Petition for Writ of Certiorari — Amertex Enterprises, Ltd. v. United States, 118 S. Ct. 851 (1998) (No. 97-583)
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07-588 JUL 3 1 1997.
No. OFFICE OF THE CLERK
In The
Supreme Court of the United States
~~
October Term, 1996
AMERTEX ENTERPRISES, LTD.,
Petitioner,
VS.
THE UNITED STATES OF AMERICA,
Respondent.
On Petition for a Writ of Certiorari to the United States
Court of Appeals for the Federal Circuit
PETITION FOR A WRIT OF CERTIORARI
JOSEPH H. REITER
Counsel of Record
KOSTOS AND LAMER, P.C.
Attorneys for Petitioner
1608 Walnut Street
Suite 1300
Philadelphia, Pennsylvania 19103
(215) 545-0570
utz
ae (800) 3 APPEAL « (800) 5 APPEAL « (800) BRIEF 21
i
QUESTIONS PRESENTED FOR REVIEW
On a contract with the United States, is the contractor
deprived of its right to sue for breach damages by agreeing to
continue performing the contract despite the United States
breach by cardinally changing the contract from a mass-
production contract to a research and development contract
where:
1. The agreement to continue performance contains no
language which can be interpreted as a waiver of accrued breach
damages;
2. The United States was in no way prejudiced by the
contractor’s election to continue performance; and
3. The United States was aware that a claim for those
damages would be presented?
ii
LIST OF PARTIES
The names of all parties to the proceedings in the Court
whose judgment is sought to be reviewed here appears in the
caption of the case. There is no parent or subsidiary company
of any party to be listed.
iii
TABLE OF CONTENTS
Page
Questions Presented for Review ................... i
stniecp testy cag TE Ree Oe ST ee RR ESE ii
oe a a BREN ETE et GRE Oe CE ili
MO NR eri oe iv
soe anes cc ap antie CSE OO OAT a em l
statement of Jurisdiction ................:....... l
I oe l
Reasons for Granting the Writ .................... “4
I. The Federal Circuit Decision Has So Far Departed
From The Accepted And Usual Course Of Judicial
Proceedings And Sanctioned Such A Course By
The United States Court Of Federal Claims As To
Call For An Exercise Of This Court’s Power Of
I hae kc boc resins a 4
Il. The Federal Circuit’s Opinion Directly Conflicts
With Numerous Decisions In Various Circuits,
Which, Based On Modern Views Of Contract Law,
Hold That A Non-Breaching Party To A Contract
Does Not Lose Its Right To Sue For Breach
Damages By Failing To End The Contract And
Agreeing To Continue Performance. ......... 9
iv
Contents
Page
Ill. The Writ Should Be Granted Because The Case Is
An Important One Over And Above Its Conflict
With Other Circuits And Well-Settled Law. ... 12
CCINOIOD kbc cg cick cance oabewss vb kbeeeee bees 13
TABLE OF CITATIONS
Cases Cited:
Allied Materials and Equipment Co. v. The United States,
SOF Fo eee Cis Cas ROT). wn ks SiN VK CRRA REE 4
Cities Service Helex, Inc. v. The United States, 543 F.2d
5 CC. CE ISTO: e kivickcc cee eek 4,6,9
Dunkin’ Donuts of America, Inc. v. Minerva, Inc., 950 F.2d
1566 CRUG AE TGR). nk Gis aa ees 9, 10
First Citizens Federal Savings and Loan Association v.
Worthen Bank and Trust Company, NA, 919 F.2d 510
Ei He. GR ae Rae eay operant eran yy) Ueno 9,10
Fuller Company v. Brown Minneapolis Tank and
Fabricating Company, 678 F. Supp. 506 (E.D. Pa.
SPR) eee Si TE ees oe ee eee 9, 10, 11
Havoco v. Hilco, 799 F.2d 349, on remand, Havoco of
America Ltd. v. Hilco, Inc., 750 F. Supp. 946, affirmed,
971 2G tok CAL ISR) PO es 9,11
Contents
Page
Laka Tool & Stamping Co. v. The United States, 639 F.2d
738 (Ct. Cl. 1980), cert. denied, 454 U.S. 1086 (1981)
Pr re ree PEE ee PS ee Pe ee re ren oe 4
Phillips, Etc., Construction Company v. Seymour et al.,
TE Tien OE TET ED «ho hin so ahah he khakis OE i
S. Leo Harmony, Inc. v. Binks Manufacturing Company,
597 F. Supp. 1014 (S.D.N.Y. 1984) .............. 10, 11
Sitlington v. Fulton, 281 F.2d 552 (10th Cir. 1960).... 9, 10
Statutes Cited:
Oe Wa ONE ve Sb Vcd ecb ake ees sce l
OF Un Ot OE ess kcal ]
Other Authorities Cited:
Contracts, Calamari and Perillo, 3rd Edition, at Page 458
NaN Oa YON OE ped Kick an ss bese dass cs 6
Pe ANOS iii os vise his Oko bac cham ocws 6
RINNE UENO 5s i5s a e 6
17A Am. Jur. 2d (Revised), Contracts § 731 ......... 6
The Uniform Commercial Code ................... 6
vi
Contents
APPENDIX
Appendix A — Decision Of The United States Court Of
Appeals For The Federal Circuit Decided February 24,
MOE EETENL ELE Lee ere ee ere ey oe
Appendix B — Dissenting Opinion By Circuit Judge
Newman Of The United States Court Of Appeals For
The Federal Circuit Dated February 24, 1997 .....
Appendix C -— Opinion And Order On Liability And
Damages Of The United States Court Of Federal Claims
EOtes OCRMBST 1D; TIPS. oan sc tensk vs sedders
Appendix D — Order Of The United States Court Of
Appeals For The Federal Circuit Denying Combined
Petition For Rehearing And Suggestion For Rehearing
Fe RE PAP OS Ba LOOT. Fave ccrcnwosseuduiss
Page
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9a
14a
1
Petitioner, Amertex Enterprises, Ltd. (“Amertex”), requests
that a Writ of Certiorari issue to review the Judgment and
Opinion of the United States Court of Appeals for the Federal
Circuit entered in this action on February 24, 1997 (Petition
For Combined Petition For Rehearing And Suggestion For
Rehearing Jn Banc denied by Order entered on May 2, 1997),
which affirmed a Final Judgment of The United States Court of
Federal Claims.
OPINIONS BELOW
The Opinion of the Court of Appeals (Petitioner's Appendix,
Page 3) is not reported. It has been designated as “not citable as
precedent”. The Opinion of the United States Court of Federal
Claims (Petitioner’s Appendix, p. 14a) is unreported.
STATEMENT OF JURISDICTION
The Opinion of the Court of Appeals (Petitioner’s Appendix,
Page 3) was entered on February 24, 1997. A timely Combined
Petition For Rehearing And Suggestion For Rehearing Jn Banc
was denied on May 2, 1997. (Petitioner’s Appendix, p. 191a).
The Court has jurisdiction pursuant to 28 U.S.C. § 1254(1).
STATEMENT OF THE CASE
The case involves the issue of whether a Government
contractor loses its right to sue for breach damages already
accrued, when it agrees to continue performance despite the
Government’s breach. It arises under the Contract Disputes Act
of 1978, 41 U.S.C. § 601, et seg. Petitioner, Amertex Enterprises,
Ltd. (“Amertex”), at the time a participant in the Small Business
Administration 8(a) program for “economically and socially
disadvantaged” contractors, was awarded Contract No. DLA100-
85-C-0402 on February 25, 1985, for 2,415,885 Chemical
2
Protective Suits at a firm fixed price of $39.88 each, for a total
of $96.35 million. The contractual delivery schedule called for
deliveries of some 200,000 units per month ending in January,
1987.
By the end of 1988 (nearly two years after the Contract
should have been completed), as a result of what the Court of
Federal Claims (“the COFC”) found to be defective Government-
provided specifications, as well as numerous Government-
initiated specification changes, Amertex had delivered
approximately 1.1 million of the 2.4 million Chemical Protective
Suits. According to the COFC, as a result of the Government’s
failure to properly test the specification prior to issuing the
underlying solicitation, the numerous changes and corrections
were necessary in order for the applicable specifications to be
suitable for mass production, to the point where the Contract,
again according to the COFC, became, “at least in part, a
research and development contract”.
Following a Default Termination of the Contract on January
6, 1989, Amertex filed several claims, including a breach of
contract claim, founded on the doctrine of cardinal change, i.e.,
that the Government had materially altered the fundamental
contractual undertaking, by turning the fixed-price production
contract on which Amertex had bid into a research and
development vehicle.
Despite its finding that the contract had become, due to
1. Unbeknownst to Amertex, for classified reasons under code name
“Operation Cement Elephant”, the Government rushed the specification
through the development process, so that the normal testing procedures
were not followed. As a result, what the COFC found to be untested and
flawed specification were incorporated, without warning or disclaimer,
into the largest mass production contract the agency (the Defense Logistics
Agency/Defense Personnel Support Center) had ever awarded.
3
Government actions, “at least in part a research and development
contract”, the COFC rejected Amertex’ Claim of Cardinal
Change/Breach. According to the COFC, Amertex’ “potentially
convincing” claim was “fatally undercut” by its August, 1988
(five months before the Default Termination and three and one-
half years after award) execution of a bilateral Modification (i.e.,
P00037) incorporating a new delivery schedule and altering the
method of payment from progress payments to payment upon
delivery. The total dollar amount of the contract remained
unchanged. The COFC neither explained its reasoning nor
offered any case citations in support of this critical holding.
The Court of Appeals of the Federal Circuit (“the Federal
Circuit”), through its deciding panel (in a 2-1 decision), affirmed
the decision of the COFC, holding that Amertex’ signing of the
Modification incorporating a new delivery schedule was an
“implicit” agreement by Amertex to perform the modified
contract, thereby operating as a waiver of the right to assert a
breach claim for damages already accrued. The Modification,
however, in question contained no waiver or release language
and was negotiated with knowledge by all parties that Amertex
would be submitting a claim for damages already accrued.’ Like
the COFC, the panel cited no law, regulation or case decision
supporting its holding. The dissent asserted that absent an
express waiver in the Modification, Amertex’ claim could not
2. Specifically, the Modification in question, PO00037, contained a
caveat, which read as follows:
It is agreed further that the execution of this
modification will not be construed by either party
as an endorsement by either party of any negotiation
position with respect to the settlement of
modifications POOOO! and P00002.
(Petitioner’s Apper.dix, p. 190a).
4
be held to have been waived, citing, inter alia, Laka Tool &
Stamping Co. v. The United States, 639 F.2d 738, 743 (Ct. Cl.
1980), cert. denied, 454 U.S. 1086 (1981); Cities Service Helex,
Inc. v. The United States, 543 F.2d 1306, 1313 (Ct. Cl. 1976);
and Allied Materials and Equipment Co. v. The United States,
569 F.2d 562, 563-64 (Ct. Cl. 1978).
REASONS FOR GRANTING THE WRIT
I.
THE FEDERAL CIRCUIT DECISION HAS SO FAR
DEPARTED FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS AND
SANCTIONED SUCH A COURSE BY THE UNITED
STATES COURT OF FEDERAL CLAIMS AS TO CALL
FOR AN EXERCISE OF THIS COURT’S POWER OF
SUPERVISION.
The COFC held that Amertex deprived itself of the right to
claim breach damages attributable to an acknowledged cardinal
change when it agreed to continue performance. Specifically,
the COFC held as follows:
Notwithstanding the evidence supporting
Plaintiff’s plausible and potentially
convincing cardinal change assertion,
Plaintiff's position on this issue is fatally
undercut by the bilateral modification made
to the delivery schedule in 1988.
(Petitioner’s Appendix, pp. 146a-147a).
This holding, unsupported by citation of law, was adopted
by the Court of Appeals. The Modification alluded to contained
a eS nannies
5
no waiver language’ and did not change the total contract price.
(Petitioner’s Appendix, p. 190a).
The Decision of the Court of Appeals to uphold and endorse
the concept of “implicit waiver” is a radical departure from
Federal Case law, as enunciated both by this Court and the courts
of other circuits.
As early as 1875, this Court reasoned, in Phillips, Etc.,
Construction Company v. Seymour et al., 91 U.S. 646, 651:
... if A. agree to deliver a horse, buggy, and
harness on Monday, and B. accepts delivery
of the horse and buggy, can he refuse to pay
any thing, though he accepts delivery of the
harness on Tuesday? This is absurd. He
waives, by this acceptance, the point of time
as to the harness, at least so far as A.’s right
to recover the agreed sum is concerned. If B.
have suffered any damage by the delay, he
can recover it by an action on A.’s covenant
to deliver on Monday; ...
The Court went on to point out that the contractor, plaintiff
in error Phillips, did not “waive its right to damage”, but waived
only its right to “forfeiture”. 91 U.S. 646 at 652.
So basic is the concept that one does not renounce his right
to damages when, after breach, he continues to perform, that it
can be found in the most elementary treatises on contract law.
For instance, West Publishing Company, in its Hornbook series
on Contracts, instructs the reader:
3. Actually, it contained a saving clause. See Footnote 1, supra.
Thus, rather than “implicitly” waiving its damage claims, Amertex
explicitly preserved them.
6
If the breach is material, the aggrieved party
may cancel the contract. He may sue also for
a total breach if he can show that he would
have been ready, willing and able to perform
but for the breach. However, he also has the
option of continuing with the contract and
sue for a partial breach.
Contracts, Calamari and Perillo, 3rd Edition, at Page 458;
emphasis supplied.
Likewise, the widely accepted American Jurisprudence
states the following on the issue:
Where there has been a material breach, the
injured party has an election of continuing
performance, or of ceasing to perform, or of
repudiating the contract. Any act by the
injured party indicating an intent to continue
will operate as a conclusive election, not
depriving him of his right of action for the
breach which has already taken place, but
depriving him of any excuse for ceasing
performance on his own part.
17A Am. Jur. 2d (Revised), Contracts § 731; emphasis supplied.
The court below’s predecessor, the United States Court of
Claims, whose precedents are meant to be binding on the Federal
Circuit, came to the same conclusion two decades ago in Cities
Service Helex v. The United States, 543 F.2d 1306 (Ct. Cl. 1976)
(The case, cited by the dissenting Judge in the instant case, was
ignored in the majority opinion). In Cities Service Helex, supra,
the court, citing the Restatement, Williston, Corbin and The
Uniform Commercial Code, among others, reiterated what this
7
Court had held in Phillips, Etc., Construction Company, supra,
i.e., one does not forfeit a claim for breach damages by agreeing
to continue performance. The United States Court of Claims
reasoned as follows:
A material breach does not automatically and
ipso facto end a contract. It merely gives
the injured party the right to end the
agreement; the injured party can choose
between canceling the contract and
continuing it. If he decides to close the
contract and so conducts himself, both parties
are relieved of their further obligations and
the injured party is entitled to damages to the
end of the contract term (to put him in the
position he would have occupied if the
contract had been completed). Jf he elects
instead to continue the contract, the
obligations of both parties remain in force
and the injured party may retain only a claim
for damages for partial breach. See generally
5 S. Williston, Contracts §§ 638-88 (3d ed.
W. Jaeger 1961); Restatement of Contracts
§§ 317, 309-10 (1932); 17 Am.Jur.2d
Contracts §§ 446-47, 489, 503, 510 (1964);
Acme Process Equip. Co. v. United States,
171 Ct.Cl. 324, 334-37, 347 F.2d 509, 515-
16 (1965), rev’d on other grounds, 385 U.S.
138 (1966); Airco, Inc. v. United States, 205
Ct.Cl. 493, 497-99, 504 F.2d 1133, 1135-37
(1974); DeVito v. United States, 188 Ct.Cl.
979, 990-991, 413 F.2d 1147, 1153-54
(1969); Ling-Temco-Vought, Inc. v. United
States, 201 Ct.Cl. 135, 144-50. 475 F.2d 630,
636-39 (1973); Northern Helex Co. v. United
8
States, 197 Ct.Cl. 118, 125-26, 455 F.2d 546,
551 (1972).
. .. [S]Jome courts and commentators and the
Uniform Commercial Code have modified
various aspects of this strict view. In
Northern Helex Co. v. United States, 197
Ct.Cl. 118, 455 F.2d 546 (1972), the court
adopted the position that the injured party
may itself continue performance in certain
circumstances and yet reserve its right to
claim material breach without the breaching
party’s assent. Jd. at 129-30, 455 F.2d at 553;
see Uniform Commercial Code § 1-207.
Some courts have shared Professor Corbin’s
view that an election should not be conclusive
unless facts giving rise to an estoppel exist;
either the breaching party must have changed
his position in reliance on the injured party’s
failure to cancel or the injured party’s
conduct must be such that it would be unjust
to allow him to change his position. 5A A.
Corbin, Contracts § 1220 (1964); Western
Transmission Corp. v. Colorado Mainline,
Inc., 376 F.2d 470, 472 (10th Cir. 1967); see
United States v. Chichester, 312 F.2d 275,
282 (9th Cir. 1963); 5 S. Williston, supra,
§ 686, at 289-91; cf. Ling-Temco- Vought, Inc.
v. United States, supra at 145-46, 475 F.2d
at 636-37 (court stressed extra expense
incurred by Government); DeVito v. United
States, supra (elements of waiver of default
in delivery include reliance and continued
9
performance of delinquent party). The
authors of the Uniform Commercial Code has
also rejected the mechanical application of
the doctrine of election of remedies:
“Whether the pursuit of one remedy bars
another depends entirely on the facts of the
individual case”. Uniform Commercial Code
§ 2-703, Comment 1.
543 F.2d at Pages 1313-1314; emphasis supplied.
In addition to overlooking the tenets of this Court, learned
treatises, and its own decisions, the court below overlooked the
law as pronounced by other Circuit Courts of Appeals. See II,
infra.
Il.
THE FEDERAL CIRCUIT’S OPINION DIRECTLY
CONFLICTS WITH NUMEROUS DECISIONS IN
VARIOUS CIRCUITS, WHICH, BASED ON MODERN
VIEWS OF CONTRACT LAW, HOLD THAT A NON-
BREACHING PARTY TO A CONTRACT DOES NOT
LOSE ITS RIGHT TO SUE FOR BREACH DAMAGES BY
FAILING TO END THE CONTRACT AND AGREEING TO
CONTINUE PERFORMANCE.
The Decision below is in direct conflict with the following
decisions from other Circuits: Sitlington v. Fulton, 281 F.2d
552 (10th Cir. 1960); First Citizens Federal Savings and Loan
Association v. Worthen Bank and Trust Company, NA, 919 F.2d
510 (9th Cir. 1990); Dunkin’ Donuts of America, Inc. v. Minerva,
Inc., 950 F.2d 1566 (11th Cir. 1992). Havoco v. Hilco, 799
F.2d 349, on remand, Havoco of America Ltd. v. Hilco, Inc.,
750 F. Supp. 946, affirmed, 971 F.2d 1332 (7th Cir. 1986); Fuller
10
Company v. Brown Minneapolis Tank and Fabricating Company,
678 F. Supp. 506 (E.D. Pa. 1987); S. Leo Harmony, Inc. v. Binks
Manufacturing Company, 597 F. Supp. 1014 (S.D.N.Y. 1984).
The Tenth Circuit, in Sitlington, supra, held that the non-
breaching party to a contract for the sale of property (in this
instance, the buyer) had a choice upon the other party’s (i.e.,
the seller’s) breach: (1) Rescind the contract and sue for breach;
or (2) Require performance, retaining a cause of action for
damages.
According to the Tenth Circuit:
Any act by the injured party indicating an
intent to continue performance is deemed a
conclusive election. But by the election to
continue performance he does not forego his
right of action to recover damages caused by
the breach. [citing, inter alia, Williston on
Contracts, 2nd Edition § 1334 at Page 3749].
The Eleventh Circuit, in Dunkin’ Donuts of America, Inc. v.
Minerva, supra, was faced with a suit arising out of a franchise
agreement, where the franchisee continued in performance after
a breach. The majority held that under Arizona law, *he
franchisee still had the right to maintain an action for partial
breach; the dissent argued that the franchisee’s right was to sue
for total breach.
In First Citizens’ Federal Savings and Loan Association v.
Worthen Bank and Trust Company, supra, the Ninth Circuit held
that a non-breaching party, when faced with a material breach
by the other party may elect to rescind the contract or may opt
for performance and a right of action for damages.
1]
The Seventh Circuit also recognizes the innocent party’s
right to continue performance without waiving its right to sue
for damages. In Havoco v. Hilco, supra, the court’s opinion stated
the principle thusly:
It is clear that under Illinois law, a waiver
can be implied from conduct [citations
omitted]. It is also clear that an essential
element of waiver is that the injured party
intended to affirm the contract and intended
to abandon his right to recover damages.
[citations omitted]. “If the intention to waive
is implied from conduct, the conduct should
speak the intention clearly”. Barkers Trust
Company v. Pacific Employees Insurance
Company, 288 F.2d 106, 111 (9th Cir., 1960).
799 F.2d at 353-354.
Both the Third and Second Circuits have taken the same
position, enunciated in District Court decisions. Of special
interest is the decision by the Eastern District of Pennsylvania
(Third Circuit), in Fuller Company v. Brown Minneapolis Tank
and Fabricating Company, supra. The court held that a party
who continues to perform on a cardinally-changed contract loses
the right to cease performance; its remedy is limited to a claim
for damages. 678 F. Supp. at 509-510.
The District Court for the Southern District of New York
(Second Circuit) held, in S. Leo Harmony, Inc. v. Binks
Manufacturing Company, supra, that the non-breaching party
to a contract could elect not to abandon performance, complete
the contract and sue for damages traceable to the defendant's
breach.
12
Il.
THE WRIT SHOULD BE GRANTED BECAUSE THE
CASE IS AN IMPORTANT ONE OVER AND ABOVE ITS
CONFLICT WITH OTHER CIRCUITS AND WELL-
SETTLED LAW.
By labeling its Decision as non-precedential, when, as noted
in the dissent, stare decisis was to the contrary, the court below
crafted a special, secret law for a socially and economically-
disadvantaged company. The effect is not unlike the effect of
Caligula’s law. (That Roman Emperor was fond of placing his
edicts high on the public pillars where they could not be read,
and then enforcing the edicts selectively). The suggestion that
there can be unstated agreements in written modifications,
whether they involve contractor claims or interpretation of
contract provisions, is so sweeping and fraught with peril that it
takes on equal protection and due process aspects.
Although Amertex was granted a forum in which it could
be heard, it was denied the benefit of a nationally accepted,
deciding principle available to others and upon which it had a
right to rely, i.e., a contractor does not lose its right to claim
breach damages when it agrees to continue performance.
Certainly, if the majority decision is well-grounded in law, is
holding (i.e. that a bilateral modification extending the delivery
schedule implicit[ly] carries with a waiver of the right to breach
of contract damages) is of considerable importance to the
Government Contract legal community as Petitioner submits, it
is and certainly precedential value. If, as Petitioner submits, it
is not well-grounded in law, then the decision amounts to
singling out this Government contractor unconstitutionally by
adopting a rule that applies only to it.
13
CONCLUSION
The Writ should be granted. It is now undisputed that
Amertex and its bank subsidized research and development for
a contract falsely awarded under the guise of being a mass-
production contract, supported by design specifications. In
deciding the case, the court below has overlooked its own
decisions, misapprehended the established law of “election of
remedies”, and brought itself into conflict with principles
applied and cases decided by other circuits and its own precedent
when it concluded that continued performance waives accrued
breach damages.
Respectfully submitted,
JOSEPH H. REITER
Counsel of Record
KOSTOS AND LAMER, P.C.
Attorneys for Petitioner
1608 Walnut Street
Suite 1300
Philadelphia, Pennsylvania 19103
(215) 545-0570
la
APPENDIX A — DECISION OF THE UNITED STATES
COURT OF APPEALS FOR THE FEDERAL CIRCUIT
DECIDED FEBRUARY 24, 1997
NOTE: Pursuant to Fed. Cir. R. 47.6, this
disposition is not citable as precedent. It is a
public record. The disposition will appear in
tables published periodically.
United States Court of Appeals for the Federal Circuit
96-5070
AMERTEX ENTERPRISES, LTD.,
Plaintiff-Appellant,
Vv.
THE UNITED STATES,
| Defendant-Appellee.
DECIDED: February 24, 1997
Before NEWMAN, MICHEL and SCHALL, Circuit Judges.
Opinion for the court filed by Circuit Judge MICHEL. Dissenting
opinion filed by Circuit Judge NEWMAN.
MICHEL, Circuit Judge.
Amertex Enterprises, Ltd. (“Amertex”) appeals the
consolidated, post-trial decision of December 15, 1995 of the
Court of Federal Claims, Nos. 90-684, 91-1700, and 92-402,
2a
Appendix A
denying its claim for cardinal change breach of a contract,
granting its claim for an equitable adjustment for delay caused
by the United States (“government”), holding that the
government's termination for default was justified, and offsetting
the equitable adjustment with the amount of unliquidated
progress payments due to the justified termination. The case
was submitted for decision after oral argument on December 5,
1996. Because we agree with the trial court that Amertex waived
its cardinal change claim by entering into bilateral modifications,
and because the trial court did not reversibly err in its calculation
of delay damages, or holding of justified default termination,
we affirm.
BACKGROUND
The detailed facts of the case are set out in the opinion of
the Court of Federal Claims. Amertex Enterprises, Ltd. v. United
States, Nos. 90-684 C, 91-1700, and 92-402 (Fed. Cl. 1995). In
brief, Amertex was awarded a government contract for the
production of chemical warfare protective suits (“chemsuits”)
on February 25, 1985. A total of 2,415,885 chemsuits were to
have been produced by December 29, 1986. In the words of the
Court of Federal Claims, “[f]rom its inception, this procurement
was plagued by poor decisions, mistakes, and miscommunication
that delayed and disrupted Amertex’s performance of its
obligations.” During the course of performance, the government
issued 42 modifications and eight amendments to the contract,
totaling over 100 changes to the specifications for the chemsuits.
Also during the course of performance, and after many of these
unilateral modifications and amendments, Amertex and the
government entered into bilateral modifications of the contract
which provided for a revised payment scheme and delivery
schedule. The government eventually terminated the contract
3a
Appendix A
for default on January 6, 1989, over two years after the original
deadline. Amertex had delivered fewer than half of the chemsuits
it had agreed to deliver in the original contract.
Amertex submitted ‘wo claims to the Contracting Officer,
one challenging the termination for default, and the second
alleging a breach of the contract through cardinal change and
seeking an equitable adjustment based on delay and disruption
allegedly caused by the government. Both claims were denied,
and Amertex filed suit in the United States Court of Federal
Claims, which denied Amertex’s cardinal change claim and
default termination challenge, but granted in part its claim for
an equitable adjustment. This appeal timely followed.
DISCUSSION
Decisions of the Court of Federal Claims are subject to only
limited review. Factual findings are reviewed for clear error,
while legal conclusions are reviewed de novo. Alger v. United
States, 741 F.2d 391, 393 (Fed. Cir. 1984).
I.
Amertex first appeals the holding that the series of changes
that the government made to the contract did not constitute a
cardinal change. This court reviews the holding of a cardinal
change de novo. See, e.g., AT&T Communications, Inc. v. Wiltel,
Inc., 1 F.3d 1201, 1207-08 (Fed. Cir. 1993). A cardinal change:
occurs when the government effects an
alteration in the work so drastic that it
effectively requires the contractor to perform
duties materially different from those
4a
Appendix A
bargained for. By definition, then a cardinal
change is so profound that it is not
redressable under the contract, and thus
renders the government in breach.
AT&T Communications, | F.3d at 1205 (citing Allied Materials
& Equip. Co. v. United States, 569 F.2d 562, 563-64 (Ct. Cl.
1978)). As to Amertex’s cardinal change claim, the Court of
Federal Claims stated:
Notwithstanding the evidence supporting
plaintiff’s plausible and potentially
convincing cardinal change assertion,
plaintiff’s position on this issue is fatally
undercut by the bilateral modification made
to the delivery schedule in 1988.
Although Amertex argues that, when presented with the
bilateral modifications, it “could not ... walk away” from the
contract, it has neither pleaded nor proven duress. The signed
modifications evidence a meeting of the minds and, since
the modifications changed both parties’ obligations, are
supported by consideration. Thus, the bilateral modifications
-are enforceable contracts which replace the parallel provisions
of the original contract. As noted above, the bilateral
modifications included modifications to the delivery schedule
and the payment scheme. By agreeing to these modifications,
Amertex implicitly agreed to a changed specification and added
costs it accrued thereby. As stated by the Court of Federal
Claims, “[i]Jn essence, Amertex promised to produce the
modified chempro suit, with all changes which had been made
to July 1988 and given the numerous other government-caused
difficulties, on a schedule contemplating half the pace as the
Sa
Appendix A
original contract.” Moreover, by advancing payment due dates
to delivery installment dates, Amertex bargained for and received
an infusion of working capital that was needed in light of
performance difficulties but that was not contemplated in the
original payment scheme. Since Amertex agreed to the changes,
it implicitly agreed that the changes were within the changes
clause of the contract. There can only be a cardinal change if
the government required Amertex to perform materially different
duties from those bargained for in the contract as modified.
Amertex does not so allege.
Amertex argues that Air-A-Plane Corp. v. United States,
408 F.2d 1030 (Ct. Cl. 1969), suggests a different result. In Air-
A-Plane, a plaintiff was allowed to pursue both an equitable
adjustment through the Armed Forces Board of Contract Appeals
(“ASBCA”) and a cardinal change claim through the Court of
Claims. In rejecting the government’s argument that the plaintiff
was estopped from pursuing its cardinal change claim by virtue
of its equitable adjustment claim, the court stated:
This is an instance of an imposed election of
remedies which seems to us unfair to
contractors. One who was confident that
Government modifications created a cardinal
change, for which he could go to court at
once, would still be well advised to pursue
his administrative remedy under the Changes
clause. If he failed to do so and the court
decided that the alterations were not cardinal
but within the clause, the contractor could
well be left without any remedy at all —
though it was clear that he was entitled to
some compensation on one basis or the other.
Id. at 1034.
6a
Appendix A
Amertex asserts that the instant situation is analogous —
that it should not be required to decline to enter into the
modification at the peril of losing its cardinal change claim.
We disagree with Amertex’s reasoning. Air-A-Plane turned
on the procedural limitations of the ASBCA at the time the case
was brought. At that time, the ASBCA did not have jurisdiction
to hear cardinal change claims. Jd. Here, it was possible for
Amertex to make both equitable adjustment and cardinal change
claims in the same forum (as it did). Thus, there was no “imposed
election of remedies” as criticized in Air-A-Plane. Although
Amertex did need to decide whether to enter into the
modifications or seek cardinal change breach remedies, this was
a business choice, not mandated by jurisdictional statutes.
Il.
Since there was no cardinal change, Amertex is entitled only
to an equitable adjustment for delay damages caused by the
government. Amertex appeals the Court of Federal Claims’
finding that the government was solely responsible for only 36%
of the 952 days of delay in the contract. Delay must be
apportioned solely to one party for damages to be awarded.
Blinderman Constr. Co. v. United States, 695 F.2d 552, 559 (Fed.
Cir. 1982). Thus, Amertex cannot recover for any of the
government’s delay that is concurrent or intertwined with other
delays. Commerce Int'l Co. v. United States, 338 F.2d 81, 90
(Ct. Ci. 1964). The determination of delay causation is a question
of fact. J.D. Hedin Constr. Co. v. United States, 347 F.2d 235,
245 (Ct. Cl. 1965).
Amertex argues that the trial court misapplied Critical Path
Methodology (“CPM”) in calculating delay. CPM looks only to
7a
Appendix A
delay along the “critical path,” that is, those parts of a project
that, if delayed, delay the entire project, to determine allocation
of delay. Delay in non-critical path components of the project,
because it does not delay the completion of the entire project,
does not result in allocation of delay. CPM has typically been
used in construction contracts where the determination of those
parts of the project on the critical path is straightforward. See,
e.g., Haney v. United States, 676 F.2d 584, 595 (Ct. Cl. 1982);
G.M. Shupe, Inc. v. United States, 5 Cl. Ct. 662, 728 (1984);
Sterling Millwrights, Inc. v. United States, 26 Cl. Ct. 49, 75
(1992).
The trial court here recognized that CPM is most useful in
those contexts where the determination of the critical path is
straightforward, but, nonetheless, was “unpersuaded that CPM
is useless in the more complex manufacturing context.” Although
Amertex argues that the Court of Federal Claims incorrectly
applied CPM, it does not argue, nor can it, that the court was
even obligated to apply CPM, or any particular modification of
CPM, for use in this manufacturing context.
We have carefully reviewed the Court of Federal Claims’
detailed and thoughtful delay analysis. Although the analysis
that the court did is certainly not the only conceivable method
of analysis, and although there may be improvements that could
have been made to the analysis (for instance, analysis of the
causal effect of early government-caused delay on later Amertex-
caused delay), we cannot hold that the analysis is clearly
erroneous. Neither can we hold that the failure of the Court of
Federal Claims to separately label disruption costs (costs caused
by the government by creating more work for Amertex, not
merely delaying Amertex’s ability to perform) was clearly
erroneous.
8a
Appendix A
Ill.
Finally, Amertex challenges the Court of Federal Claims’
upholding of the default termination. The court held that the
government met its burden of proof that Amertex’s financial
condition at the time of the default termination made it
reasonably likely that the contractor would be unable to finish
performance in the remaining time. See Lisbon Contractors, Inc.
v. United States, 828 F.2d 759, 765 (Fed. Cir. 1987). The court
further held that Amertex did not have a valid defense of excuse
because the poor financial condition of the company was not
primarily caused by the acts or omissions of the government.
See TGC Contracting Corp. v. United States, 736 F.2d 1512,
1515 (Fed. Cir. 1984).
Amertex argues that the factual findings relied on by the
Court of Federal Claims are in error. We have carefully
considered Amertex’s arguments and discern no clear error in
the Court of Federal Claims’ analysis. Based on these underlying
facts, the court reached the correct legal conclusion that the
default termination was justified.
IV.
The Court of Federal Claims correctly held that the bilateral
modifications are binding and therefore there was no cardinal
change, and there was no clear error in the allocation of delay
or default termination factual analysis. The decision of the Court
of Federal Claims is therefore affirmed.
9a
APPENDIX B — DISSENTING OPINION BY CIRCUIT
JUDGE NEWMAN OF THE UNITED STATES COURT OF
APPEALS FOR THE FEDERAL CIRCUIT
DATED FEBRUARY 24, 1997
NOTE: Pursuant to Fed. Cir. R. 47.6, this
disposition is not citable as precedent. It is a
public record. The disposition will appear in
tables published periodically.
United States Court of Appeals for the Federal Circuit
96-5070
AMERTEX ENTERPRISES, LTD.,
Plaintiff-Appellant,
Vv.
THE UNITED STATES,
~, Defendant-Appellee.
NEWMAN, Circuit Judge, dissenting.
I respectfully dissent, for the Court of Federal Claims
applied incorrect law in holding that the contract modification
of the payment and delivery schedules, three and a half years
after commencement of the two-year contract, was a waiver by
Amertex of any claim that the government had cardinally
changed the contract. There was no waiver or release of such a
claim, at any time.
The Court of Federal Claims made many findings relevant
to the extent of the changes in the design specifications, and
10a
Appendix B
how these changes affected Amertex’s performance. The court
found as fact that the design was new and untested, that the
specifications were inadequate or incorrect, and that the contract
was not performable in accordance with its terms. The court
concluded that “The fixed price contract became, in part, a
research and development contract.” However, following this
exposition, the court found as follows:
The unreasonable rejection of the second
First Articles and the other unreasonable acts
by the government which undermined this
project hampered mass production and,
arguably, fundamentally changed the nature
of this contract.
Notwithstanding the evidence supporting
plaintiff’s plausible and potentially
convincing cardinal change assertion,
plaintiff’s position on this issue is fatally
undercut by the bilateral modifications made
to the delivery schedule in 1988.
Thus although the Court of Federal Claims found that the claim
of cardinal change was “plausible and potentially convincing,”
the court apparently inferred either release or waiver. That
conclusion is incorrect, for the modification to the delivery
schedule did not release or waive this claim, which related not
to delivery, but to all of the contract changes. So substantive
and financially significant a change in the contractor’s rights
can not be inferred from a contract modification that is silent
on the matter of release of claims. See Laka Tool & Stamping
Co. v. United States, 639 F.2d 738, 743 (Ct. Cl. 1980) (contractor
did not waive claim for equitable adjustment when contract
lla
Appendix B
modification did not contain an express waiver of the claim),
cert. denied, 454 U.S. 1086 (1981).
The modification simply extended the delivery dates of the
now delayed product, and provided for payment based on
deliveries. It neither expressly nor by implication withdrew from
the contractor the legal right to recover on an otherwise valid
claim that the contract had been cardinally changed.
The panel majority offers the theory that since Amertex did
not allege duress in accepting the contract modification, it can
not argue that it did not waive its claim. Duress, alleged or not,
is not at issue. The contractor was not required to walk away
from the contract instead of entering into the modified delivery
and payment terms, in order to preserve a claim for cardinal
change.
“Under established case law, a cardinal]
change is a breach. It occurs when the
government effects an alteration in the work
so drastic that it effectively requires the
contractor to perform duties materially
different from those bargained for. By
definition, then a cardinal change is so
profound that it is not redressable under the
contract, and renders the government in
breach.”
AT & T Communications, Inc. v. Wiltel, Inc., 1 F.3d 1201, 1205
(Fed. Cir. 1993) (quoting Allied Materials & Equip. Co. v. United
States, 569 F.2d 562, 563-64 (Ct. Cl. 1978)).
Cardinal change relates to changes in the entire contract,
12a
Appendix B
with all of its modifications. Atlantic Dry Dock Corp. v. United
States, 773 F. Supp. 335, 339-40 (M.D. Fla. 1991):
[D]etermining the merits of a cardinal change
claim requires an examination of the totality
of the circumstances surrounding the project
and the many modifications. . . . These facts
cannot be nown until the project is
completed or nearly completed.
Indeed, had Amertex wal ed away from the contract, such an
action could have speeded Amertex’s financial demise, for
progress payments were being retained. A business decision to
continue to perform does not waive a contractor’s recourse to
remedy on a theory of cardinal change. Cities Service Helex
ne. v. United States, 543 F.2d 1306, 1313 (Ct. Cl. 1976):
A material breach does not automatically and
ipso facto end a contract. It merely gives the
injured party the right to end the agreement;
the injured party can choose between
canceling the contract and continuing it.
See Allied Materials, 569 F.2d at 564 (“Undoubtedly, the
cautious contractor might often proceed under the revised
coniract because of doubt whether he could invo e the cardinal
change doctrine.”)
The Court of Federal Claims did not mae a final finding
on the issue of cardinal change, instead holding that any claim
on this ground was waived. The panel majority has ratified this
error by requiring duress while ignoring the absence of either
waiver or release. It is irrelevant whether there were hard
13a
Appendix B
economic decisions made by Amertex; the question of law is
whether there was a waiver or release of this claim, and there
plainly was not. The decision of the Court of Federal Claims,
since based on incorrect law, should be vacated, and the matter
returned to the trial court for final determination of the issue of
cardinal change.
l4a-
APPENDIX C — OPINION AND ORDER ON LIABILITY
AND DAMAGES OF THE UNITED STATES COURT OF
FEDERAL CLAIMS DATED DECEMBER 15, 1995
UNITED STATES COURT OF FEDERAL CLAIMS
December 15, 1995
Nos. 90-684 C, 91-1700 and 92-402 (consolidated)
AMERTEX ENTERPRISES, LTD.,
Plaintiff,
versus
UNITED STATES OF AMERICA,
Defendant.
Marc Lamer, Philadelphia, Pa., for plaintiff. Ruth E.
Ganister, Philadelphia, Pa., of counsel.
Sheryl L. Floyd, Washington, D.C., with whom was Frank
W. Hunger, Assistant Attorney General, for defendant. S. Lane
Tucker and Sandra Guydon, Washington, D.C., of counsel.
OPINION AND ORDER ON LIABILITY AND DAMAGES
TURNER, Judge.
This opinion addresses the merits of three consolidated
cases (filed pursuant to the Contract Disputes Act, 41 U.S.C.
§ 605(a)) involving a multi-million dollar supply contract. Final
post-trial arguments were conducted on June 21, 1994. This
decision resolves both liability and damages.
—————————aaaEEeEeEeEeEeEeEeEeEeEeEwee
15a
Appendix C
Plaintiff agreed to manufacture over 2.4 million chemical
protective (chempro) suits for defendant in exchange for
approximately $96 million. After more than four years of
intermittent delay, defendant terminated the contract for default,
contending that plaintiff's poor financial condition endangered
completion of the contract. The parties blame one another,
almost exclusively, for plaintiff’s slow progress and financial
problems.
Upon consideration of voluminous testimony and thousands
of exhibits presented during a trial spanning eight weeks over a
period of several months, and, further, upon consideration of
extensive briefing, it is concluded as follows: First, plaintiff
failed to prove that defendant breached the contract under the
theory of cardinal change. Second, plaintiff demonstrated that
it deserves an equitable adjustment for that portion of delay
and disruption attributable solely to defendant. Third, not-
withstanding those delay and disruption damages, defendant
proved that the termination for default was justified. Fourth,
defendant established its right to the balance of unliquidated
progress payments less the amount of plaintiff's equitable
adjustment,
I,
The parties’ versions of relevant events could hardly be more
diametric. Their antagonism compounds the exceptionally
tangled facts giving rise to this contract dispute. In such a
context, Justice Jackson’s observation seems apt: “It can never
be made simple, but we can try to avoid making it needlessly
complex.” Dobson v. Commissioner of Internal Revenue, 320
U.S. 489, 495 (1943) (describing tax law). With this goal in
mind, we chronicle the life of the contract in dispute.
16a
Appendix C
A. Solicitation & Award
On September 7, 1984, the United States government'
solicited sealed bids for the mass production of chempro suits.
DX-2001.? The manufacture of these chemical warfare protective
uniforms involved both the sewing of a nylon cotton (nyco) twill
outer garment treated with quarpel water-proofing and the
attaching of a lining sewn from a nylon tricotton (tricot) material
laminated with a special charcoal. The chempro design also
required the attachment of butyl-coated reinforcement patches
and special “atropine” pockets designed to allow the wearer to
gain access to antitoxin syringes kept near the body for warmth.
In all, the technical data package (TDP) detailing assembly of
the garments required more than 162 manufacturing operations
for each chempro suit, referenced twenty-one primary
specifications, and imposed stringent testing requirements on
both components and final products. DX-3078.
The solicitation requested bids for the manufacture of
millions of chempro suits in accordance with specification MIL-
S-43926D, called “specification D.” In internal memoranda, the
government described this procurement as “an accelerated
program designed to correct a critical deficiency in the standard
1. For clarity, the terms “defendant” or “government” will be used
in place of the acronyms for the several government agencies involved in
this contract. On cefendant’s side, the chempro suit procurement involved
cooperation among the Defense Personnel Support Center, United States
Army Natick Research & Development Laboratories, Defense Logistics
Agency, Defense Contract Audit Agency, and numerous subdivisions
within these agencies. The specific government actor will be mentioned
only when necessary.
2. Defendant's and plaintiff's trial exhibits are cited as “DX-" and
“PX-,” respectively. References to trial transcripts are designated as “Tr.”
17a
Appendix C
chemical protective overgarment.” DX-2155. Amertex
Enterprises, Ltd., (Amertex) submitted a unit price bid of $39.88
per chempro suit for the production of the uniforms within a
670 day period. Amertex’s bid was 1.3 %, or 52 cents, lower per
suit than the closest bid of a qualified, experienced competitor.
PX-284. Five firms bid within twenty-five percent of Amertex’s
bid. DX-2153.
Before accepting Amertex’s bid, however, the government
conducted two detailed pre-award surveys of the company. These
surveys concluded that Amertex was capable of successfully
performing the terms of the solicitation. In particular, the
government determined that Amertex possessed the experience,
production capacity, accounting system, and quality control
procedures necessary to fulfill the procurement requirements.
DX-2015. In fact, Amertex had participated in the production
of millions of chempro suits under a previous design of the suit,
specification B. PX-284. The company also had manufactured
hundreds of thousands of fragmentation vests, military shirts,
and duffle bags for the government on other contracts. PX-284.
The government also examined whether Amertex was
certified as a small business under the government’s 8(a)
program. 13 C.F.R. §§ 121 & 124 (1984). The government
elected to offer this enormous and expedited procurement as a
“total small business set-aside” for contractors employing no
more than 500 workers. DX-2001. Such a set-aside necessarily
required that the government provide the selected prime
contractor and its subcontractors with compatible patterns and
consistent interpretations for the production of the 2.4 million
chempro suits. Amertex fulfilled the small business requirement.
Upon completion of the pre-award surveys, the government
18a
Appendix C
selected Amertex as the lowest responsive and responsible
bidder. On February 25, 1985, the government awarded to
Amertex contract number DLA100-85-C-0402. DX-2002. In the
contract, the government accepted Amertex’s bid unit price and
Amertex agreed to produce 2,415,885 chempro suits for
$96,345,493.80. The contract set forth a rapid delivery schedule
and referenced numerous specifications, many of which were
modified after contract award.
B. Testing of the Specifications
From its inception, this procurement was plagued by poor
decisions, mistakes, and miscommunication that delayed and
disrupted Amertex’s performance of its obligations. Even prior
to contract award, government actions created an unstable
foundation for successful completion of the contract. For
instance, defendant ignored the recommendation of the designers
of the new suit that the garment be tested for mass production
through the use of an “expanded First Article.”? DX-2127. This
type of First Article is described in the “Memorandum of
Agreement for Clothing, Textiles, and Equipment Between
Defense Personnel Support Center and U.S. Army Natick
Research & Development Laboratories [Natick]” as follows:
In this procedure, a contractor makes a
quantity of items under production conditions
to determine the validity of the technical data.
The contractor is required to critically review
the TDP prior to and during first article
production and to make all required changes.
3. “First Articles” are preliminary samples, or prototypes, of the
garment.
19a
Appendix C
PX-1. In contrast, when a First Article is not “expanded,” the
contractor is required to make a nominal quantity to demonstrate
the ability to interpret the TDP so as to produce an acceptable
finished item. PX-1. Generally, an unexpanded First Article is
used either after the initial procurement of a new specification
or when revisions involve “simple” clothing items.
The design engineers urged that the revised patterns and
specifications for the chempro suit be verified under mass
production conditions through the manufacture of several
hundred suits in the full range of sizes. See PX-2; Tr. 7941-42
(Levell). The engineers recommended an expanded First Article
because the technical data package for specification D involved,
in their words, “major changes” from the preceding
specification. PX-2. These changes included the addition of buty!
protective pieces at the elbows and the knees; the use of the
chemical phoschek with the state-of-the-art additive
polyethylene oxide (polyox) in the mixture (slurry) for the
charcoal laminated lining (“Type III” charcoal laminate); the
addition of atropine syringe pockets on the coat; the addition of
other pockets on the sleeves; the addition of gussets at the leg
closures; the redesign of the chest pockets to incorporate side
entrance; the addition of hip pockets on the trousers; and the
change to bellows-type pockets with flaps on the trousers.
In light of these revisions, the engineering memorandum
indicates that there were concerns about sending specification
D into full-scale production without adequate testing via an
expanded First Article. Tr. 7940-41 and 7943-48 (Levell). When
an expanded First Article is not used, the government usually
requires the contractor to produce a “standard” First Article of
fifty suits of varying sizes before full-scale production can begin.
Tr. 4702-04 (Hepner), Tr. 4498 (Pease), Tr. 3077-78 (Price).
Nevertheless, the government chose to use a First Article of five
20a
Appendix C
units, that is, five samples to be produced individually rather
than en masse. DX-2001. Had the government used an expanded
First Article, the contractor would have known that the new
specifications had not been tested for accuracy in mass
production. Indeed, under an expanded First Article, once a
contractor “certifies [that] the TDP is adequate for mass
production, future changes (other than product improvement)
are made at no cost to the government.” PX-1.
To justify its decision to override the engineering
recommendation for an expanded First Article, the government
relied in part on the testimony of Lisa Hepner, a quality specialist
for the government. Although the use of an expanded First Article
is normal after the issuance of such a revised specification (Tr.
4199), Hepner testified that no such testing was necessary
because, in her opinion, the changes from the previous
specification were minor. Tr. 4676.
The government’s heavy reliance on Hepner’s opinion in
this instance was misplaced. At the time of the decision, Hepner
had held her position for less than a year, had only one month
of government training courses, and had no professional
experience in the manufacturing or sewing industries. DX-3333.
The changes to the specification, on their face, cannot reasonably
be dismissed as “minor.” The engineers contemporaneously
assessed that specification D embodied “major changes.” Some
of these major changes were needed, urgently, to correct a
“critical deficiency” in the previous specification for the
chempro suits, which were called “overgarments” at that time.‘
4. Indeed, it appears that defendant “rushed” specification D into
production because an expanded First Article would have lengthened this
expedited procurement for the new chempro suits designed to correct a
> potentially lethal defect in the old garments. See DX-2132; DX-2155.
PE TE ee
21a
Appendix C
We are similarly unpersuaded by defendant’s other main
explanation for its decision to override the engineering
recommendation for an expanded First Article. At trial, the
government insisted that no expanded First Article was warranted
because the adequacy of specification D had already been tested
prior to the solicitation. To support this contention, the
government notes that Winfield Manufacturing Company
(Winfield), one of Amertex’s competitors, produced 200 of the
chempro overgarments in July 1983. The government evaluated
fifty of the suits and identified 158 defects. DX-2138. Even
though the government recognized that the Winfield suits had
“an exceptional amount of deficiencies,” it observed that “the
lot should be accepted since none will affect the serviceability,
or involved any of the unique design changes for which the end
item was produced, or will be evaluated for, in field testing.”
DX-2138.
Indeed, as Don Wadja (project director at Natick for
chempro suits prior to 1985) testified, the primary purpose of
the Winfield samples was to subject the suits to field testing,
i.e., Chemical agent and human factors (wear) testing, not to
verify that the design was sufficiently accurate for the mass
production of millions of the garments. Tr. 4151-53, 4162-64
(Wadja). Moreover, unlike Amertex, Winfield was not charged
with manufacturing its own quarpel-treated nyco and charcoal
laminated tricot lining. Winfield received the materials from the
government, along with one sample suit, a pattern, and a partial
table of operations. DX-2135; Tr. 4178-79 (Wadja). Additionally,
a Winfield representative, Weinsten, acknowledged at trial that
the samples were not manufactured under mass production
conditions. Tr. 7480 (Weinsten). The following exchange during
plaintiff's direct examination of Weinsten illustrates this point:
22a
Appendix C
Q: And in the course of that undertaking,
was there any effort to determine the mass
produced ability [mass produce-ability] of
the specification?
A: Not by us. It wasn’t part of the contract.
Tr. 7480 (Weinsten). We are convinced that the revised
specifications were not adequately tested for mass production.
Furthermore, the engineers recommended the use of the
expanded First Article in the memorandum dated May 31, 1984,
in spite of the Winfield suits of 1983. PX-2. The government
disregarded this recommendation, as rationalized in Hepner’s
testimony. In addition to not testing the revised specification
for “mass produce-ability,” the government elected to solicit the
manufacturing of millions of chempro suits even though it was
aware of several specific potential deficiencies with specification
D. These potential deficiencies included problems with suits
exceeding the weight requirements of the specifications and lack
of quality control provisions for the state-of-the-art charcoal
lining, among others. PX-3. Nonetheless, the government chose
to proceed with this accelerated 2.4 million unit procurement
by requiring the contractor to submit only five sample units
before advancing to full-scale production. This choice was but
one of the factors that contributed to the production disaster
that this contract became.
C. No Waiver Policy Change
Immediately following contract award, Amertex’s ability
to perform the expedited procurement successfully was
diminished by a change in the manner in which deviations were
ha i eS ea
23a
Appendix C
handled. On February 28, 1985, three days after the contract
was signed, defendant circulated a change in practice dubbed
the “No Waiver” policy, which required strict adherence to all
specifications, no matter how minor. DX-2161; DX-2349. This
policy interpreted a new regulation that became effective three
months after contract award. 48 C.F.R. § 46.407 (1985). Prior
to that time, the government traditionally allowed personnel
closely involved in a clothing procurement to give waivers for
deviations that did not affect serviceability of the item. See, e.g.,
PX-3; PX-307 (showing that the previous contractor using Type
III charcoal lining had routinely exceeded the weight
requirements and was granted waivers). In the case of the
chempro suit, those parts of the specification that had not been
revised had also not been strictly enforced in previous
procurements except when a nonconformance diverged
significantly from the specifications or adversely affected
serviceability.* One of the many examples of the past approach
toward chempro suit evaluation was the government’s acceptance
of the Winfield suits of 1983 even though 158 defects were
identified. DX-2138. According to the new interpretation, which
was not in place at the time of bid or award, deviations would
no longer be tolerated.
In an internal memorandum, the new regulation was
interpreted by the Defense Logistics Agency as follows:
[W]aivers are the exception, not the rule, and
5. See Tr. 73-74 (L. Jacobson) (stating that waivers were not an
issue because tolerances were implied when the company worked on a
previous version of the suit); Tr. 2054, 2204-06 (Ludwig) (noting that
inspectors on previous versions implied tolerances for mass production);
PX-284. See, e.g. Appeal of Vi-Mil, Inc., 82-2 BCA 15,840, 78,527,
ASBCA No. 25,111 (A.S.B.C.A., 1982). (noting that “although the
tolerances do not appear in the specifications it is undisputed . .. that
they have been allowed for many years ... .”). Cf. DX-2175.
24a
Appendix C
if the specification is wrong, take action to
change it, do not waive it .... In addition,
the [regulation] places approval of waivers
at the Center Command level as assurance
to the contract administration community that
when a waiver is approved it has been
reviewed at the highest level.
DX-2161. The purpose of the change was to improve the quality
of goods as well as to make contractual performance more
efficient by identifying and correcting inadequacies in
specifications rather than simply waiving the requirements. Cf.
DX-2166.
In the context of the Amertex chempro contract, however,
the policy’s effect was exactly the opposite. Signed prior to the
policy change, the contract between Amertex and the government
contemplated the rapid manufacture of millions of complex
garments produced through the coordination of several small
businesses. The decision to produce items in an accelerated
contract of this size involved financial assumptions related to
economies of scale, that is, cost efficiencies to be achieved under
expedited mass production conditions. See, e.g., Tr. 2994-2996
(Caldwell). In the Amertex contract, the interpretation of the
regulation as a No Waiver policy caused costly shutdowns and
slowed production for minor deviations while the contractor
awaited high level approval of waivers and clarifications. The
Situation was further aggravated because the revised
specification had not been tested for adequacy in mass
production. Thus, although the policy interpretation appeared
benevolent on its face, it was detrimental in practice because
the government repeatedly failed to give prompt clarification or
waivers for ambiguous or erroneous specifications.
25a
Appendix C
The new policy also applied to First Article approval
requirements. In a change from past practice, the government
decided to strictly evaluate all First Article submissions. In
particular, the Defense Logistics Agency made the following
interpretation:
The policy requires contracting officers to
use [the] specified accept/reject criteria as
the basis for first article approval decisions.
It also requires contracting officers to
disapprove first articles which are
manufactured with nonconforming parts and
materials. In addition . . . contracting officers
shall not grant conditional approval of first
articles without the specific approval of the
Center Command.
DX-2161. Those in charge of applying this interpretation in
evaluating the First Articles and mass production units seemed
to take the policy to an illogical extreme. As will be
demonstrated, in the Amertex contract, government personnel
applied the No Waiver interpretation as a “no tolerances” rule,
scrutinizing every sewing operation for deviations of as little as
1/32 of an inch, approximately the size of the period at the end
of this sentence. The policy interpretations for both the Amertex
First Articles and mass production units frequently resulted in
“overinspection” by government representatives.
Hence, the No Waiver Policy helped lay the foundation for
some of the intermittent delay and disruption that occurred on
this contract. The implementation of the new policy fostered an
inspection mindset that was often unreasonable. Government
inspectors seemed to ignore the fact that the chempro uniforms
26a
Appendix C
were not solicited as individually tailored dress uniforms but
were procured as an expedited mass production of millions of
battle garments requiring the coordination of different plants
employing hundreds of textile workers who were handling
numerous specifications, some of which had never been tested
or strictly enforced before. The numerous government
modifications to those specifications after contract award only
compounded the problems inherent in this situation.
D. Delay Analysis
Government actions thus sowed the seeds of delay and
disruption before plaintiff sewed a single stitch of this chempro
contract. At trial, however, the parties offered dramatically
conflicting evidence regarding fault for delay during the 1,411
days between contract award on February 25, 1985 and default
termination on January 6, 1989.° The contract set forth a schedule
requiring delivery of nearly a quarter of a million chempro suits
within eleven months, by January 31, 1986, and then monthly
deliveries of approximately 201,335 suits for a total of 2,415,885
by December 29, 1986. The parties agreed to a contract
performance period of 672 days. By the time of the default
termination, 1,411 days after award, however, Amertex had not
completed performance.
It is impossible to quantify with exactitude the amount of
and the responsibility for the delay and disruption in this case.
The contractor encountered a variety of problems of differing
magnitudes and durations. Perhaps in this type of case more
than others, determining delay involves particularly intuitive
assessments of the conflicting evidence. Nevertheless, we are
6. In counting days, the court, like the parties, does not count the
date of award, February 25, 1985, as a performance day.
27a
Appendix C
convinced that both parties share responsibility for the delay
and disruption that occurred. Moreover, we are confident that
the evidence adduced at trial provides a sufficient basis for
apportioning responsibility for the delay.
1. Evaluation of the Experts
The parties do not agree on the number of delay days, let
alone responsibility for that delay during the 1,411 days between
award and termination. Plaintiff, the party bearing the burden
of proof on the delay and disruption issue, contends that 984
delay days occurred and that the government caused 956 of them.
Defendant counters that there were more than 1,118 delay days,
only 94 of which were the sole responsibility of the government.
The delay experts of both parties had substantial and
comparable experience in schedule and delay analysis. The
experts differed sharply, however, in the thrust of their
methodology and the results of their analyses. For example,
plaintiff’s delay expert, Jayant Pandya, Project Director at Hill
International, Inc., calculated and attributed delay using an
analytical technique known as “critical path methodology”
(CPM). CPM is a method for determining which delays in a
multi-task project are critical, or controlling, in terms of actually
delaying completion. Defendant’s delay expert, Michael
D’Onofrio, a Professional Engineer at MDC Systems, offered
an alternative calculation and attribution of delay which
purportedly attached equal significance to every delaying
element in a manufacturing case like this. Moreover, D’Onofrio
criticized plaintiff’s use of CPM, contending that the
manufacturing context makes it impossible to isolate the specific
aspect of mass production that was “critical” or significant in
terms of delay.
28a
Appendix C
We credit the testimony of both delay experts but find the
testimony of neither to be persuasive in all areas. In our analysis,
we draw upon the opinions expressed by the experts of both
parties but rely extensively upon neither the methodology nor
determinations of any of them. Rather, as we explain, our
conclusions concerning quantification of delay and
responsibility for the delay are based upon our independent
assessment of the data amassed at trial.
a. Calculating Amount of Delay
In calculating delay, both parties’ experts analyzed the
amount of delay within specific time periods in diagrams called
“time impact analyses” (TIA’s). In particular, defendant’s expert
estimated the amount of delay that had occurred by certain dates,
one of which was June 30, 1988. By that time, plaintiff had
delivered more than a half-million chempro suits and had another
million suits in the production line. The contract originally
planned for a performance period of 672 days, with 340 days to
deliver 201,355 chempro suits and 332 additional days to deliver
the remaining 2.2 million suits.
D’Onofrio testified that 1,118 delay days occurred during
the 1,221-day period ending June 30, 1988.’ Thus, defendant
asserts that plaintiff made only 103 days of “progress” (1,221 —
1,118) despite the amount of production that had occurred by
that point. Defendant’s expert also maintained that additional
delays occurred between June 30, 1988 and termination on
January 6, 1989, but did not offer a delay figure for this period.
We believe that defendant’s calculation overstates the amount
of delay.
7. Defendant's expert stopped “counting” delay days for the last
six months of the contract, even though he acknowledged production
delays up to default termination.
29a
Appendix C
Plaintiff’s expert offered a more persuasive basis for
calculating the total amount of delay by analyzing the level of
production in each of twelve categories of chempro suit
operations.® Based on this analysis, Pandya opined that Amertex
experienced 984 delay days before default termination.
Our review of the production records and schedules on
which Pandya relied leads us to conclude that plaintiff’s estimate
was off by a slight margin. In addition to scrutinizing the
testimony and thousands of exhibits, we have tested the validity
of both parties’ delay arguments against Amertex’s actual
production levels. Upon analysis of the conflicting evidence,
we find that there were 952 delay days during the 1,411 calendar
days between contract award and termination.
b. Helpfulness of Critical Path Methodology
Defendant and its delay analyst maintained that CPM is
inappropriate in a manufacturing context due to the complexity
of mass production, and because such projects involve elements
which have unpredictable production times or durations, such
as the use of First Articles or a dependence on material suppliers.
It is true that the archetypical use of CPM is in the analysis of
construction projects. For instance, under CPM, a delay in
obtaining carpet would not actually delay the project if, at that
8. Amertex made a production plan with manufacturing goals and
tracked production levels in the following twelve categories: cut butyl,
cut coats (nyco), cut pants (nyco), cut lining, sew coats A (“A” indicates
outershell), sew pants A, sew lining, sew coats B (“B” indicates joining
lining with outershell), sew pants B, interim pack, final packing and
testing, and delivery. Of course, the actual production of the chempro
suits involved Amertex’s planning for and monitoring of production levels
on materials manufacturing, testing, and shipping, as well as the efficiency
of hundreds of sewing operations.
30a
Appendix C
time, the floor had not been completed (the “critical” task being
the completion of the floor). See, e.g. Haney v. United States,
230 Ct.Cl. 148, 676 F.2d 584, 595 (1982).
While CPM may be most useful in a simplified construction
context, we are unpersuaded that CPM is useless in the more
complex manufacturing context. (Defendant’s concerns about
the complexity and uncertainty in mass production are also
applicable to the use of CPM in construction cases, a use
defendant finds acceptable.) Furthermore, we do not agree that
the uncertainty of timing in manufacturing cases is a proper
ground for rejecting plaintiff’s CPM testimony. While the
manufacturing process necessarily involves estimations about
the durations of key events, Amertex’s master schedule, in
conjunction with the contractual delivery schedule, provides a
reasonable basis for comparing progress with production goals
for the purpose of analyzing delay. The parties have provided
the evidence necessary to adjust for any inadequacies in the “‘as-
planned” schedule.
However, we do not suggest that the use of CPM in a
manufacturing context is trouble free. The enormity and
complexity of the chempro suit contract does make it
exceptionally difficult to determine which item or items were
critical at different times during production. Moreover, the non-
linear, multi-tasking reality of mass production makes attributing
causation for delay especially laborious, even though the
chempro suit involved a linear sequence of operations with
specific estimates of duration. Despite these problems, CPM is
useful, but not conclusive, in analyzing the delay in this case.
c. Attributing Responsibility for Delay
Not surprisingly, Pandya attributed the vast majority of the
3la
Appendix C
delay to the government. D’Onofrio’s mirror testimony attributed
almost all of the delay to plaintiff. Out of 1,118 delay days,
D’Onofrio attributed 94 days solely to the government, 88 days
concurrently to both parties, and the remainder solely to
Amertex.
As the chronology of this contract unfolds, it will become
apparent that much of the delay is best categorized as
“concurrent.” We next set forth the factual findings relating to
responsibility for the 952 delay days that occurred during the
four years of the chempro contract.
E. Evaluating Delay Chronologically
1. Year One
After contract award on February 25, 1985, Amertex began
the process of making purchase orders for the chempro suits.
Almost immediately thereafter, however, preparations were
delayed when the contracting officer (CO) advised Amertex that
the government was planning to issue formal modifications of
the specifications. Tr. 135 (L. Jacobson). The parties discussed
the proposed changes at a meeting on April 9, 1985. PX-7; DX-
2162. The basic changes included the addition of a hydrostatic
test to verify the proper formulation of the chemicals phoschek
and polyox in the Type III charcoal laminate;° the change from
elastic sleeve closures to hook and pile (velcro) fasteners; the
replacement of the snaps on the coat with velcro fasteners; a
9. As mentioned earlier, the government sent the procurement into
solicitation without quality control provisions for the new charcoal slurry.
The addition of the hydrostatic test was intended to address this deficiency.
In another change from past practice, the government decided that it would
no longer accept contractor certification that the specification recipe for
the charcoal lining had been followed.
32a
Appendix C
change in the type of slide fasteners (zippers) from brass to
continuous element (plastic), and an increase in the length of
the garment. The specification was also to be changed from
specification D to specification E. DX-2162.
On May 24, 1985, three months after contract award,
Amertex received the official version of these changes in
unilateral modification PO00001, (P1). PX-12. Modification P1
provided that delays and costs would be finalized by the
administrative contracting officer.'® It would take the ACO three
months to make a contractual extension for P1 and three years
to finalize the increased costs related to this modification.
The parties had another post-award meeting on June 24-
25, 1985 to discuss additional specification issues. At these
meetings, the parties discussed problems with the state-of-the-
ert charcoal laminate passing the testing requirements and,
specifically, whether some of the tests had negative effects on
the others. Tr. 2821; 2880-81; 3433-34. These testing
requirements included the new hydrostatic resistance test, a
carbon tetrachloride test, weight test for the cloth, and a “ball-
burst,” or fabric strength, test. DX-2190; PX-13; PX-14; PX-
15; and PX-1007. The latter three standards were part of the
solicitation. The parties discussed other issues including the
“traceability” of treated materials for verification requirements
and the transportation of items between the prime contractor’s
facilities in Puerto Rico and subcontractor plants in Puerto Rico
and the continental United States.
10. In the Amertex contract, two different types of modifications
were issued: the “P” series, those modifications to the contract signed by
the procurement contracting officer (PCO), and the “A” series,
amendments to the contract signed by the administrative contracting
officer (ACO).
eer nats ee PEPER eR PRO Nya ME ee Te
7
33a
Appendix C
Three weeks later, on July 18, 1985, the parties executed a
bilateral agreement, P2, which made two additional changes to
the contract. This modification changed the specifications by
correcting the size of the velcro fasteners for the atropine pockets
and imposed a new component test requiring infrared reflection
limits for the nyco outer shell cloth. PX-16. This modification
also required Amertex to submit to the PCO within 30 days a
proposed delivery extension for the P2 changes. P2 also provided
that the ACO would finalize any price adjustment resulting from
the changes therein.
On July 31, 1985, the parties executed another bilateral
agreement, Al, allowing Amertex to apply for permission to
purchase “Long Lead Time Items and to commence Essential
Production work prior to First Article Approval.” DX-2002. This
amendment to the contract explicitly provided that the agreement
changed neither price nor delivery. DX-2002. Al allowed
Amertex to begin receiving progress payments to cover the costly
expense of obtaining large quantities of base materials necessary
for production build-up.'' According to the terms of the
amendment, however, any non-essential preparatory work was
still at the contractor’s risk.
a. The “90-Day” Delay
On August 19, 1985, the PCO determined that Amertex was
entitled to a schedule extension totalling 90 days as a result of
11. These materials included carbon, butyl, tricot, polyurethane
foam, and nyco. DX-2173. The estimated cost of the first batch of
materials was $6.9 million. Defendant authorized progress payments up
to $6,994,501, subject to a 95% reimbursement limitation under Defense
Acquisition Regulation 7-104.35. DX-2201. By the end of 1985, Amertex
would receive payments totalling $5,244,018, which covered less than
one-third of the incurred costs for materials only. DX-2273.
34a
Appendix C
modifications P1 and P2. PX-20. That 90-day period was
calculated by comparing the contract award date, February 25,
1985, with the date that Amertex received P1, which was May
26, 1985. PX-15. The government did not transmit to Amertex
the new patterns that corresponded with the formal changes in
Pi until June 19, 1985."* Defendant issued P2 a month after
that.
At trial, Amertex disputed the validity of the 90-day period
as an accurate and reasonable calculation of the amount of delay
caused by P1 and P2. For instance, Amertex contends that its
performance of the contract was delayed because crucial
preparations were slowed pending receipt of both the formal
modifications and patterns. Plaintiff also claims that the 90-day
figure was a premature calculation because it was not clear how
much additional time would be necessary to produce components
conforming to the two new testing requirements of P1 and P2.
Moreover, plaintiff contends that, at the time, it was not clear
what the net effect of the new fasteners would be in terms of
production time and cost.
The government proposed a bilateral modification, P-3,
incorporating the 90-day assessment for P] and P2 and a
provision waiving all delay claims for Pl and P2. Amertex
refused to waive its claim for delay damages as a result of P1
and P2 and, accordingly, did not sign the modification allowing
only a 90-day extension to the contract.
12. PX-20. Plaintiff also suggests government delay for the late
transmission of the patterns and refers to DPSC Form 4234, APR 87, at
21, which describes Defense Acquisition Regulation § 52.245-1008. PX-
221. However, as Amertex presented no evidence that the government's
failure to send the new patterns actually delayed plaintiff, we do not find
any delay specifically for the late transmission of the patterns.
35a
Appendix C
Unilateral modification P3 poses another complication,
however, which exemplifies the miscommunication and
uncertainty that permeated the contract performance. Both
parties refer to P3 as the “90-day extension.” However, P3
modified the First Article and mass production delivery schedule
from a schedule set forth in a modification that was never issued
by the government. P3 explicitly changed the First Article
submission deadline from August 24, 1985 to November 22,
1985, a period of 90 days. However, P3 actually extended the
date for the completion of the contract by only 89 days (from
December 29, 1986 to March 28, 1987). Nonetheless, D’Onofrio
opined that the government was solely responsible for
compensable, nonconcurrent delay for the “90 days” embodied
in P3. Therefore, we find the government solely responsible
for at least 90 days of delay for modifications P1 and P2. Whether
Amertex actually proved in excess of these 90 days of
compensable delay and disruption for P1 and P2 changes is
addressed hereafter.
b. The First Article Submissions
The next significant aspect of Year One in terms of delay
relates to the contract’s requirement that Amertex submit five
First Articles. The contract incorporated the solicitation’s First
Article provision. That clause stated, in part, that “[bJefore First
13. In defendant's 1989 decision on Amertex’s delay claim, the
contracting officer did not count the 90-day delay in P3 against the
government. DX-3252. Defendant suggested, instead, that Amertex
delayed the project by not having all of the slurry equipment until late
July. Amertex offered convincing evidence that this item was not critical
and that the slurry could be mixed by hand for the five sample units.
Defendant also noted that one of three nyco suppliers stopped production,
but Amertex established both that it had sufficient nyco on hand and that
this item was not on the critical path prior to First Article approval.
36a
Appendix C
Article approval, the acquisition of materials or components for,
or the commencement of production of, the balance of the
contract quantity are at the sole risk of the contractor.” DX-2001.
By reference to the solicitation, the contract set forth a
production scheme which allowed the contractor 180 days to
prepare the five-unit First Article, then thirty days for the
government to review those samples, followed by 130 days for
the contractor to build-up production rapidly in order to make
the first delivery of 201,335 suits. Accordingly, First Article
preparation was on the “critical” path of production during this
period of the contract; both parties acknowledged that First
Article preparation was a prerequisite to production. Thus, any
delay in First Article approval delayed the performance of the
contract as a whole.
The contract signed February 25, 1985 incorporated by
reference the First Article provisions in paragraph IIS of the
solicitation. In so doing, the contract created another ambiguity
that complicates the determination of delay during the first year
of the contract. The contract referred to the solicitation’s First
Article provisions which required the delivery of the five samples
within 180 days of the contract award. In direct contravention
of that provision, the contract also explicitly states that the First
Articles were due on June 4, 1985, or within 98 days. The record
is unclear about which due date was in effect and each of the
parties makes internally conflicting statements. At one point,
plaintiff had even developed a master schedule conforming to
this earlier date. However, in Post-Trial Briefs, defendant and
plaintiff both refer to the initial due date of the First Articles as
August 24 or August 25, 1985, respectively, which is
approximately 180 days from award. See I Def.’s Post-Trial Br.
1 (1993); Pl.’s Post-Trial Br. 16 (1993). We deem August 24,
37a
Appendix C
1985 to be the operative first deadline for First Article
submission.
As noted, modification P3 changed that deadline for First
Article presentation. On August 19, 1985, because of the changes
in modifications P! and P2, the government decided to extend
the First Article deadline by approximately 90 days, from August
24 until November 22, 1985. PX-20. Thus, prior to the August
24 deadline for the First Articles, the CO issued a determination
that Amertex was entitled to 90 days of “excusable” delay due
to “numerous specification and pattern changes.” PX-20. That
determination was approved by the government internally on
August 28. At about this time, a disagreement arose about the
waiver language in modification P3, which set forth the 90-day
extension. In response, the government unilaterally issued P3
which changed the First Article deadline to November 22.
Regardless of the parties’ other disagreements about the
modification spawned by the August 19 determination, P3 is a
binding modification of the contract’s delivery schedule. P3
explicitly imposed a new First Article delivery deadline of
November 22. Even though at trial the parties made contradictory
Statements about the new First Article deadline, we find that
both parties contemporaneously considered the new deadline to
be November 22, 1985. This has significant ramifications for
the calculation of delay based on what actually transpired during
the First Article submissions.
1) The First Set of Samples
Amertex submitted five First Articles on about September
10, 1985, two months ahead of the November 22 deadline set
by modification P3. DX-2216. Those First Articles were rejected
38a
Appendix C
by the government on September 18, 1985.'* Had the initial First
Articles been approved, Amertex would have been authorized
to proceed with production ahead of schedule. Nevertheless,
because September 10 was well in advance of the contractual
deadline, the rejection of those First Articles cannot be said to
have truly “delayed” or extended the project for purposes of
compensable delay. Therefore, any impropriety in that rejection
is immaterial to the determination of the extent to which the
contract was delayed beyond the 672-day performance period
originally agreed.
In response to the rejection of the September First Articles,
Amertex opted to submit new First Articles by the binding
deadline rather than to appeal the rejection of the first
submission. Tr. 163. While Amertex was preparing for the second
submission, the government unilaterally issued modification P4
which made several new changes.'° P4 changed the applicable
specification from “E” to “F (GL).” Additionally, P4 authorized
the limited use of brass zippers, altered new specifications that
had been inserted by modifications Pl and P2, and corrected
some “discrepancies found between the patterns and
14. The government attempts to defend its rejection of the
September First Articles, in part, by citing plaintiff's November 29, 1985
letter accompanying the second First Articles. DX-2254. In that letter,
Amertex stated: “We acknowledge the comments of your letter dated 7
October 1985 in which you pointed out the defects encountered in the
first five Chemical Protective Suits submitted for First Article evaluation.”
DX-2254.
15. P4 also stated that any price or delivery extension would be
finalized by the ACO. The changes in P4 were definitized almost a year
and a half later in a bilateral amendment to the contract, A3, dated March
9, 1987. DX-2002. A3 fixed the cost of the changes in P4 at $1,240 and
contained a release of liability for the P4 changes. DX-2002.
39a
Appendix C
specifications” relating to the atropine pocket construction and
to the trousers. DX-2002. Then, on November 4, 1985, the parties
agreed to modification P5, approving certain subcontractors and
designating locations for government inspection of chempro
components. Bilateral modification P5 provided that no delay
in deliveries would result from the changes therein. With the
modified contract specifications and patterns, Amertex continued
working toward the November deadline for the First Articles.
2) The Second Set of Samples
Amertex submitted the second set of First Articles on
November 29, 1986, seven days late. PX-26. Amertex avers that
it was tardy because it was awaiting clarification of the
specifications for the zippers on the legs of the trousers. DX-
2254. However, it appears that plaintiff received clarification
by telephone around November 12. Therefore, Amertex’s
evidence is insufficient to support its contention that the
government is responsible for Amertex’s submission of the
November First Articles seven days late. Furthermore, the
contract forbade Amertex to begin full-scale production until
the First Articles were approved; consequently, these seven days
delayed performance of the contract and are chargeable to
Amertex.
In the letter transmitting the November First Articles,
Amertex acknowledged the presence of some deviations in the
new set of samples. DX-2254. Amertex described these
deviations as minor and correctable in production and,
alternatively, as due to inconsistencies between the specifications
and the patterns. Jd.
On December 18, 1985, the government, through quality
40a
Appendix C
assurance specialist Hepner, indicated its concern about some
discrepancies between the specifications and the First Articles.
In response to these criticisms, Amertex reiterated, with greater
specificity, its position that the deviations were minor and
correctable in production. See, e.g., DX-2262. At the same time,
Amertex requested that the government not further delay
authorization to commence production. /d.
The government ignored this request and officially rejected
the second submission on December 30, 1985. DX-2268. This
was one day later than allowed by the solicitation, which
provided that the government had “30 days .. . [to] notify the
Contractor, in writing, of the conditional approval, approval, or
disapproval of the first article.” DX-2001. D’Onofrio
acknowledged defendant’s sole responsibility for this one day
of delay for tardy evaluation and we so find.
The key issue for attributing the remaining delay in Year
One is the propriety of the government’s rejection of the
November First Articles. The parties disagree about
responsibility for the delay associated with that rejection. In
the December 30 letter rejecting those samples, the government
identified 109 defects. (Some of the deviations were found on
every suit and thus were counted five times.) On a superficial
level, such a significant number of defects would suggest that
the government acted reasonably and should bear no
responsibility for the delay related to the rejection. On closer
examination, however, we find that the government improperly
rejected the November samples'® and thus delayed the
performance of the contract.
16. All of these samples were destroyed by the government during
First Article evaluation. DX-2268.
aoe Ci ac aes ae at ae ates anal
4la
Appendix C
a) Bases for Second Sample Rejection
The production of a single chempro suit in the Amertex
contract involved nearly 200 manufacturing operations. Some
of these operations were crucial to the effectiveness of the
uniforms in the event of chemical exposure. Other operations
were not so closely related to the efficacy of the suit, such as
the operation prescribing the stitch for finishing the raw edge
of material for a pocket. Indeed, the table of defects for
specification F classified over 200 potential deviations as
“minor,” “major,” or “critical.” PX-235. In its rejection of the
November First Articles, the government scored 109
imperfections, 103 of which were classified as minor deviations.
In the rejection of the November First Articles, the
government scored as defects numerous unreasonably picayune
items. These defects included 32 instances in which a stitch
margin, such as the placement of a belt loop on the trousers,
was purportedly out of alignment by as little as 1/32 of an inch.
Defendant also scored 13 defects for the presence of stubs, small
knots of thread on the face of fabric which are inherent to the
weaving process. Regarding the alleged stub deviations, plaintiff
presented persuasive evidence that the government’s
specifications were defective in that no slubs whatsoever were
tolerated in the end product but slubs were acceptable in the
component fabric.
As to the other minor deficiencies, plaintiff provided
compelling evidence that these deviations were most probably
the result of either incorrect interpretations by the examiners or
inconsistent specifications. Even government witnesses at trial
conceded that the minor defects were mentioned only for
advisory purposes. Tr. 4708 (Hepner) and Tr. 5875 (Marshall).
42a
Appendix C
Such minor imperfections should not have been allowed to keep
plaintiff's plants idle, delaying the start of mass production.
The remaining scored defects cast further doubt on the
propriety of the government’s rejection of the November First
Articles. Specifically, Hepner testified that she identified 5
“major” defects relating to some, but not all, of the “bartacks,”
a particular kind of stitching.’ Hepner claimed that after ripping
apart the bartacks, she counted only 14 stitches instead of the
28 required by the specifications.
Plaintiff offered strong evidence that the number of stitches
could not be counted accurately after a bartack is made because
the perforations are extremely close together.'* The evidence
also supported plaintiff’s contention that Amertex made all
bartacks using an unvarying setting of 28 stitches via cam
operated sewing machines. Tr. 2034-36 (Ludwig).
Defendant also contends that the rejection of the November
samples was justified because the First Articles contained one
instance in which a velcro sleeve tab was out of alignment by a
quarter of an inch. At the time, the defect table classified a
“sleeve tab set crookedly or poorly shaped” as minor, but a
“sleeve tab and pile tape out of alignment or not able to be
fastened properly” as critical. PX-235. Hepner scored one minor
17. Hepner similarly scored 20 “minor” defects for bartacks in
which she counted only 14 stitches.
18. Moreover, a person could mistakenly conciude that there were
half as many stitches as there really were; that is, those experienced in
textile manufacture count stitches by the number of perforations made
by a needle. A novice might conclude that a piece of thread between two
perforations was one stitch, whereas those in the industry would count
two stitches.
43a
Appendix C
and one critical defect for two deviations involving the sleeve
tabs: the former for a “crooked” sleeve tab and the latter for a
“1/4 inch” deviation.
The table of defects, however, neither specified the
distinction between “crooked” and “out of alignment,” nor
prescribed any measure for tolerances necessary for mass
production of the suits. There is also no evidence that the velcro
tab in the First Article did not fasten; instead, in the detailed
rejection letter, only a quarter inch variation in the tab was
identified. Moreover, the deficient ambiguity in the table of
defects was later corrected, clarifying that only if the tabs were
So misaligned that they could not be fastened could such
deviations be called “critical.”'® In sum, we find that had
defendant acted properly in its evaluation of the First Articles,
the quarter inch misalignment of the velcro tab would have been
considered both minor and easily correctable.
Finally, the evidence relating to the third First Article, which
was submitted on January 22, 1988, also bears on the
persuasiveness of the government's witnesses relating to the
November First Articles.” The government concluded that there
were zero defects in the third set of samples, that is, that they
were perfect. PX-43 (stating “[n]o departures were found:
production is authorized”). At trial, however, plaintiff used the
19. PX-127. Furthermore, the velcro sleeve specification, which had
been added by P1, had not been previously verified as accurate for mass
production. In fact, the velcro tab operation was corrected and adjusted
several times during the life of the contract.
20. It is also noteworthy that in a later chronology of the garment,
the government noted that it made specification changes on December
26, 1986 “resulting from Ist article to clarify Table of Defects such that
it coincides with Table of Operations requirements.” DX-59.
44a
Appendix C
one suit preserved from the January submission to illustrate the
disparities in the government’s position. The suit was shown to
have some obvious but easily correctable defects that would have
caused rejection had the inspectors applied the same “no
tolerances” approach as was used in the earlier submissions.
Moreover, the government’s position was weakened by
Hepner’s insistence that in January she ignored at least five
defects in the third First Article submission because Amertex’s
president promised that the operation would be performed
properly in production. Those deviations involved the placement
of a snap next to a seam in contravention of the specification’s
faulty requirement that the snap be placed through the seam.”!
Plaintiff’s president, Leo Jacobson, convincingly testified that
he never made such a statement because following the
specification to the letter would have destroyed the seam of the
trousers, critically damaging the functionality of the suit.”
Furthermore, even with the deviations in the third First Article,
defendant’s own expert testified that he would have “bought”
the samples. Tr. 5789 (Marshall). Hepner maintained that any
defect was cause for rejection, even though that was not the
normal practice. Tr. 4707-08 (Hepner).
All of these reasons convince us that the government acted
21. Bud Marshall, one of defendants sewing experts, agreed that
the operation could not be performed according to the specification
because doing so would damage the fastener “almost 100% of the time”
and also cut the stitches that hold the back seam of the pants together. Tr.
5947-48.
22. Even though this specification requirement was plainly
defective, it took the government nearly fifteen months to transmit to
Amertex formal permission to move the location of the snap. PX-118.
45a
Appendix C
improperly in its outright rejection of the November First
Articles. We are persuaded that defendant should be held
accountable for the delay damages resulting from its application
of a “no tolerances,” or perfection, standard during the November
First Article inspection.
b) Assigning Legal Responsibility for the
Second Rejection
Aside from disputing plaintiff’s factual evidence, defendant
attempts to justify the rejection of the November samples with
essentially two legal arguments. First, defendant contends that
it is not responsible for unreasonably delaying the project
because plaintiff has not established by “well-nigh irrefragable
proof” that the government acted in “bad faith.” Second,
defendant claims that it acted reasonably because it could reject
due to the presence of any defect. These contentions merit
additional discussion.
Defendant seems to suggest that, even if the government
acted unreasonably in rejecting the samples and delaying
production, in the absence of incontrovertible bad faith, plaintiff
cannot prevail on the First Article issue. Proof of bad faith,
however, let alone “well-nigh irrefragable proof” of malice, has
never been the touchstone for proving entitlement to an equitable
adjustment for damages caused by delay and disruption. Instead,
to recover for delay, plaintiff must prove that defendant
unreasonably delayed the completion of the contract, the
defendant proximately caused the delay, and that plaintiff’s costs
were increased as a result. See, e.g., Mega Constr. Co. v. United
States, 29 Fed.Cl. 396 (1993). Reasonableness, not bad faith, is
the essence of delay analysis. Cf. J.D. Hedin Constr. Co. v.
United States, 171 Ct.Cl. 70, 347 F.2d 235 (1965).
46a
Appendix C
Furthermore, the cases cited by defendant are not delay and
disruption cases, but are cases involving allegations of bad faith
termination. See, e.g., Sanders v. U.S. Postal Service, 801 F.2d
1328, 1331 (Fed.Cir. 1986) (citing Kalvar Corp., Inc. v. United
States, 211 Ct.Cl. 192, 543 F.2d 12980 (1976), cert. denied,
434 U.S. 830 (1977)). The strength of Kalvar’s “well-nigh
irrefragable proof” language appears to have been restrained
by the Court of Appeals for the Federal Circuit's subsequent
conclusion that a contracting officer’s decision to terminate a
contract for default may be set aside for reasons short of bad
faith. Darwin Constr. Co., Inc. v. United States, 811 F.2d 593
(Fed.Cir. 1987). Even in a termination claim, the circuit court
stated: “There is nothing in these decisions to support the
Government’s contention that the aggrieved contractor must add
another layer of proof by demonstrating that the decision was
also made in bad faith.” Jd. at 598. Similarly, there is no support
for extending the bad faith burden to the settled law relating to
proof of fault and injury in the delay claim regime.
As to defendant's second assertion, that the government is
entitled to reject outright the First Articles based on the presence
of a single deviation, we are similarly unpersuaded. The contract
itself is internally conflicting. For example, the specifications
contain a clause that states that the samples “shall be examined
for the defects specified in 4.4.3.1 and 4.4.3.2. The presence of
any defect shall be cause for rejection of the First Article.” PX-
235. Yet, the contract also states that there are three options for
First Article submissions: accept, conditionally accept, or reject.
DX-2001. The contract further indicates that unconditional or
conditional approval does not relieve the contractor of the
obligation to comply with the specifications during production.
DX-2002. If rejection were mandated by the presence of any
defect, then the availability of conditional approval would be
devoid of meaning. One contractual provision, like a statutory
47a
Appendix C
provision, should not be read in a way that renders accompanying
provisions superfluous. See, e.g., Northwest Marine Iron Works
v. United States, 203 Ct.Cl. 629, 639, 493 F.2d 652, 657 (1974).
Moreover, regardless of the superficial clarity of the “any
defect” language, the court is not bound to follow the literal
language when doing so would lead to absurd results. Jd. Cf.
United States v. Wilson, 503 U.S. 329, 334 ( 1992); United States
v. Providence Journal Co., 485 U.S. 693, 708, 710 ( 1988)
(Stevens, J., dissenting); Best Power Technology Sales Corp. v.
Austin, 984 F.2d 1172, 1175-76 (Fed.Cir. 1993). In the case at
bar, the production of a single chempro suit involved numerous
operations and hundreds of potential deviations that were graded
by their severity. Accordingly, it would be unreasonable, if not
absurd, to interpret the contract as giving defendant unlimited
power to deny acceptance, or conditional acceptance, based on
the presence of a single imperfection, no matter how slight.
The appropriateness of this construction of the contract is
buttressed by the contract’s Default Clause, which gives the
government the right to terminate the contract for default based
on the rejection of a First Article. DX-2002. Although defendant
did not default terminate the contract at this early juncture, the
severe implications of rejection warrant our approach to
reviewing First Article evaluations. In termination cases, the
ability to terminate for any deviation in the items delivered has
been modified by the “substantial compliance” rule. See, e.g.,
Radiation Technology, Inc. v. United States, 177 Ct.Cl. 227, 232,
366 F.2d 1003, 1005 (1966); see also Appeal of U.S. Optics
Corp., 75-2 BCA 11,603, ASBCA No. 18,972 (A.S.B.C.A., Nov.
25, 1975). In general, this rule modifies the doctrine of strict
conformity, which, when “coupled with a summary termination
power, would place in the hands of a contracting officer an
unfettered right to reject... .” Radiation Technology, 366 F.2d
48a
Appendix C
at 1005. The substantial compliance rule strikes a balance
between the competing rights of both parties.
The Armed Services Board of Contract Appeals has had
frequent opportunity to examine this rule in the special context
of First Article rejections. Over the past three decades, the Board
has addressed dozens of First Article rejection cases and has
refined the substantial compliance rule into the “correctable”
(also known as the “easily correctable”) standard. The Board
has consistently held that:
[T]he Government may not demand strict
compliance with the specifications [with
respect to First Articles] as with supplies
tendered for final delivery. The purpose of a
First Article is to discover defects. Therefore,
if defects are discovered and are easily
correctable in production the Government
may not reject the [samples].
Appeals of Defense Technology Corp., 91-3 BCA 24,189,
ASBCA No. 39,551, ASBCA No. 40,308 (A.S.B.C.A., July 17,
1991) (citation omitted). Accordingly, “[dJeficiencies in a first
article that are correctable in production are not a valid basis
for an outright disapproval . . . .” Appeal of Advanced Precision
Industries, Inc., 89-2 BCA 21,597, ASBCA No. 34,676
(A.S.B.C.A., Jan. 9, 1989); see International Tel. & Tel. Corp.,
ITT Defense Communication Division v. United States, 206
Ct.Cl. 37, 509 F.2d 541 (1975). Indeed, in a case strikingly
similar to plaintiff’s, the Board applied this standard in favor of
another chempro suit manufacturer whose second set of First
Articles had been rejected. Appeal of Winfield Mfg. Co., 88-1
BCA 20,353, ASBCA No. 34,901 (A.S.B.C.A., Nov. 19, 1987).
49a
Appendix C
The Board’s well-reasoned approach to reviewing decisions to
reject First Articles is equally applicable to the controversy at
bar.
Additionally, rejecting the samples was especially
inappropriate in light of the government’s election to use a five
unit, as opposed to an expanded, First Article. The government's
Chief of Technical and Quality Assurance Division, Director of
Clothing and Textiles had stated: “The ultimate purpose of the
first article is to demonstrate that the contractor possesses the
technical expertise necessary to produce the specification item
and to ensure a product with requisite quality.” PX-287. On
cross-examination, Hepner, the quality assurance representative
who made the decision to reject the November First Articles,
concurred that this was in fact the purpose of a small-sample
First Article. Tr. 4701. The government inspectors apparently
ignored both this purpose and the well-settled “easily
correctable” standard in withholding approval of the November
First Articles.
Although the evidence at trial was conflicting, we are
convinced that all of the defects identified were easily
correctable and not significant. Therefore, we find that the
government acted unreasonably and improperly in rejecting the
second First Article submission. The improper rejection resulted
in a 53 day delay in the authorization of production and this
entire amount is charged to the government.
c. Other Significant Events at the End of Year One
During the First Article process, the government informed
Amertex that several changes to the specifications were in
process, including a correction for performing the sleeve tab
50a
Appendix C
operation. PX-35. The changes were not issued before the end
of the first year of the contract and did not arrive until well after
mass production was authorized by the government.”
Additionally, Amertex informed the government that the
specifications did not provide an adequate method for spot or
stain removal. PX-28. Several spots had been scored on the
September First Article submission and, accordingly, the
contractor was concerned about meeting the specification
requirement for cleanliness. Also, during handling, the charcoal
lining had an inherent tendency to generate charcoal! dust that
smudged the outer shell. In January 1986, defendant provided a
soap and water method for removing stains, but noted that great
care had to be taken with the garments because any soap residue
would destroy the water resistant finish. PX-33. Ultimately, this
stain removal method would prove to be inadequate for many
of the marks inherent to the mass production of such a garment,
including some which were caused by an interaction between
the required quarpel coated thread and the specified fabric
components.
In addition to these issues, on January 17, 1986, defendant
modified the specifications to increase the allowable weight of
the charcoal lining.** This modification, P6, implicitly
recognized the unavoidable increase in weight caused by the
modified specification requirements. In fact, the letter
recommending the weight increase stated: “These changes
23. These modifications were formally incorporated in the contract
in June 1986 by modification P7. DX-2002.
24. The maximum allowable weight per square yard of the lining
cloth was increased from 9.5 ounces to 10 ounces. The modification also
corrected two other inconsistencies in which the specifications
contradicted the patterns or were otherwise inadequate. PX-40.
Ni ear” ya a errr ee re aay eae ei otc a occ
Sla
Appendix C
[were] required to eliminate the unnecessary restrictiveness of
the existing requirements.” PX-29. P6, a unilateral modification,
also included a clause providing that no increased costs or delays
would be allowed for this change. Plaintiff did not sign that
modification nor was plaintiff asked to do so.
Moreover, as noted above, defendant rejected Amertex’s
second First Article submission on December 30, 1985. PX-32.
Amertex received provisional approval of its third set of First
Articles on January 28, 1986, but did not receive authorization
to proceed until February 24, because the government needed
to complete additional testing of the samples. During this period,
Amertex notified the government that its preparatory work had
been delayed as a result of numerous government actions during
the first year. PX-37. On January 28, 1986, Amertex estimated
that its build-up schedule had been delayed by 105 days more
than the 90 days allowed by modification P3. Therefore, plaintiff
requested a delivery extension for this amount of time, with final
delivery to be made by July 13, 1987. PX-37. Defendant did not
issue an official delivery extension until nearly fifteen months
after this request.
Additionally, while awaiting First Article approval, Amertex
began small-scale production build-up at its own risk. By the
time that authorization for mass production was received on
February 24, 1986, Amertex had cut approximately 59,358 units
25. At that time, Amertex advised the government that it
“understood” the changes made through modification P7. At the same
time, Amertex also advised the government that the company was in the
process of quantifying the economic impact of changes and noted the
delay to preparatory work caused by the modifications. Additionally, as
Amertex later stated, once mass production began, the discrepancies and
impossibilities started impacting the company’s ability to meet the plan.
DX-3233 at 4; see infra.
52a
Appendix C
of butyl,”° 72,118 units of nyco for both coats and trousers, and
had sewn 14,670 nyco coat outer shells and 15,670 nyco trouser
outer shells. Because of the deficiencies in the lining
specifications, Amertex had only cut 50 units of lining prior to
First Article approval. However, because First Article approval
was on the critical path of production during this period, any
delay in lining production caused by defective specifications
did not yet manifest in delay to the project as a whole.
d. Distribution of Delay in Year One
There were 154 delay days during the 364 day period
encompassing the first year of the contract. D’Onofrio
acknowledged government responsibility for 90 days of delay
related to the first two modifications of contract and four delay
days due to tardy evaluations of the First Articles. Of the
remaining 60 days, the court finds that plaintiff is solely
responsible for seven delay days for late submission of the
November First Articles. We further find that the government is
solely responsible for 53 delay days resulting from the
unreasonable rejection of the November First Articles.
Accordingly, for the first year of production, the government
was solely responsible for 147 days of delay, and Amertex was
solely responsible for seven days.”’ This delay and disruption
26. Units are used rather than yards of material for the purpose of
tracking production of the garments. To say that 59,358 units of butyl
were cut, for instance, indicates that Amertex had cut sufficient butyl for
the production of 59,358 chempro suits.
27. From this point onward, we divide delay into two categories:
first, that caused solely by the government, and second, that caused either
solely by Amertex or concurrently by both parties. Only delay caused
solely by defendant is compensable; thus, it is unnecessary to differentiate
with respect to delay not solely attributable to defendant.
53a
Appendix C
meant that Amertex and its subcontractors had almost half a
year of “down-time” before receiving authorization to begin full-
scale production.
2. Year Two
Once Amertex received authorization to proceed in late
February 1986, the chempro suit production was fraught with
mistakes and disruptions caused by both parties. Overinspection
and inadequacies in the specifications, however, were not the
only causes of production difficulties. The government also
experienced substantial delays in approving butyl because of
complications at its testing site, Aberdeen Proving Grounds
(Aberdeen). Amertex, too, experienced problems in its cutting
operations that adversely affected its sewing production.
Furthermore, at the beginning of the second year of the
contract, some financial issues arose which implicate both the
delay and termination claims. Ultimately, Amertex’s cash-flow
Status provoked the break-down of the parties’ contractual
relationship. The contractor’s financial difficulties began to
crystallize near the start of the second year. At that time, two
financial issues were outstanding: compensation for long-lead
time items (LLTI) and also for P1 and P2 changes.
First, in terms of LLTI payments, the manufacture of
chempro suits involved the coordination of four functional
categories of production: materials supply, materials cutting,
sewing, and packing. Amertex had obtained approval in
amendment A] to begin essential pre-production work, such as
materials purchase, prior to First Article approval. The
government also authorized advance progress payments to cover
this work and it set-aside about $7 million to do so.
54a
Appendix C
The LLTI charges were subject to the same reimbursement
rate as ordinary progress payments which were available after
First Article acceptance. The contract provided that Amertex
was entitled to progress payments up to 95% of incurred costs
on the contract price of $96,345,493.80. In addition to Amertex’s
own equity, plaintiff arranged for a $5 million line of credit with
Banco Popular de Puerto Rico (Banco Popular) to cover the
remaining 5%.
By the time Year Two began and First Article approval was
obtained, Amertex had incurred more than $16 million in
expenses for materials alone. DX-2273. This amount was
exclusive of fixed and variable costs related to preparing
facilities for production, employing workers, making the First
Article samples, and performing research and development
related to complying with the P1 and P2 modifications, as well
as Amertex’s expenses for manufacturing in advance of
authorization to proceed. By the first week of January, Amertex
had received about $5 million toward expenses for LLTIs.
Another $1.5 million payment request was being processed but
had not yet been paid.
On January 10, 1986, Amertex requested (with itemized
documentation) an additional long-lead time progress payment
for the $9.7 million dollar gap between sunk material costs
($16,741,701) and the amount initially authorized for early
purchase of essential materials ($6,994,501). DX-2273. The
government disregarded this request, stating in internal
commentary that this large gap in funding for materials costs
“won’t make any difference once [First Article] approval comes
through.” Jd. As described earlier, the First Article sample was
not approved until February 24, 1986, the one-year anniversary
of the contract. Two more months would pass (until April 28,
1986) before Amertex received progress payments that covered
Ln nner nc cc ener eee ne ee ee ee eee eee a
55a
Appendix C
the amount of its January request. As noted, that $16 million
covered only material purchases; Amertex was financing the
remainder of its mounting expenses apparently without progress
payment reimbursement up to that point.
Second, it is noteworthy that at the outset of Year Two,
defendant had not finalized the price adjustment that Amertex
was due for the changes in P1 and P2. Perhaps the most
significant aspect of these changes related to the imposition of
the hydrostatic test to verify the formulation of state-of-the-art
slurry for the polyurethane foam. Defendant was aware, through
its frequent consultations, of the significant time and money
expended by Amertex’s subcontractors in their Struggle to
manufacture a cured polyurethane foam that conformed to the
requirements of that test, especially in conjunction with the other
lining specifications such as the weight requirement and the ball-
burst and the CCL, tests.”
28. The modified specifications for the state-of-the-art charcoal
lining also hampered Amertex’s ability to secure approved lining for
introduction into the production line. Shortly before production
authorization, the government eliminated the “unnecessar[ily]” restrictive
weight requirement for the lining material. PX-29. However, lining
produced according to the specifications continued to fail other testing
requirements. Tr. 2880-86 (Sallavanti).
To pass the new hydrostatic test requirement, the lining had to be
cured at high heat. Tr. 3432-34; Tr. 2878-81. The government’s expert on
the lining cloth acknowledged that the specifications relating to the burst
requirement were flawed. Tr. 4250-51 (McKinney); DX-2351. After
months of problems with the lining specifications, the government
changed the ball-burst test requirements in recognition of this problem.
DX-2002. Issued July 23, 1986, unilateral modification P12 noted that
any costs and delay would be finalized by the ACO. No adjustment specific
to P12 was ever issued.
56a
Appendix C
Even though P1 had been issued nine months before First
Article approval, Amertex had not received even a provisional
adjustment by the time Year Two began. Five months prior to
First Article approval, Amertex submitted a cost estimate of
$11,210,210 for Pl and P2 changes. This estimate included
disbursed costs, such as research and development for the lining,
and also prospective costs, such as materials and labor related
to the substitution of the velcro fasteners. That estimate did not
purport to cover any delay compensation relating to the issuance
of Pi and P2. The government had not finished its review of the
proposal and audits of the prime contractor and subcontractors
by the time of First Article approval.
Shortly after the start of Year Two, Amertex revised its
estimate of P! and P2 costs to $15,662,531. Amertex did not
receive a provisional adjustment for costs related to P] and P2
until nearly two years after production was authorized.
(Eventually, in January 1988, the government allowed a
provisional increase in the contract price for those first year
modifications in an amount over $8 million, which was finalized
in September 1988 at $12.9 million.) Thus, Amertex began Year
Two without an agreement on compensation for the changes
issued in Year One and the government would not finally
definitize those changes until just months before the default
termination, which was based in part on Amertex’s financial
condition.
Although these financial disagreements do not entitle
Amertex to delay compensation, they do shed light on the context
in which production build-up began. Due to the lack of prompt
compensation for these expenses combined with the 154 delay
days in Year One, Amertex and its subcontractors began Year
Two under financial strain. This financial stress grew worse as
those 154 delay days stretched into nearly three years worth of
57a
Appendix C
delay and disruption during the life of the chempro contract.
We next determine how many of the 952 delay days (between
award and termination) occurred during the year following First
Article approval.
a. Delay Days in Year Two
The second year of contract performance covers the period
from February 25, 1986 through February 28, 1987. During this
period, 369 days elapsed, but Amertex made very few days of
progress toward completion of the contract. Based on the expert
testimony concerning this issue as well as the production records,
we find that there were 304 delay days during Year Two. Thus,
Amertex took a year to manufacture the quantity of chempro
suits that it had originally planned to make during about two
months of production time.
The parties presented sharply conflicting theories regarding
responsibility for the delay. The evidence indicates that both
Amertex and the government contributed to the delay and
disruption during the second year of the contract. Nonetheless,
Amertex provided strong evidence of the government’s delay
separate and apart from its own (even though plaintiff’s experts
underestimated the amount of delay caused by company
mistakes). Plaintiff proved defendant’s sole responsibility for a
portion of the delay in Year Two. The causes of delay in this
period may best be understood by examining the production
circumstances in each of the two halves of the year. In the
following sections, we describe the factual predicates to our
apportionment of the 304 delay days.
1) The First Six Months of Authorized Production
From February 25, 1986 through August 31, 1986, 188 days
58a
Appendix C
elapsed. During these six months, Amertex’s manufacturing
processes moved forward at a very slow pace. According to the
solicitation and contract plan, Amertex was to deliver 201,335
Suits to the government within about six months of First Article
approval. Amertex’s actual production levels during this six
month period fell far short of those expectations.
Indeed, according to the contract schedule unilaterally
imposed by modification P3, Amertex was required to deliver
more than one million suits by the end of August. P3, the 90-
day extension, did not include all of the excusable delay in Year
One nor, obviously, did it contemplate any schedule adjustment
for excusable delays encountered in the first half of Year Two.
The rapid delivery schedule imposed by modification P3 was
consistent, however, with the parties’ expectations that the
contract involved an expedited production of chempro suits. To
say the least, Amertex’s progress in Year Two was anything but
expedited.
We find that plaintiff experienced 155 delay days in the
first half of Year Two. That is, Amertex made only about 33
days worth of progress toward its production goals during
roughly half a year’s time.”
Attributing responsibility for delay in a case such as this is
not susceptible to surgical precision. Instead, assigning fault
for the delay causation here involves a subjective but reasoned
assessment of the totality of the evidence introduced at trial.
a) Actual Production Levels
Amertex’s production strategy planned for staggered
29. Specifically, we make the following delay day/progress day
findings: February 25 to March 31, 30 delay days/5S days of progress;
April, 28/2; May, 26/5; June, 25/5; July, 22/9; August 24/7.
59a
Appendix C
production such that a sufficient quantity of materials would be
cut in order to support the sewing production lines and likewise
a sufficient quantity of sewn material would be “built-up” to
Support the packing operations. In addition to securing an
adequate supply of materials, the strategy to produce 2.4 million
chempro suits involved the coordination of materials cutting,
sewing, and packing. Cutting encompassed four main Categories:
butyl cutting, nyco cutting (coats), nyco cutting (trousers), and
charcoal lining cutting. Sewing included five main categories:
sewing “part-A” (outer shell) coats, sewing part-A trousers,
sewing linings, sewing “part-B” (joining linings and outer shells)
coats, and sewing part-B trousers. Packing involved three
primary categories: interim packing of finished units in Puerto
Rico, final packing and testing in the continental United States,
and delivering the suits to the government.
In this way, the Amertex plan called for a build-up of about
three months in materials cutting before the target output of
200,000 cut parts per month in each of the four cutting categories
would be reached. Similarly, Amertex planned to build-up
sewing production to about 200,000 sewn parts per month in
each of the five sewing categories before the target output of
200,000 in each grouping per month would be reached.
Specifically, Amertex made a reasonable plan that would
have fulfilled the contractual schedule and consisted in essence
of the following synchronized schedule: First, for butyl and nyco
cutting to proceed at the same rate; then, once about 100,000
“kits” of butyl and nyco were prepared, for the use of such kits
in the outer shell sewing; at that same time, for lining cutting to
begin; then, once about 150,000 units of lining were cut, for
lining sewing to begin; then, once about 100,000 outer shells
were accumulated, for the joining of sewn linings and outer
60a
Appendix C
shells to begin; finally, for packing operations to begin once
about 100,000 suits were completed.
During the first half of Year Two, Amertex was not able to
fulfill this scheduling plan. Amertex did, however, try to alleviate
the effect of the problems in Year Two by commencing its sewing
operations in advance of the plan’s build-up schedule.
To illustrate our discussion of the causes of slow production
during this six month period, we recap the production outputs
at the start of Year Two. Amertex tracked and coordinated the
productive output and also recorded cumulative production levels
by month.” The following table shows the cumulative production
in units at the end of the months that demarcate the parameters
of this part of Year Two, February and August 1986:
Table 1: Cumulative Levels of Production
First Half of Year Two
Category 2/28/86 8/31/86
Cut Buty! (Sets) 59,358 265,602
Cut Nyco (Coats) 72,118 327,378
Cut Nyco (Pants) 72,118 327,378
Cut Lining (Sets) 50 328,562
| Sew Outer shells A (Coats) 14,670 121,863
Sew Outer shells A (ants) 15,670 —*115,328
| Sew Linings (Sets) 0 48,144
Sew Linings & Shells B (Coats) 0 408
Sew Linings & Shells B (Pants) 6 18,744
Interim Packing 0 0
Final Packing & Testing 0 0
Delivery 0 0
30. For consistency, cumulative production at the ends of months
is compared, even though Year Two began on February 25, 1986.
eee ee : OOO ee. eee
6la
Appendix C
As the table shows, butyl cutting lagged behind nyco cutting
for coats and trousers at the start of Year Two. By March,
Amertex cut 59,358 units of butyl, which was all but 4800 units
of the butyl that had been approved by the end of February
(64,158 units). PX-297. Also, due to problems with the lining
specifications, almost no lining material was available for cutting
or sewing prior to authorization to proceed. Amertex’s
subcontractors were able, however, to perform some part-A
work, that is, to sew the nyco and butyl cut parts into outer shells.
The lack of lining precluded any part-B work, which involved
the attachment of sewn linings to sewn outer shells.
From February through August, Amertex cut about 200,000
units of butyl. Due to delays in butyl testing at Aberdeen,
Amertex had almost no butyl available for cutting in April, none
in May, June, and most of July. Amertex did cut about 150,000
units in March and about another 50,000 in July. We examine
the butyl-caused delays in greater detail in the next section.
Because of the government’s delay in buty] approval,
Amertex’s monthly nyco cutting levels surpassed buty] cutting
in every month but March. This situation disrupted plaintiff's
production schedule, which planned for butyl and nyco cutting
to proceed at the same pace. Synchronicity in these items was
necessitated by the specification’s requirement that the outer
shell be constructed of nyco reinforced with butyl. During the
first half of Year Two, the rate of nyco cutting grew for about
taree months, slowed in June, progressed in July, and then slowed
again in August. Nonetheless, by August 31, 1986, Amertex had
made a cumulative cut of 327,378 units of nyco for coats and
the same quantity for trousers.
According to the plan, butyl and nyco were to produced in
parity in terms of units. (Each suit required about three yards of
62a
Appendix C
nyco for each half yard of butyl.) Moreover, regardless of the
contractor’s plan, the specifications required that the outer shell
consist of nyco with butyl reinforcements in several locations.
Similarly, due to the limited shelf life of the charcoal lining
material, it was not practical to expedite the linings for
integration into the chempro suits without an assured availability
of butyl. Lining manufacture and cutting had to be closely
monitored to calibrate lining sewing with part-A outer shell
sewing so that these operations would dovetail into part-B
procedures that joined the lining with the outer shell. Because
of the drought in butyl supply, lining cutting inevitably eclipsed
butyl cutting. Lining cutting grew steadily during the first six
months of production, with a slight drop in July. By the end of
August 1986, Amertex had 328,562 units of lining, a negligibly
greater quantity than cut outer shell units and more units than
cut butyl.
The sewing of the outer shell coats and pants by Amertex’s
subcontractors, Lajas and Apparel Art, proceeded at a very slow
pace during the first three months of Year Two, increased
somewhat during June and July, and dropped slightly during
August.*' Sewing part-A required parity in available nyco and
butyl cut parts. Additionally, the level of sewing operations
31. After the nearly half-year of government caused delay in Year
One, Amertex’s relations with its subcontractors were strained at the outset
of authorized production. Frustrated with the amount of delay and
disruption experienced on the contract, Lajas laid off workers in May.
Because Lajas was responsible for the part-A sewing of trousers, this
layoff caused a disparity between the level of part-A production of coats
versus pants.
32. PX-240. Butyl was required for six of the 15 primary part-A
categories of coat operations and for three of the 13 primary part-A
(Cont'd)
63a
Appendix C
had to be monitored in order to maintain a sufficient backlog of
materials so that the assembly line would not run out of supplies.
During times of material shortage, Amertex explained that the
sewing subcontractors had a rational preference to keep
production lines flowing at 2 slow pace rather than to speed
through all available cut work and be required to cease
production, losing specially trained workers to other apparel
companies.
By the end of August 1986 (i.e., during the first six months
of authorized production), Amertex had completed the sewing
of 121,863 part-A coat outer shells and 1 15,863 part-A trouser
outer shells. This cumulative quantity is approximately the
amount that the contractor originally planned to build-up during
the first five and a half weeks of production.
Amertex did not begin to sew linings until April 1986. For the
remaining months in the first half of Year Two, Amertex sewed on
average 11,500 lining sets per month. This lining sewing was ahead
of schedule in that originally the company had scheduled lining
sewing to begin once there was a backlog of about 150,000 lining
Cut pieces to support the assembly line. Despite this “early” start,
by the end of August 1986, Amertex had completed only slightly
more sewn lining sets than it had planned to produce in the first
two weeks of build-up of this item.
During the first half of Year Two, Amertex also began its
part-B sewing, attaching sewn linings to sewn outer shells, ahead
(Cont'd)
Categories of trouser operations. /d. Amertex's witnesses established that
part-A work could not proceed without sufficient quantities of butyl in
the sewing assembly line. In each coat, for example, butyl was needed
for the atropine pocket protective piece, the under sleeve elbow patch,
the sleeve pocket protective piece, the top sleeve elbow patch, and the
chest pocket protective pieces. Id .
EE
64a
Appendix C
of its production plan in terms of backlog of material to support
the assembly line. Yet, due to the reduced levels of production
in the other categories, Amertex did not start part-B work until
July, four months after authorization to proceed. Even then, the
specification deficiencies on the coat stalled part-B coat
production work to such an extent that only 408 coats had been
sewn by the end of August. In contrast, although also proceeding
at a sluggish pace, 18,744 part-B trousers were completed by
August 31, 1986. For both part-B garments, there was an
insufficient amount of part-A and lining sewn work to feed full-
blown production build-up.
Furthermore, because few sets of coats and pants were
completely sewn by the end of August, plaintiff did not proceed
to pack, present for final testing, or deliver any garments during
the first half of Year Two. In these ways, Amertex’s production
output fell far short of its own plan and the contractual delivery
schedule. During this period, however, the government issued
no “show cause” letters based on the contractor’s slow
production or failure to fulfill the delivery schedule in
modification P3.
b) Assessing Responsibility for Delay
Each party contends that the other was the primary cause
of delay between February 25, 1986 and August 31, 1986.
Plaintiff’s witnesses placed great emphasis on the effect of the
lack of government approved butyl] on the production processes,
asserting that butyl availability was controlling. In contrast,
defendant’s scheduling and production experts theorized that
almost all of the delay was due to defective cutting slowing the
sewing production and that none of this delay was attributable
solely to the government.
We next examine the merits of the parties’ contentions about
65a
Appendix C
responsibility for delay by focusing on the three key issues of
this period: the effect of tardy butyl testing, the effect of bad
cutting on sewing operations, and the effect of changes and
inadequacies in the specifications on production in general.
(1) Butyl Issues
The specifications referred to in the contract provided that
Amertex was required to submit samples of butyl for
toxicological testing at Aberdeen before the material could be
used in the production of the chempro suits. DX-2003. The
contract also mandated that defendant take no more than 30
working days to test and approve butyl. DX-2002; DX-2003.
Butyl was a key component in the initial operations for the
chempro outer shell. Each outer shell kit required sufficient nyco
and butyl cut pieces for one chempro suit. Tr. 472-73 (L.
Jacobson). Butyl was required for six of the 15 primary part-A
divisions of coat operations and for three of the 13 primary part-
A divisions of trouser operations.” In this way, the availability
of butyl for cutting could pace the cutting of nyco, as well as
the sewing operations.
Since before First Article approval, Aberdeen had regularly
failed to approve butyl within the contractual time limit and
had approved butyl at an unpredictable rate for purposes of
planning for butyl availability. This sporadic “pattern”
33. PX-240. Amertex’s witnesses established that part-A work could
not proceed without sufficient quantities of butyl in the sewing assembly
line. In each coat, for example, butyl was needed for the atropine pocket
protective piece, the under sleeve elbow patch, the sleeve pocket protective
piece, the top sleeve elbow patch, and the chest pocket protective pieces.
PX-240.
34. The term “to approve” is used to mean both “to test” and “to
(Cont'd)
66a
Appendix C
continued during the first six months of Year Two. Following
authorization to proceed with production, the government made
a surge in butyl approval. Amertex, through its subcontractor
Gentex, cut 151,680 units by the end of March 1986. PX-297 at
12. Gentex was able to rapidly integrate this large quantity of
butyl into its cutting assembly lines even though Amertex’s
production plan did not contemplate cutting that much buty! in
a thirty day period until about the third month of production
build-up.
Gentex cut the remaining approved buty! (1,920 units worth)
during the first week of April. PX-297 at 12. The government
failed to approve any more buty! in April. Gentex kept Amertex
and the government informed that the delays in butyl testing
would restrict the subcontractor’s cutting output and,
consequently, the overall delivery schedule. See, e.g., DX-2377.
Gentex repeatedly asked Aberdeen to “expedite” the testing of
butyl. As of April 29, 1986, Amertex was awaiting approval of a
quantity of butyl sufficient to incorporate into more than 200,000
outer shells.*°
In May, no butyl was approved. Gentex wrote Amertex
advising that “the current status of testing at Aberdeen will result
in further serious delays in receiving approved material at Gentex
for production, and that unless corrected, will put the entire
production system at risk .. . .” PX-53. Amertex then contacted
DPSC, requesting assistance in expediting the testing. DPSC
(Cont'd)
accept.” The government's tardiness in approving butyl was not due to
inadequacies or deviations in the materials tested. Only one lot of butyl
experienced some testing failure during this period.
35. Each suit required about a half-yard of butyl to be stitched into
key areas. Tr. 474.
67a
Appendix C
then contacted Aberdeen about the “inordinate delays” and
advised that the delays could “result in breach of contract.”
Despite these efforts, no butyl was approved in June. By
that time, Amertex elected to allow the cumulative cutting of
nyco to exceed the cumulative cut of butyl in order to put some
additional material into the sewing production lines. To the extent
that Amertex tried to mitigate the lack of butyl through preparing
kits without a key component, plaintiff’s assembly lines could
make only limited progress in sewing. Butyl was, indisputably,
an integral part of the manufacturing of the chempro suits at the
outer shell stage; no matter how much nyco could be cut and
shipped in advance of the butyl, the design of the chempro outer
shells meant that Amertex’s subcontractors could not complete
more outer shell units than butyl units were available.
At the beginning of July, Gentex reiterated the production
delay impact of having no butyl available. The subcontractors
had also been complaining about the lack of sufficient quantities
of butyl for sewing in the preceding three months. In late July,
defendant released 67,044 units of butyl. PX-65 (noting that
the buty! situation had restricted output severely); PX-297. When
butyl finally became available in July, Amertex shipped butyl
cut pieces to its assembly lines by air-freight. PX-68. Even
though 280,002 units of butyl had been approved for cutting
and Gentex had cut 265,602 units by the end of July, nyco cutting
remained ahead of butyl cutting, with 291,858 units in the
former. By the end of the first haif of Year Two, butyl cutting
was behind nyco cutting by about 60,000 units.
By the end of August 1986, butyl had only been approved
in two out of six months. Butyl testing had been delayed to such
an extent that shortly after the end of this period (in September
68a
Appendix C
1986), the government created a surge in butyl approval in the
amount of more than a half-million units.
The extensive butyl delays in this period adversely affected
the unofficial delivery schedule the parties had been following
in lieu of the P3 schedule. Amertex had kept the government
apprised of the way in which butyl was slowing delivery, as
reported in a government memorandum:
Initial delivery due 1/86. Contractor claimed
excusable delay, agreed to revised schedule
commencing 8/86 .... Tox[icological]
testing of butyl coated nylon was delayed
(spring ‘86) when [the Environmental
Protection Agency] shut down test lab at
Aberdeen ... for about two months ....
Amertex claimed additional excusable delay
as a result [with delivery commencing]
11/86.
PX-71 (noting also that there was a “large number of
spec[ification] changes issued”).
In sum, during the first six months after First Article
approval, the butyl approval problem stunted plaintiff’s ability
to build-up its production levels to the point needed to expedite
the production of the garments. This situation not only delayed
performance of the contract but was a violation of the explicit
provisions of the contract itself. Yet, throughout the life of the
contract, defendant continually exceeded this contractual time
limit.*°
36. For 22 of 44 months, no buty! was approved. PX-297. (Amertex’s
first submission of butyl for testing occurred in late July 1985, almost
(Cont'd)
ee ee ee ee
69a
Appendix C
This pattern of sporadic approval of butyl followed by
months with no approved butyl wreaked havoc on Amertex’s
ability to plan production, maintain its cutting operations, retain
employees, and achieve production efficiencies. Tr. 786-87 and
474-77 (L. Jacobson); Tr. 7673-76 (Pullo); Tr. 2505-06; PX-
291. During the first half of Year Two, Amertex immediately
cut most butyl! that was approved yet spent nearly three months
with no butyl to put into the production line.
A year and a half after the worst of the butyl testing delays,
the government wrote in a contract newsletter:
{C]ontinued Government delays in testing of
Butyl Fabric at Aberdeen . . . had caused this
material to become the pacing item for
contract performance. As long as this
condition persists the Government is
exposed, not only to excusable delays in
product delivery, but also to claims for delay
costs already estimated by the contractor to
exceed $7 million.
PX-284.
During the first half of Year Two, buty! testing delays
prolonged the performance period of the contract; such delays
to the program caused by slow buty] approval were not subsumed
by or entirely concurrent with other problems on the contract.
(Cont'd)
contemporaneously with contract amendment Al which authorized
essential pre-production work in advance of First Article approval.)
Testing times ranged from a low of five days to a high of 270 days with
a mean testing time of about two months. DX-3337 at 256-57. Only 12
of the 74 lots submitted were tested within 30 days. /d.
70a
Appendix C
The lack of butyl for cutting had a delaying impact that
was Of a different duration and magnitude than the other
obstacles encountered by plaintiff. Indeed, had Amertex been
efficient in all other operations, contract performance still would
have been substantially delayed and the government’s tardy buty]
approval would have been responsible for almost all of that delay.
However, as the following discussion reveals, Amertex did not
achieve close to optimal production, and therefore the amount
of delay for which the government is solely responsible is
diminished significantly. We find the government solely
responsible for 70 delay days, less than half of the delay in this
period.
(2) Poor Cutting and Its Effect of Sewing Levels
The government presented strong evidence, consisting in
part of contemporaneous correspondence, that Amertex’s
production was delayed due to poor cutting. The evidence shows
that a small, but nevertheless deleterious, percentage of the fabric
was Cut improperly. Additionally, some of the cut parts had
inadequate surveillance marking. These cutting problems slowed
plaintiff’s sewing operations and aggravated the already strained
environment in which Year Two began. Some margin of error is,
of course, inherent in the mass production process, especially
at the beginning of a manufacturing operation. Yet, both the
degree and persistence of the cutting problems on the chempro
contract exceeded the expectations of all participants. These
cutting problems were a substantial cause of delay in this period
in that they controlled the rate at which the already low supply
of cut parts could be utilized for the production of sewn units.
The cutting problems were present before the outset of Year
Two. See, e.g., DX-2281 (describing problems including
imprecise cutting of small parts like pockets and flaps). Amertex
Tla
Appendix C
had even received a “quality deficiency record” (QDR) for the
presence of some defective parts cut smaller than pattern, chest
pockets in particular. DX-2301. As stated earlier, however, these
problems were not “critical” in terms of delay prior to
authorization to proceed.
Two days after First Article approval, Amertex wrote to its
cutting subcontractor, Gentex, describing some of the problems
and “strongly suggest[ing] that. . . a Gentex representative come
to Puerto Rico as soon as possible... . If they are not corrected
soon, these problems will only get bigger and costly.” DX-2312.
Those cutting problems included misplaced drill holes and
poorly cut small parts such as pockets and flaps, including parts
that had excess selvage.”’ There were also problems with notches
being omitted or cut poorly. DX-2314. Unfortunately for all
concerned, those cutting problems were not corrected promptly.
In our evaluation of delay, we find highly significant a
memorandum by one of the Gentex representatives who went
to Puerto Rico in response to Amertex’s request. DX-2327. In
that March 14, 1986 memo, the representative noted that “60%
of the problems were actual cutting problems and 40% were
material defect problems.” Plainly, the contractor was
experiencing a higher rate of defects than it considered to be
acceptable at the time and this slowed progress.
Another observation in the Gentex memo indicated that the
pace in the factory was “very low” and that it seemed as if the
plants had only recently started operations. However, the
representative’s visit occurred only about two and a half weeks
after production was authorized. Had Amertex not started some
advance production at its own risk, the company would not even
37. Selvage is unusable material at the edge of a roll of fabric.
72a
Appendix C
have had sewing operations on-line by that time. Because some
quantity of poor cut parts was being shipped and slowing build-
up, we find plaintiff responsible for some delay.
In April, the cutting problems continued. The government
issued a QDR citing discrepancies relating to “inadequate
incoming inspection system to detect deficiencies.” After
plaintiff reconfigured its 100% inspection policy for cutwork,
Amertex returned two cut lots to Gentex because of continued
problems relating to drill holes, notches, selvage, and the
precision of cuts for small parts like collars. DX-2358; DX-
2362.
These problems continued to occur in May, along with some
surveillance marking and pinhole problems in the linings coming
from Gentex. The sewing subcontractors were distressed over
the continued degree of poor cutting. For example, in late May,
Amertex’s subcontractor, Lajas, noted that it had suffered “a
great amount of losses because of bad quality in the cut work
and shading problems in the fabric.” DX-2402. However, that
same letter noted the adverse effect of the slow cutting rate that
resulted from lack of butyl, stating “we stopped operations three
times because of lack of work.” /d.
In June and July, the problems with cut parts coming from
Gentex continued. At the end of the month, Amertex complained
yet again to Gentex about the “lack of acceptable quality cut
parts ....” DX-2458. Leo Jacobson, Amertex’s president,
emphasized, “It is impossible to build up efficiency in this
38. DX-2352. That QDR also noted problems such as a surveillance
control number missing from “one cut part” of charcoal lining, in addition
to a few other traceability issues.
73a
Appendix C
manner.” DX-2458. Amertex also found a sudden increase in
the quantity of the lining materials being cut too small for the
patterns. DX-2496. The problems with the notches and drill holes
in the nyco persisted.
By August, plaintiff decided to transfer the cutting
operations from Gentex to one of its own plants in Puerto Rico.
DX-2528. At trial, Amertex tried to minimize the relevance of
the cutting problems that culminated in its decision to terminate
the cutting part of its agreement with Gentex.”* It is possible
that Amertex decided to take-over cutting operations for some
combination of reasons, but we find that the evidence of cutting
problems leading up to the transfer speaks for itself, The
termination, or phase-out, of the cutting operations at Gentex
resulted in a drop in nyco cutting, even though lining cutting
experienced a 67% increase during August. Additionally, none
of the 14,400 units of butyl] that had not been cut in July was cut
in August.
By the end of the first half of Year Two, Amertex had sewn
about one-half of the butyl and one-third of the nyco into outer
shells. This production output was roughly consistent with the
production plan which contemplated the completion of 107,500
each of coat and pant outer shells by the time that 250,000 butyl
units were cut. However, it is undeniable that part-A production
was disrupted by problems in the cutting.
As noted, Amertex’s production levels were so far off the
contractual plan that 155 delay days occurred in this six-month
period. Even if the defect rate for nyco was only about the 4%
39. Gentex remained responsible for obtaining materials for
Amertex's cutting operations and for packing the chempro suits for final
shipment to the government.
el
74a
Appendix C
figure credibly determined by plaintiff’s production expert, that
rate undoubtedly had an adverse impact on output.“ This is so
especially because the contract required that all fabric parts in a
chempro suit be matched for shade and be traceable to the same
production lots. Therefore, any poor cutting beyond the amount
inherent to an efficient mass production operation impeded the
sewing process. The sewing process was already slowed due to
there being fewer cut parts than planned as a result of the butyl
delays discussed earlier.
Perhaps more significant was the effect of problems with
the lining cuts and surveillance numbers. This problem in the
supply of lining cut parts resulted in a 280,000 unit gap between
cut linings and sewn linings, which was about 100,000 units
more than planned. The low quantity of linings then delayed
the start of part-B sewing. Amertex’s own documents note that
“70% of [lining] work being processed was not acceptable” in
late July. DX-2458; DX-2496.
Ultimately, Amertex billed Gentex $75,991.88 for direct and
indirect costs associated with butyl cutting. DX-3346. Amertex
excluded about $3 million worth of costs from its delay and
disruption claim for delays caused by problems in the materials
during the life of the contract. Tr. 8175 (Madera).
Without engaging in insoluble hypotheticals, we note that
had there been no buty/ testing delays slowing the cutting of all
materials, the unacceptably high percentage of cut part
40. We assume, without deciding, that the error rate for nyco was
at least 4% and exceeded the amount contemplated by the parties to the
contract as inherent to mass production. The specific defect rate is not
relevant since the inadequacies in the cut parts delayed performance
regardless of the percentage of the problem.
75a
Appendix C
inadequacies would have affected any increased level of cutting
that would have been possible. Indeed, due to the problems with
cut parts, we are persuaded that more than half of the delay to
the completion of the contract occurring during this period
cannot be attributed to the sole responsibility of the government.
However, we are not convinced that the problems with the cut
parts would account for all of the delay in this period especially
in light of the butyl situation discussed earlier and the
specification problems we turn to next.
(3) Specifications and Enforcement
The butyl and cutting problems do not reveal the whole story
of the six months following the government's authorization of
production. The specifications continued to evolve and
government inspection policies combined with lengthy delays
in correcting or waiving specification problems continued to
hamper production. Numerous Specification and pattern
problems remained unrésolved including a lack of tolerances,
seam location inadequacies, and conflicts within the
specifications. |
About one month into authorized production, the
government conducted a thorough plant visit to review the
“quality assurance status” of the chempro suit manufacturing
process. PX-47. The trip report, written by Bruce Dansby, a
quality assurance supervisor, indicated that problems with
inadequacies in the specifications were hampering production.
The specification problems identified included the following:
the fact that the specifications were ambiguous in indicating
when the butyl was to be sewn heavy-side or “face up,” and the
difficulty in determining after cutting a roll of butyl which side
was the heavy side on each of the parts; two concerns relating
to the clarity of the specifications for the pocket flaps; and at
76a
Appendix C
least seven other specification inadequacies. PX-47. In
particular, the government noted that it needed to “add
tolerances,” “clarify” the pocket stitching, “correct” the order
of construction of the new velcro sleeve tabs, and “add” new
defects to the table of defects. PX-59.
The pocket flap problem was not resolved until early 1988.
The specification stated vaguely: “sew around the flap.” Amertex
reasonably interpreted this to mean sewing three sides while
stitching the fourth side in the seam attaching the flap. The
government issued a QDR in April for failing to sew the flap on
all four sides. Subsequent problems relating to the flap included
seam margin tolerances and whether the bartack had to be sewn
all the way through to the trousers. There is no reasonable
explanation for the years it took for the government to resolve
these and other issues.
The trip report is significant for two other reasons. First,
Dansby reported that he asked Hepner, the DPSC technical
representative, about “ ‘Lessons Learned’ from previous
contracts [and] [s]he said that this was a newly revised
specification [therefore] not too much from the past would
“pertain to this new procurement.” PX-47 at 5. This position
stands in sharp contrast to the government’s litigating position
that the revisions to the old specification were minor and no
expanded First Article was necessary to test the adequacy of the
specifications. The effect of this government stance was that
past tolerances and understandings about deviations inherent to
mass production of the suit would not apply. The past practice
was to allow reasonable tolerances for manufacturing.
Second, the government’s new position was that “if no
tolerance is given in the specification, then the operation would
77a
Appendix C
have to be ‘exactly as specified’ or it would be scored as a
defect.” PX-47. This is especially significant because 26
operations apparently had either no stitch tolerance or were
written with a 1/64 of an inch tolerance. PX-284. Both parties’
apparel experts basically agreed that such tolerances, or lack
thereof, were unworkable for mass production.
The government repeatedly asserted at trial that there was
not a “no tolerances” policy in effect, but we are convinced that
there was, and it had the effect of slowing operators in their
sewing operations because of the company’s reasonable fear
based on its actual early experience with this contract that every
deviation would be scored and its final products would fail
government inspection for minor defects. The First Article
debacle certainly made such a concern quite rational. Many
operations in the specifications had no tolerance given because
past practice was to imply tolerances reasonable for mass
production of the item. Even defendant’s production expert
acknowledged that a contractor must have tolerances in order
to mass produce a garment. Tr. 5980-81. Amertex actually
engaged in a higher level of inspection due to the policy.
Nonetheless, it is impossible to produce millions of garments
in an expedited and efficient manner in an atmosphere in which
the government expressed its intent to score every single
deviation with no tolerances implied.*!
41. The government repeatedly ignored the specification problems
caused by a combination of specifications with missing tolerances and
quality assurance personnel who refused to imply tolerances necessary
for mass production. For example, there was a problem with the inspection
of the cut parts relating to drill holes, which are the result of holding
stacks of fabric hundreds of layers thick in order to cut and also mark
notches. Tr. 914-15. The specification did not provide a tolerance for
this item; therefore, Amertex requested that tolerances be established.
(Cont'd)
78a
Appendix C
Also in April 1986, a new modification was issued, P7,
which included changes for the lining specifications and the
sleeve tabs. Tha
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