Christopher G. Hill | Construction Law Musings
Remember BAE Sys. Ordnance Sys. V. Fluor Fed. Sols? I examined that case on two occasions previously here at Construction Law Musings. Previously the discussions were about the mix (or lack thereof) between fraud and contract and about how careful contract drafting is key.
In the most recent opinion in this ongoing litigation from March of 2022, the Court examined various motions to dismiss the Complaint and Counterclaim in the matter. As a reminder, the basic facts are as follows.
The US Army Joint Munitions Command (“Army”) contracted with BAE Systems OrdnanceSystems, Inc. (“BAE”) to operate and maintain the Radford Army Ammunition Plant (“RFAAP”)under a basic ordering agreement (“BOA”). Under BOA Task Order 002, BAE contracted to replace the legacy NC facility at the RFAAP with a newer one (the “NC Project”). Initially, BAE subcontracted the NC Project to Lauren Engineers & Constructors (“Lauren”), but later terminated Lauren. Despite terminating Lauren, BAE’s timeline to complete the NC Project remained unchanged and BAE was required to use Lauren’s design for the NC Project. BAE gave interested bidders access to the Lauren design and other related documents and required the selected subcontractor to perform in accordance with the 85% complete Lauren design, that the Lauren design could be relied on for accuracy, and the selected subcontractor only had to complete the unfinished parts. Fluor Federal Solutions, LLC (“Fluor”) submitted a request for information (“RFI”) asking BAE about the standards referenced in the SOW. Fluor was unable to determine the completeness of the Lauren design but relied on BAE’s assertion that the design was 85% complete. BAE rejected Fluor’s initial bid as being too high given what BAE had already paid Lauren for its design and told Fluor to lower its bid because the design was close to complete. Fluor lowered its price and submitted another bid proposal that outlined a firm-fixed-price design/build that forecasted 32 months to complete the NC Project. BAE awarded Fluor an Undefinitized Contract Action (“UCA”) in the amount of $9 million dollars, later increased to $32 million. Under the UCA, Fluor began procuring materials and physical construction before a formal subcontract was agreed upon. On December 17, 2015, BAE and Fluor agreed to a fixed-price design and build subcontract (the “Subcontract”) in which Fluor agreed to design, construct, and partially commission the NC Project for $245,690,422.00, which included money spent already in the UCA. When this litigation began, Fluor was scheduled to complete its work by December 2020, 2.5 years beyond the originally agreed-upon completion date.
On September 30, 2020, BAE sued Fluor for breach of contract. On May 24, 2021, Fluor counterclaimed for breach of contract, quantum meruit, and unjust enrichment. Fluor’s counterclaim alleged that Fluor was not at fault for failing to meet the agreed-upon schedule and Fluor had $183 million in outstanding change proposals when the litigation was filed.
The parties filed their respective, and inevitable, motions to dismiss. In addition to its motion to dismiss, and of great interest to construction attorneys here in Virginia, BAE sought to strike Fluor’s claim for damages in excess of the limitation of liability found in the contract. The Court denied Fluor’s motion to dismiss BAE’s claims because BAE had plausibly pleaded that the concessions BAE had to make to keep the contract with the Army were direct damages caused by Fluor’s delay and that the descoping of work from Fluor’s scope of work was not a breach.
The Court also denied BAE’s cross motions to dismiss relating to the equitable adjustment claims and the breach of the duty of good faith and fair dealing and granted BAE’s motion to dismiss the quantum meruit claim based upon the existence of an enforceable contract.
More interesting (at least to me) was the discussion of BAE’s motion to strike based upon the limitation of liability provision limiting the total value of the contract and all changes to $30 million. The Court granted BAE’s motion to strike any damages over the limitation and rejected both Fluor’s argument based upon the contractual language and Va. Code 11-4.1:1 regarding diminishing rights to assert claims for additional costs in advance of furnishing labor, services or materials. The Court reasoned as follows:
Pursuant to the UCA, Fluor provided labor, services, and materials to BAE prior to negotiating and executing the Subcontract. Because Flour provided substantial services and materials before the Subcontract, containing Limitation of Damages clauses, was executed, Virginia Code §11-4.1:1 does not apply. Fluor’s argument that this law provides opportunities for small subcontractors to be unfairly manipulated is acknowledged. But this case―involving sophisticated entities―is far removed from that concern.
In other words, because much of Fluor’s work was performed prior to the execution of the contract, Va Code 11-4.1: did not apply. Ask yourself if you think that this is a proper interpretation. Should it be true that performing work prior to the execution of a written contract would take any limitation of liability provision found in a subsequently executed written contract outside of the prohibition of Virginia statute? If you believe that the Court was correct in its interpretation, do you also think this reasoning would apply in the mechanic’s lien context and the 2015 amendments to Va. Code 43-3?
In my view, if the Western District of Virginia District Court’s interpretation of this Virginia statute were to win out, no subcontractor should begin work until there is a fully executed subcontract in place. My hope is that this loophole won’t spread to other courts of the Commonwealth. To allow for limitations of this sort simply because work began before the ink was dry is an invitation to the type of abuse these anti-limitation statutes sought to bar.
As always, I highly recommend that you read the opinion and then let me know if you have questions, comments, or general thoughts on the opinion itself or my analysis.
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