pet. 9, 16). The Federal Circuit decision was

the result of an effort, not to thwart, but to effectuate

the parties’ presumed intent under the extreme cir-

cumstances presented in this case.’’.As a court with

a deep understanding of both the principles and the

practicalities of government contracting, the Federal

Circuit was aware that GP-10 does not exist in a legal

vacuum. Federal common law ground rules of con-

tract interpretation were established long before this

contract was signed and have persisted during the

performance of many hundreds of subsequent con-

tracts, all containing GP-10 in substantially the same

' The Federal Circuit found that “the waterstop was entirely

adequate for the project and that its replacement was unnec-

essary.” (Pet. 22a). As Judge Cardozo observed in Jacobs &

Youngs v. Kent, 230 N.Y. at 242; 129 N.E. at 891:

From the conclusion that promises may not be treated

as dependent to the extent of their uttermost minutiae

without a sacrifice of justice, the progress is a short

one to the conclusion that they may not be so treated

without a perversion of intention. Intention not other-

wise revealed may be presumed to hold in contempla-

tion the reasonable and probable. If something else is

in view, it must not be left to implication. There will

be no assumption of a purpose to visit venial faults

with oppressive retribution. (emphasis added)

18

form. If the government had wanted to change the

ground rules it would have written GP-10 to convey

that intent clearly. (Section B, supra). As the gov-

ernment did not do so, the court was right to assume

that the parties intended that the implied duty to

exercise discretion reasonably would continue to co-

exist in harmony with GP-10.

Although procurement regulations that mandate the

use of standard clauses have been held to have the

“force and effect of law,’ the courts have never

treated such clauses as exempt from interpretation.

To be sure, the wording of a mandatory clause is

fixed by regulation, and the contracting officer is not

authorized either to omit the clause” or to alter its

wording."* The courts have never gone so far, how-

ever, as to hold that because a clause is mandatory,

federal commen law principles of interpretation are

suspended. On the contrary, the courts regularly have

interpreted such clauses in light of federal common

law principles. See Ronald A. Torncello and Soledad

Enters., Inc. v. United States, 681 F.2d 756, 770 (Ct.

Cl. 1982) (mandatory termination for convenience

clause qualified by common law concepts of consid-

eration and mutuality); Continential Ill. Nat’l Bank,

1G.L. Christian & Assocs. v. United States, 312 F.2d 418,

424 (Ct. Cl.), reh’g denied, 320 F.2d 345 (Ct. Cl.), cert. denied,

875 U.S. 954 (1963), 170 Ct. Cl. 902, cert. denied, 382 U.S. 821

(1965).

2 Td., 312 F.2d at 424.

18 Any deviation from a mandatory clause which is made with-

out the required authorization, see, FAR 1.403, is unenforceable.

McDonnell Douglas Corp. v. United States, 670 F.2d 156 (Ct.

Cl. 1982); Southwest Marine, Inc., et al., 91-1 B.C.A. (CCH) {

23,323.

19

101 F.Supp. at 757 (mandatory liquidated damages

clause qualified by principle of substantial perform-

ance); and Calfon Constr., 18 Cl. Ct. at 488-39 (man-

datory changes clause notice provision qualified by

principle of constructive notice).

D. The Federal Circuit’s Decision Will Not Encourage

Contractors to Base Their Bids on Nonconforming

Products

Petitioner argues that if the economic waste ex-

ception is allowed to persist, any incentive for a ra-

tional contractor to bid on conforming components

will “all but vanish,” and the integrity of the public

bidding system will be damaged. (Pet. 19). Petitioner’s

predictions are at odds with those practical realities

of government contracting that the Federal Circuit

was equipped to appreciate. They are also inconsistent

with the fact that the ‘economic waste’ principle

applies only in extraordinary circumstances. The Fed-

eral Circuit’s reiteration of the economic waste prin-

ciple will have no effect on government contractor

bidding practices, just as the Court of Claims’ first

articulation of the principle twenty-six years ago in

H.L.C. has had no such effect.

The Federal Circuit decision does not alter or abol-

ish the doctrine of “strict compliance” as it has ex-

isted for years in both private and government

contracts. Nor does it grant the contractor a general

ucts, even if they may be superior to those specified.

The government and private owner are almost

entitled to receive precisely what they specified. The

economic waste principle applies only in those rare

and extreme circumstances in which a reflexive ap-

plication of the strict compliance rule would yield re-

20

sults that are so harsh compared to the benefits

gained that they are presumed to be unintended.

No rational contractor would attempt to manipulate

the procurement process to take advantage of the

economic waste doctrine. To make its gamble seem

worthwhile, the contractor would have to make a

number of assumptions. In order to gain a competitive

advantage the substitution would have to be of a ma-

jor nonconforming component representing a sub-

stantial price differential. The more important the

component, however, the more likely it is that the

nonconformity would be detected. The contractor

would have to assume that its employees participating

in the bidding of the project would not discover and

report the intended fraud. It would have to assume,

further, that its workmen, foremen, superintendents

and project managers at the site would not discover

and report the nonconformity. The contractor would

have to assume that its independent quality control

representative’ would either falsely certify that the

work conformed to specifications or fail to discover

the deviation. Finally, the contractor would have to

assume that the government’s full-time, on-site in-

spectors would fail to discover the nonconforming

product. Each of these assumptions is problematic;

cumulatively they are irrational.

The contractor will also face the reality that, if the

nonconformity is detected, the greater the price dif-

4 On large construction projects the government generally re-

quires that work be inspected and records maintained by a con-

tractor quality control organization that is independent of the

contractor’s project management. See, e.g., Santa Fe Engr’s, 81-

1 B.C.A. (CCH) ¢ 14,976, at 74,102-03.

21

ferential, the more likely it is that the government

will be able to articulate a quality-based rationale to

reject the cheaper item. In all likelihood, if there is

an equivalent major component that is less costly, the

government will already have considered specifying it

and will be able to state good reasons for not doing

so.

If the government orders replacement, the con-

tractor runs the risk that it will not prevail in any

ensuing litigation. At that point the contractor is as-

sured, at a minimum, of having to pay the difference

in value between the as-built and as-specified struc-

ture. At the other extreme, the contractor risks the

cost of replacement, almost certainly much higher

than its original cost savings, plus the cost of liti-

gating in a vain attempt to recoup its costs.

If these risks are not sufficient deterrents, the False

Claims Act, 18 U.S.C. § 287 (criminal); 31 U.S.C.

§ 3729 (civil), and False Statements Act, 18 U.S.C.

§ 1001, provide the prospect of fines, imprisonment

and debarment for contractors who invoice the gov-

ernment for material that they know to be noncon-

forming.® Any contractor who would not be deterred

by these sanctions is unlikely to be deterred by the

elimination of the economic waste principle.

* See United States v. Bornstein, 861 F. Supp. 869 (D.N.J.

1978), off'd:tn. part and-saetd-te pasts 04 ae Sadie Che

1974), rev rev'd on other grounds, 423 U.S. 808, vacated without

held liable

under 31 U.S.C. $8729 for knowingly furnishing electron tubes

not meeting specifications) and United States v. Bass, 472 F.2d

207 (8th Cir.), cert. re tpn U.S. 928 orate incre oar

22

In the rare cases when the economic waste issue

does arise, it will not be in the manner contemplated

by petitioner; but in the manner reflected in this case.

The waterstop was a $5,750 item on a $36 million

contract. No competitive advantage was sought, or

could have been gained, by bidding on waterstop that

did not meet the specifications.

E. Adoption Of The Economic Waste Doctrine Will Not

Encourage Litigation

No more persuasive is petitioner’s argument that

the Federal Circuit’s application of the economic waste

doctrine will encourage “‘pointless’”’ litigation. (Pet.

19)..° There is no reason to expect a flood of ‘‘eco-

nomic waste” litigation in government contracting any

more than in private contracting, which has not been

thrown into disarray by the economic waste doctrine.

In twenty-six years after the first discussion of the

economic waste doctrine by the Court of Claims, there

have been only a half dozen decisions involving that

issue, despite the large volume of construction con-

tracting financed by the federal government every

year.” The paucity of such government. construction

16 There are already sufficient deterrents to bringing “‘point-

less” cases, @.9., cost and the requirement that claims be certified

pursuant to the Contract Disputes Act, 41 U.S.C. § 605(cX1).

17 Though large, the volume is not nearly as large as petitioner

suggests. Petitioner cites Department of Transportation (DOT)

construction expenditures of $1.3 trillion over the past five years.

(Pet. 22, n. 16). Both the figure and the inference that petitioner

23

contract cases to date is the best indication that sit-

uations giving rise to an economic waste argument

are extremely unusual. The reason is that in most

cases, the contractor and government work together

to find the least expensive method to provide the

government with a product that meets its needs. Sel-

dom does the government demand strict ccmpliance

when it results in economic waste."

F. The Federal Circuit’s Decision Will Not Discourage

the Use of Uniform Specifications

Uniform specifications are generally written for the

most severe conditions and therefore overstate the

government’s actual minimum needs with respect to

most projects. Petitioner argues that an economic

waste exception to strict compliance will undermine

the use of uniform specifications by encouraging con-

tractors to demand that a lesser product be substi-

tuted for the standard one. (Pet. 20-21). The doctrine

Highway Program). These grants are not governed by the Fed-

eral Acquisition Regulation; the government is not a party to

the resulting contracts; and the contracts are not required

include an “Inspection and Acceptance” clause such as GP-10.

'* Petitioner argues that litigation of the economic waste doc-

trine will encourage ‘“‘Monday-morning quarterbacking.”’ (Pet. 10,

n. 14). Using this case as an example, petitioner states that

respondent’s waterstop expert’s opinion was

Board and not presented to the Corps at the

arose. This assertion is misleading. When ees problem

Ss

24

of strict compliance, however, prevents a contractor

from simply “‘demanding”’ a substitution prior to in-

stallation. Strict compliance also applies after instal-

lation except in ‘the unusual circumstance when

economic waste would result. It is highly unlikely that

the government will scrap its vast and useful system

of uniform specifications simply because, in the very

few cases when economic waste would result, it may

not demand, at the contractor’s expense, more than

it needs. In the twenty-six years since H.L.C., 367

F.2d 586, there is no suggestion that the government

has curtailed its use of uniform specifications. The

government will, and should, continue using uniform

specifications unaffected by the decision in this case.

G. The Government Can Write the Economic Waste Ex-

ception Out of the Standard Contract Without the

Aid of this Court

This Federal Circuit case does not involve a conflict

with a decision of this Court or of any other court,

nor does it involve statutory construction. Cf United

States v. Goodyear Tire and Rubber Co., 493 U.S. 132

(1989), reh’g denied, 4938 U.S. 1095 (1990) (Internal

Revenue Code § 902); United States v. American Bar

Endowment, 477 U.S. 105 (1986) (Internal Revenue

Code §§ 511-13); United States v. Hill, cert. granted,

112 S. Ct. 1758 (1992) (Internal Revenue Code

§ 57(aX8)). Here, petitioner has a remedy, revision of

the standard form construction contract, wholly within

its control.

The government can write the “economic waste”

exception out of future contracts simply by amending

clause GP-10(b) to state that the contracting officer’s

decision whether to require removal or replacement

25

is not reviewable under the Contract Disputes Act.’

The government has previously rewritten standard

clauses specifically to overcome the effect of Court

of Claims decisions.” It has amended GP-10 before

(to address matters unrelated to this case). (Pet. 10-

11, nn. 8, 9). The government can do so again if it

feels that it is good procurement policy to eliminate

the principle of economic waste from federal con-

struction contracting.

(Sec. B, supra). See, DK’s Precision Machining and Mfg., 90-2

BCA (CCH) { 22,880 at 114,637. a

26

CONCLUSION

The petition for a writ of certiorari should be de-

nied.

Respectfully submitted,

WILLIAM C. KELLY, JR. ADRIAN L. BASTIANELLI, III -

LATHAM & WATKINS Counsel of Record

1001 Pennsylvania Ave., N.W. CHARLES M. REIFEL

Suite 1300 BASTIANELLI, BROWN &

Washington, D.C. 20004-2505 TOUHEY, CHTD.

(202) 637-2200 2828 Pennsylvania Ave., N.W.

Suite 203

Washington, D.C. 20007

(202) 338-8088

December 1992