Contracting with the Government? Be careful! Make sure the government representative with whom you are dealing has the actual authority to bind the Government to a contract because you bear the risk if the government representative overstated his or her authority.
The Government has millions of civilian employees and military personnel. Federal expenditures would be completely unmanageable if all these government representatives could, of their own accord, enter into contracts obligating the United States. Therefore, the Government places strict limitations on the authority of its representatives to spend government money, and the boards of contract appeals and the courts have placed the burden and risk on the contractor of accurately ascertaining that the government representatives stay within their authority. Contractors who follow the directions of unauthorized government representatives may be held to have volunteered their supplies or services.
On the other hand, the Government wants to encourage healthy competition and not punish innocent contractors who genuinely believe and rely on the government representative’s representation of authority from getting compensated for their supplies and services. Thus, the boards and courts have engaged in the intricate balance of controlling federal expenditure and staying fair to contractors. To balance these competing interests, the boards and courts have established four elements of proof to determine whether someone has a valid contract with the Government. These elements are: (1) mutuality of intent to contract; (2) lack of ambiguity in offer and acceptance; (3) consideration; and (4) actual authority on the part of the government representative to bind the government in contract. The fourth element is where most contractors get into trouble and it is also where the boards and courts spend most of their focus. A recent case demonstrates this balance. Appeal of Guardian Safety & Supply LLC d/b/a Enviro Safety Prod., ASBCA No. 61932, 2019 WL 2235706 (May 8, 2019).
In that case, Enviro Safety received an order by the United States Air Force (USAF) for 500 3M Verflo masks and components for use by children at Osan Air Force Base in South Korea. The USAF used a Military Interdepartmental Purchasing Request (MIRP) purchase these masks and components from Enviro Safety. As the name suggests, a MIRP is used only as an internal funding documents and is not meant to contract with commercial parties such as Enviro Safety.
Enviro Safety, believing the MIRP was a valid contract, began performing. Subsequently, the Government advised Enviro Safety that the MIPR was not a contract and directed Enviro Safety to stop work. Although the Government advised Enviro Safety that a valid contract would be issued, no contract ever was issued.
Enviro Safety ultimately submitted a claim for a restocking fee that Enviro System had to pay to one of its suppliers. Interestingly, the government representatives had directly negotiated with the supplier on the amount of the restocking fee. Nonetheless, the Government argued that a valid contract was never formed and refused to pay the restocking fee.
In order to have a binding contract with the Government, whether express or implied-in-fact, the government representative who entered into the contract has to have the actual (or actual implied) authority to bind the Government. The question before the board was whether any of the government representatives with whom Enviro Safety dealt had that authority. The record before the board was unclear on whether the individuals directly involved in the issuance of the MIRP had contracting authority.
However, the board noted that a responsible contracting officer (CO) can ratify an unauthorized contract and thereby bind the Government. Ratification generally requires that a superior official have authority to ratify, have actual or constructive knowledge of a government representative’s unauthorized act, and adopt the unauthorized act. Fortunately for Enviro Safety, this is exactly what happened in its case. The board found that there were two COs who were aware of the issuance of the MIRP and then intervened on behalf of Enviro Safety to negotiate a lower restocking fee with the supplier. The board found that these COs implicitly ratified the unauthorized commitment for the purchase of the masks and components. As a result, the board held that Enviro Safety was entitled to recover for the restocking fee.
This case is a cautionary tale for contractors doing business with the Government – always make sure the person with whom you are dealing is authorized to enter into the contract or to modify an existing contract.