Sometimes the decision not to proceed with a contract can get the government in trouble

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Energy savings performance contracts have been around for a while, and in the new green frenzy we may see more of them. So when one of these deals goes south, it’s worth looking at how and why. The Defense Department backed out of such a performance contract for an Air Force base. Now it’s headed to court. The Federal Drive with Tom Temin got more on the case from Smith Pachter McWhorter procurement attorney Joe Petrillo.

Interview transcript:

Tom Temin: Joe, tell us what happened here.

Joseph Petrillo: So this was in case involved, as you mentioned, in energy savings performance contract. That’s an interesting program that’s been around for a while, and it allows an agency to enter into a contract or an energy savings program. And as part of the program, the contractor gets paid portion of the savings in energy costs resulting from implementation of the program. The program can be as simple as changing light bulbs, or more complex, like rebuilding an energy grid, having alternative sources of energy. All of these programs, however, are procurement contracts. And they involve a long term — up to 25 years — so the contractor can recover the costs of studying what the energy savings program should be, implementing it, and then maintaining it for its useful life.

Tom Temin: So in this case, the government was taking a two-stage approach and it never really got out of the stage one.

Joseph Petrillo: Right, right. And this illustrates some of the procedural hurdles faced by contractors trying to get a day in court. What happened in this particular case was that AECOM got a multiple award contract from DoD for such services, and they called the MATOC program run by the corps of engineers. And the government issued a solicitation for one of these energy savings performance contracts to all the MATOC contract holders for work at Buckley Air Force Base, which is a facility of the U.S. Space Force. The government selected AECOM the awardee, authorized it to proceed. AECOM did the first part of the contract, which, as you mentioned, was a feasibility study design and price proposal for the project. So it figured out what was the best way to achieve these energy savings, had a design of how to do it, and had a pricing proposal for implementing the program and getting a share of the savings. At that point, the government decided not to go forward. It did not accept the price proposal and implement the system. And it did not exercise an option it had to get use of the design that the contractor had written. AECOM, however, felt that the government had in fact taken over and used its design and felt that the government really hadn’t been forthright in that regard. It had used the design and not compensated it. So it’s filed a claim for compensation.

Tom Temin: So basically, the company was saying the government stole the plan.

Joseph Petrillo: Well, it isn’t putting in that sense. But when you take something that’s not yours, and you own it and use it, that is the issue. And that then becomes an interesting legal question. After the claim was denied, the contractor filed an appeal to the Armed Services Board of Contract Appeals. And that appeal hasn’t been decided yet, because there was a procedural issue. First, the government moved to dismiss. And it had two grounds for its motion to dismiss the appeal. One was, well, you know, we didn’t accept the option and we didn’t continue the contract. So there isn’t any contract here. And the board said, wait a minute, there’s this multiple award MATOC contract. There’s the second contract you awarded to AECOM for Buckley Air Force Base. And the contractor AECOM also alleged that keeping the design and using it created an implied in fact contract. So we’ve got three different contracts to adjudicate here that’s not going to get anywhere. The second argument the government had was, well, since we didn’t exercise the option, there was no breach of contract. And this is the tort of conversion. And here we get into this fairly complicated legal procedural issue of what happens when someone who doesn’t have the right to use something, takes it and exercises control over it. And there are two ways of looking at that. One way is there’s a tort called conversion. You can’t take someone’s property, use it, without subjecting yourself to the possibility of paying compensation for that as a tort. However, when you’re in the context of a contract, and you’ve taken control or dominion over an item, and you haven’t paid the compensation or done the thing necessary under the contract to have that right, then that can be a breach of contract. And the board looked at it and said, well, yeah, conversion can be a tort, but it can also, in this context, amount to a breach of contract. The contract had a purpose for the government to obtain the right to use this study, and it didn’t do that. So the argument here is that it breached a contract.

Tom Temin: Right. So if it had breached a tort — or had caused a tort or some damage to the company — maybe the company could take the government to another court, but not to the Armed Services Board of Contract Appeals.

Joseph Petrillo: Exactly. That is the issue.

Tom Temin: But the board found that there had been a breach of contract. So therefore they said, yes, it belongs here.

Joseph Petrillo: There was an allegation of a breach of contract. Now, the contractor will finally get its day in court, and we’ll see if we can prove its case. But it’s unfortunate that the government is throwing up these procedural arguments, especially in a context where it doesn’t seem like they have a lot of traction to deny the contractor its day in court. There’s an issue here, it needs to be decided, and it’s something that unfortunately, contractors have to keep in mind when they do business with the government. If things go south, they could be facing complications like this and procedural motions to complicate and increase the cost of litigation.

Tom Temin: So in this case then, AECOM had, in a sense, delivered a product, which was a piece of intellectual property on how to design an energy saving system, and what the payback would be and so forth. So that gave the government the possibility of moving ahead, say, with another contractor to actually execute on that plan. But nevertheless, by delivering a plan, AECOM felt it was due compensation for what I’m calling intellectual property.

Joseph Petrillo: That’s right. AECOM, under this contract, did its part, performed its work. And it feels that the government now has the benefit of its plan and is using it. So we’ll see what happens when push comes to shove in the next case.

Tom Temin: So, so far then, just to make sure we understand, the Armed Services Board of Contract Appeals has said yes, we have jurisdiction over this, but they haven’t actually ruled on the merits.

Joseph Petrillo: Exactly. We finally go to the next stage and see what the substance is behind this case and if the contractor is entitled to compensation.

Tom Temin: Joseph Petrillo is a procurement attorney with Smith Pachter McWhorter. Thanks so much.

Joseph Petrillo: Thank you, Tom.

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