Increased Security Risks May Be A Cardinal Change - Government Contracts, Procurement & PPP

Former Secretary of Defense Donald Rumsfeld once explained that there are the known unknowns and the unknown unknowns. Some greeted that gnomic pronouncement with bemused smiles. But contractors operating in a contingency environment know exactly what he was talking about. No mere mortal can accurately predict, much less price, all of the risks involved in supporting and accompanying the military in various hot spots around the world. Planate Management Group, LLC v. United States, a case currently before the Court of Federal Claims (COFC), is a good example. In Planate, a contractor providing support services in Afghanistan has asserted claims for the cost of arming its in-theater personnel when the security situation changed dramatically for the worse.

In light of deteriorating security conditions in Afghanistan, including a fatal insider attack, the military issued a new security directive. To comply with that directive, the contractor purchased weapons to arm its in-theater personnel. The contractor submitted a claim to recover the costs of arming its personnel. The government denied the contractor's claim, and the contractor filed suit at the COFC, alleging (among other things) that the changed security conditions amounted to a cardinal change. The COFC denied the government's motion to dismiss for lack of subject matter jurisdiction because the contractor had properly presented its claim for a cardinal change to the contracting officer (CO).

Claims for cardinal changes to the contract are rarely successful. Although the court considered only whether it had jurisdiction to hear Planate's allegations and has not yet addressed the merits of Planate's cardinal change theory, the case offers an interesting and potentially promising approach for contractors to recover when they experience major changes to the circumstances under which they are performing.

BACKGROUND

The U. S. Department of the Army Expeditionary Contracting Command ("Army") awarded Planate Management Group, LLC ("Planate" or "plaintiff") a firm fixed-price contract in 2011 to perform support services at sites throughout Afghanistan. The contract required Planate to embed six individuals within a U.S. Air Force squadron. The embedded Planate personnel were required to comply with all "[o]rders, directives, and instructions issued by the [United States Central Command] Combatant Commander, including those relating to force protection, security, health, safety, or relations and interactions with local nationals." Planate Mgmt. Grp., LLC v. United States, No. 17-1968C, 2018 U.S. Claims LEXIS 880, at *2 (Fed. Cl. July 27, 2018).

To perform the contract, Planate's employees needed to travel outside of secure areas to various locations in Afghanistan. The travel exposed Planate's personnel to attack. The Air Force squadron was required to provide transportation for the contractors between their headquarters in Kabul and other locations, as well as access to the office, computers, and network accounts, but the contractor was required to provide everything else needed to perform the required services.

April 27, 2011 Attack and Subsequent Security Mandates

Shortly after the Army awarded Planate the contract, an Afghan Air Force officer working with the squadron perpetrated an insider attack. The April 27, 2011 attack killed eight airmen and one civilian contractor. Planate alleged that, after the attack, the squadron chief of staff recommended that Planate arm its personnel.

According to the opinion, violent attacks in Afghanistan increased through the rest of 2011. In response to the heightened security threat, the squadron commander issued a force protection directive instituting a mandatory "two-person rule" that required Planate's personnel to travel with a companion at all times, imposed a curfew, and imposed travel restrictions. Although active duty military personnel initially provided the required protection, Planate's personnel did not have military escorts at all times. Therefore, Planate began discussions with the contracting officer about arming its embedded personnel. Additionally, the squadron vice commander forwarded a memorandum explaining Planate's request to arm its personnel for personal protection.

The Army modified Planate's contract to update contract clause 952.225-0011. The modification authorized Planate personnel to be armed but provided that the Air Force squadron would only provide Planate's personnel weapons if the squadron had weapons available. When weapons were not available, Planate would need to furnish the approved weapons itself. Significantly, the modification did not include a line item for Planate to procure and manage weapons itself.

After the contract modification, the CO "expressed a willingness to negotiate a weapons modification that included reimbursement for plaintiff's costs in arming its personnel, but stated that approval from a higher authority was necessary because weapons were not within the scope of the contract." Id. at *8-9. The opinion does not address whether higher authorization was obtained.

In July 2012, the commander issued a force protection directive that required Planate's personnel to have a "guardian angel" at all times on Afghan Air Force bases and installations. "Guardian angels" were required to be in "weapon status" and "remain alert and capable of immediate response to hostile threat[s]" at all times. Id. at *10. In October 2012, Planate purchased a Beretta M9 and ancillary equipment for each of its in-theater personnel.

Plaintiff's Request for Equitable Adjustment

Planate submitted a Request for Equitable Adjustment (REA) to the CO under the contract's changes clause, requesting an increase to the contract price in the amount of $76,574.00 to account for the "additional and unexpected cost impacts [Planate] incurred as a result of the need for [Planate] to provide for the self-defense of its employees." Id. at *10. Planate explained that the costs incurred arming its personnel "were not foreseeable prior to contract award" because "weapons were not authorized during original . . . proposal development and no provision for reimbursement of such costs [was] allowed" in either the original contract or the then-current option year. Id. at *10. Moreover, Planate asserted that the "the costs incurred to allow [plaintiff's in-theater personnel] to carry M9 weapons [were] outside the Statement of Work." Id. at *10. The CO did not answer this initial REA. Planate submitted a second REA with the same reasoning, and the CO denied Planate's request.

Claims

Planate submitted a formal claim for $86,864.85 under the Contract Disputes Act (CDA), alleging that the heightened security risks and the subsequent force protection directive compelled Planate to incur unexpected costs in protecting its contractors.

Specifically, Planate alleged that it had to rely on its own personnel for protection to comply with the force protection directive because there were an insufficient number of active duty personnel to protect the contractor personnel. Planate explained that its offered price did not include any costs for acquiring, transporting, using, or managing weapons, because the original contract did not permit its personnel to carry weapons. Planate asserted that it was required by the contract to comply with any changes in security requirements and that its representatives understood this to mean that any change in security requirements would be a contract change. Additionally, Planate alleged that the heighted security risks, and the CO's failure to acknowledge those risks, constituted a change under the contract.

Relatedly, Planate alleged that the security risks had not been accurately reflected in the solicitation. Because the security risks were not conveyed to the offerors, Planate argued that the security costs were not reflected in its offered prices. Planate asserted that, had it known the risks, it could have included appropriate security costs in its offer. However, the true risks did not become apparent until after the April 27, 2011 attack, shortly after the contract was awarded. Planate asserted that this constituted a mutual mistake of the contracting parties.

The CO denied Planate's claim.

COFC Decision

Planate filed suit in the COFC to appeal the CO's decision, asserting five counts for relief:

Count I—Dispute Under the Contract: Appeal of Final Decision
Count II—Breach of Contract
Count III—Breach of Covenant of Good Faith and Fair Dealing
Count IV—Constructive Change
Count V—Cardinal Change

The government moved to dismiss Counts III and V of the complaint for lack of subject-matter jurisdiction pursuant to Rule 12(b)(1) of the Rules of the United States Court of Federal Claims, arguing that the claims had not been presented to the CO. The question before the court in resolving the government's motion to dismiss thus was whether Planate's assertions for breach of the covenant of good faith and fair dealing and cardinal change were first presented to the CO.

In Count V, Planate alleged that the changed security situation amounted to a cardinal change. Planate argued that the new security conditions were outside the scope of the contract, that the new situation "significantly changed the security posture, working environment, and thus the costs associated with security," and that the resulting changes "directed by the Defendant were beyond the scope of the contract and fundamentally altered [plaintiff's] contractual undertaking." Id. at *26. Therefore, Planate contended that "the cost of work performed was drastically changed from the cost of work [it] bid to perform." Id. at * 26. In response, the government asserted that Planate's certified claim failed to discuss how the change was "materially different" from what was bargained for in the contract.

The court observed that Planate's certified claim discussed the change in risk posture, the military's advice to Planate to arm its personnel, and the increased costs it incurred to arm its personnel. For these reasons, the court concluded that the allegations in Count V of Planate's complaint were before the CO when she made her final decision on the claims challenged before the court. Similarly, the court found that it had jurisdiction over Planate's claim for breach of the covenant of good faith and fair dealing because Planate's claim put the CO on notice of the operative facts that formed the basis of its claim.

Whether Planate's cardinal change claim will succeed on the merits remains to be seen, but surviving the government's motion to dismiss is a promising start. Planate's theory will test the extent to which a dramatic change in circumstances may constitute a cardinal change. A cardinal change occurs when a contractor is directed to perform additional work beyond the scope of the contract. A cardinal change is not a contract change, and a cardinal change cannot legally be ordered by a CO under a contract's Changes clause. Instead, a cardinal change is commonly thought of as a remedy outside the four corners of the contract.

In determining whether a cardinal change has occurred, the courts and boards must determine whether the change is beyond the scope of the contract. To determine whether a change is outside of the scope of a contract, judges compare the total work performed by a contractor with the work called for by the original contract. Work is within the scope of a contract if it can fairly be regarded as within the contemplation of the parties when the contract was entered into or if it is essentially the same work that the parties bargained for when they entered the contract.

Planate has argued that the additional work created by the heighted security risks constituted a cardinal change because it resulted in work that was materially different from what was bargained for: namely, the contract was for support services and did not mention the provision of weapons, but due to the increased security threats the contractor was required to supply its personnel with weapons for self-defense. Depending on how the case evolves, it has the potential to broaden the application of cardinal change claims when the working conditions contemplated by the parties have drastically changed, as is often the case in overseas contingency contracts.

A viable cardinal change theory would be a useful addition to a contractor's legal toolbox. In factually similar cases, other contractors have taken a different approach. For example, IAP Worldwide Servs., Inc., ASBCA Nos. 59397 et al., 17-1 BCA ¶ 36763 (May 17, 2017), concerned a delay caused by the closure of the Pakistan border. IAP Worldwide Services, Inc. ("IAP") contracted with the U.S. Army Corps of Engineers to provide generators at military bases in Afghanistan. IAP had previously shipped equipment for similar procurements into Afghanistan by way of Pakistan. IAP received three delivery orders for generator sets to be delivered in Afghanistan, but after receiving the delivery orders, Pakistan closed its borders in response to a military operation by the United States and NATO. The border remained closed for seven months. The government denied the contractor adequate extensions to deliver the generators.

IAP asserted that circumstances on the ground, and the government's response to those circumstances, constructively accelerated IAP's performance and required an equitable adjustment of its contract price. In doing so, IAP framed its claim as a contract claim and sought remedies under the contract for the additional costs incurred to perform during the border closure.

The ASBCA held that "[t]he government accelerated performance when it failed to timely grant extensions to fully account for the delay." 17-1 BCA ¶ 36763. Accordingly, the ASBCA concluded that "IAP is entitled to an equitable adjustment reimbursing it for expenses actually and reasonably incurred in complying with the acceleration orders." 17-1 BCA ¶ 36763.

Planate's claims are factually analogous, i.e., the government's response to the change in circumstances on the ground resulted in damages. But in addition to asserting a contract claim based on a constructive change theory, Planate has also claimed that the change in circumstances and the government's response to those changes resulted in a breach of contract.

CONCLUSION

Contractors today often operate in contingency environments in support of and even alongside military personnel. Those contingency environments are fraught with risks to life and limb and, on a much more mundane level, to a contractor's balance sheet. Although the COFC and Boards of Contract Appeals are often hesitant to recognize changed conditions as a basis for seeking increased compensation, IAP and Planate highlight two potential avenues for recovery in these circumstances: constructive acceleration and cardinal changes.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.