Opinion
CIVIL CASE NO. 95cv0239-BTM(CGA)
December 29, 2000
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This matter came on for a non-jury trial on May 30 and 31, June 1 and 2, 2000, on plaintiffs' claims against the United States. The court makes the following findings of fact and conclusions of law and directs entry of judgment for the United States.
I. BACKGROUND
In 1993, the United States Navy, through the Supervisor of Shipbuilding, Conversion and Repair, San Diego, ("SupShip") entered into four fixed-price contracts with AE Industries, Inc. ("AE") for repair work on the aircraft carrier U.S.S. Constellation. AE hired subcontractors, including plaintiffs J.W. Bowman Co., Inc., Master Pipefitting Welding, Inc., Southern Delta Metal Fabricators, Inc., and Allied Piping Welding, Inc. (collectively "Plaintiffs"), who performed work on the Constellation. The United States paid AE for the ship repairs, but AE failed to pay the full amount of monies that it owed to the subcontractors. On August 1, 1994, AE filed for bankruptcy.
Plaintiff Tidelands Testing, Inc., was dismissed out of the action on February 24, 1999.
In this action, Plaintiffs seek compensation for their work from the United States under an implied-in-fact contract theory and/or third party beneficiary theory. Plaintiffs, with the exception of Master Piping Welding, Inc., claim that they were parties to an implied-in-fact contract with the United States, whereby the United States promised that Plaintiffs would be paid for their work by way of an escrow account into which AE would deposit a portion of the funds it received from the Navy equal to the percentage of the work done by the subcontractors. Plaintiffs also argue that they are third party beneficiaries to an agreement between the United States and AE to establish the separate account and pay Plaintiffs from the account.
II. FACTS
AE was the low bidder on the four prime contracts — N62791-93-B-0024, 0025, 0026 and N62791-94-B-0008 — for the repair of the Constellation. SupShip had prior experience with AE and was aware of previous complaints concerning AE's failure to pay subcontractors. To allay subcontractors' fears on a previous Navy contract involving the aircraft carrier Kitty Hawk, AE set up a "subcontractor/vendor trust account" into which it represented to SupShip that it would deposit payments from the Navy in a percentage that equaled the percentage of work done by subcontractors and would thereafter make payments to the subcontractors from this account. The account used in connection with the Kitty Hawk work, however, was not administered by any third party and was not audited by SupShip.
AE's bid on the Constellation contracts was not only the lowest but also below SupShip's own estimate. Therefore, to insure that AE would actually perform, SupShip did a pre-award survey. As part of this survey, personnel from SupShip contacted subcontractors listed by AE.
A woman from SupShip telephoned Jeffrey Vineyard and David Chambers, officers of Southern Delta Metal Fabricators, Inc., ("Southern Delta"). She asked them if Southern Delta intended on doing work for AE on the Constellation. Vineyard told her that there was a "good chance" but that Southern Delta was still owed $50,000 by AE for a prior Navy job. The woman from SupShip told Vineyard that AE had set up an escrow or trust account for subcontractors on the Kitty Hawk and that this arrangement worked well. Vineyard replied that if the Navy would make AE have such an account, Southern Delta would probably do the job but that he had to check with his partner, Dave Chambers.
Thereafter, the same woman from SupShip called Dave Chambers and inquired as to whether Southern Delta would be subcontracting with AE to do work on the Constellation. The woman told Chambers that AE would set up an "escrow account" like it did on the Kitty Hawk contract, which worked well for the subcontractors. At no time did the woman from SupShip tell Vineyard or Chambers that the Navy would monitor the account or that it was guaranteeing payment to the subcontractors. Neither Vineyard nor Chambers believed that they were entering into an agreement with the Navy. Chambers received three calls from the same woman inquiring about whether he would be doing subcontract work for AE on the other Constellation contracts. Southern Delta was contacted as part of the pre-award surveys for each of the four contracts. See Exhibits 1010, 1011, 1012, 1013 and 1016.
In October 1993, Georgia Bolt of SupShip called Frank Chavez, President of Allied Piping and Welding, Inc., ("Allied") to inquire whether Allied intended to do work for AE on the Constellation. Chavez told Bolt that he was undecided. Chavez told Bolt that he had heard rumors about an escrow account. Bolt told him that there would be such an account to pay the subcontractors, which the Navy would monitor. Based on these representations, Chavez told Bolt that Allied would do work for AE on the Constellation.
Johnny W. Bowman of plaintiff J.W. Bowman Co., Inc., testified that his company had done work for AE on the Kitty Hawk and had been paid. However, AE owed him $148,000 for work on the Arcadia. Bowman testified that in the summer of 1993, Patricia Pauley, Procurement Officer for SupShip, called him and asked him if he was going to do work for AE on the Constellation. Bowman said he would get back to her. Bowman checked with AE and was advised that AE intended to use the same subcontractor/vendor account it had used on the Kitty Hawk. Bowman testified that he then called Pauley and told her that if the Navy would insure that he would be paid, he would do the work. Bowman testified that Pauley said he would be paid for work performed through a trust or escrow account which would use two-party checks requiring the signature of a person not employed by AE. Bowman also testified that Pauley said the Navy would monitor the account. He testified that he agreed to do the work based on these representations.
The court rejects Bowman's testimony as not credible. First, his testimony is refuted by Pauley's testimony, which the court finds credible. Second, his testimony was confused and commingled alleged conversations with Pauley. Third, Bowman's credibility is impaired by his felony conviction for receiving kickbacks in connection with government contracts. In discussing his conviction, Bowman intimated that the district judge pressured him to plead guilty by telling him that if he went to trial, he faced five counts of ten years each. Finally, Bowman's account is inconsistent with what Chambers, Vineyard and Chavez were told.
The Court finds that Bowman agreed to work for AE because Steve moore from AE told him the subcontractor/vendor account used with the Kitty Hawk contract would be used with the Constellation contract. Bowman's testimony about receiving a telephone call from Pauley and his testimony about the contents of that call is rejected as not credible in light of all the evidence.
No evidence was offered by plaintiff Master Pipefitting and Welding, Inc. ("Master Pipefitting") as to any representations made to it by SupShip. It relies solely on a third party beneficiary claim for recovery.
III. JURISDICTION
The United States, as sovereign, is immune from suit save as it consents to be sued, and the terms of its consent to be sued in any court define that court's jurisdiction. United States v. Sherwood, 312 U.S. 584, 586-87 (1941). Contracts entered into by the United States for the procurement of services are subject to the waiver of sovereign immunity provided by the Contract Disputes Act, 41 U.S.C. § 601, et seq. ("CDA").
To maintain an action under the CDA, an aggrieved contractor must first present its claim in writing to the agency contracting officer. 41 U.S.C. § 605. The contractor may appeal the decision of the contracting officer to the governing agency board of contract appeals ( 41 U.S.C. § 606) or may bring an action directly on the claim in the United States Court of Federal Claims ( 41 U.S.C. § 609 (a)(1)). The decision of an agency board of contract of appeals may be appealed to the United States Court of Appeals for the Federal Circuit. 41 U.S.C. § 607 (g).
The Tucker Act provides that the district courts shall have concurrent jurisdiction with the United States Court of Federal Claims over civil actions or claims against the United States, not exceeding $10,000, founded either upon the Constitution, or any Act of Congress, any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort. However, the Tucker Act excludes from its purview claims that are subject to sections 8(g)(1) and 10 (a)(1) of the Contract Disputes Act ( 41 U.S.C. § 607 (g)(1) and 609 (a)(1)). 28 U.S.C.
The CDA establishes an alternate procedure for claims arising under maritime contracts, such as contracts for the repair of vessels.Southwest Marine. Inc. v. United States, 43 F.3d 420 (9th Cir. 1994). Section 603 provides: "Appeals under paragraph (g) of section 607 of this title and suits under section 609 of this title, arising out of maritime contracts, shall be governed by chapter 20 or 22 of Title 46 as applicable, to the extent that those chapters are not inconsistent with this chapter."
The effect of Section 603 is that contractors who are parties to a maritime contract (1) may file suit directly in federal district court, as opposed to the United States Court of Federal Claims, after receiving a decision from the contracting officer; and (2) may appeal the decision of an agency board of contract of appeals to federal district court. 41 U.S.C. § 603. As explained by Southwest Marine:
This provision [ 41 U.S.C. § 603] does not alter the requirement that contract claims be presented to a Contracting Officer in the first instance. Rather, it directs jurisdiction for CDA appeals away from the Claims Court and the Federal Circuit Court of Appeals, in favor of the historic admiralty jurisdiction of the federal district courts.Id. at 424.
The parties do not dispute that Plaintiffs submitted written claims to the contracting officer as required by the CDA. According to Plaintiffs' Second Amended Complaint, Bowman, Master Pipefitting, and Southern Delta submitted written claims to the contracting officer on or about January 4, 1995. (Second Amended Complaint, ¶ 12.) These claims were rejected on or about January 23, 1995. Allied Piping submitted its claim on or about March 1, 1994. This claim was rejected on or about March 9, 1994.
IV. ANALYSIS
Plaintiffs seek recovery against the United States under the theories of implied-in-fact contract and third party beneficiary. As discussed below, the Court finds that nobody with contracting authority made any promises to Plaintiffs and that Plaintiffs are not entitled to relief as third party beneficiaries.
A. Implied-in-Fact Contract
To recover on their breach of oral contract claims, Plaintiffs must establish that the alleged oral agreements they reached with SupShip were implied-in-fact contracts. Pacord. Inc. v. United States, 139 F.3d 1320 (9th Cir. 1998). An implied-in-fact contract exists when there is no express contract but under the facts and circumstances, it is clear that there is: (1) mutuality of intent to contract; (2) consideration; and (3) lack of ambiguity in offer and acceptance. City of El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990). When the United States is a party, there is a fourth requirement that the government representative "whose conduct is relied upon must have actual authority to bind the government in contract." Id. (quoting Juda v. United States, 6 Cl. Ct. 441, 452 (1984)).
The Federal Acquisition Regulation ("FAR"), 48 C.F.R. Ch. 1, delineates who has authority to contract on behalf of the United States. Among other things, the FAR provides:
Contracting officers may bind the Government only to the extent of the authority delegated to them. Contracting officers shall receive from the appointing authority . . . clear instructions in writing regarding the limits of their authority.
48 C.F.R. § 1-602-1(a). The FAR further provides that contracting officers shall be appointed in writing on an SF 1402, Certificate of Appointment (a "warrant"), which shall delineate any limitations on the scope of authority to be exercised. 48 C.F.R. § 1.603-3.
The Court finds that Georgia Bolt and Barbara Brown, the SupShip employees who spoke with Southern Delta and Allied about the subcontractor/vendor account during the course of the pre-award surveys, did not have the authority to contract on behalf of the United States. Neither Ms. Bolt nor Ms. Brown possessed a contracting warrant."
As discussed above, the Court rejects Bowman's claim that Patricia Pauley made promises to him regarding the trust account. Master Pipefitting does not allege government made any direct representations to it regarding the account.
Indeed, during closing arguments, counsel for Plaintiffs conceded that Ms. Bolt and Ms. Brown had no authority to enter into a contract on behalf of the government. Plaintiffs argue instead that the government is bound by the representations of Ms. Bolt and Ms. Brown because the government ratified their actions. Specifically, Plaintiffs argue that Patricia Pauley ratified the alleged agreements by arranging for the establishment of the subcontractor/vendor account.
Even assuming that Ms. Bolt and Ms. Brown entered into agreements with Southern Delta and Allied, the Court finds that there was no ratification by the United States. Agreements made by government employees without authority to bind the United States "may be subsequently ratified by those with authority if the ratifying officials have actual or constructive knowledge of the unauthorized acts." Harbert/Lummus Agrifuels Proiects v. United States, 142 F.3d 1429, 1433 (Fed. Cir. 1998) (emphasis added).
The FAR sets forth requirements for the ratification of agreements entered into by government representatives without authority. Among other things, the FAR specifies that the unauthorized commitment must by ratified by an official who has the authority to enter into such a contractual commitment. 48 C.F.R. § 1.602-3 (a) and (c)(2).
Pauley did not have the authority to enter into or ratify the alleged agreements with Plaintiffs. Pauley's contracting authority was limited to entering into fixed-price contracts with holders of a NAVSEA ("Naval Sea Systems") Master Ship Repair Agreement ("MSRA") or holders of Agreements for Small Boat Repairs ("ABR").
Plaintiffs were not parties to an MSRA or ABR. Furthermore, the alleged agreements with Plaintiffs were not fixed price contracts. At the time Ms. Bolt and Ms. Brown allegedly guaranteed payment to Plaintiffs by way of an escrow account, Plaintiffs had not yet entered into subcontracts with AE and, therefore, AE's obligation to them was unknown.
Even if Pauley had the requisite contracting authority, there is no evidence that Pauley ratified the alleged agreements. To the extent that Pauley had a role in establishing the subcontractor/vendor account in connection with the Constellation contracts, Pauley's actions may demonstrate acceptance of an agreement to set up the account, but do not demonstrate acceptance of an agreement to monitor the trust account and guarantee payments. See EWG v. United States, 231 Ct. Cl. 1028, 1030 (1982) ("Ratification . . . must be based on a demonstrated acceptance of the contract.")
Ratification cannot occur without actual or constructive knowledge of the unauthorized acts. Harbert/Lummus, 142 F.3d at 1433. There is no evidence that Pauley had any knowledge, whether actual or constructive, that representations had been made regarding the guaranteeing of payments or monitoring of the trust account.
Nobody with contracting authority entered into or ratified the alleged agreements with Plaintiffs on behalf of the United States. Accordingly, Plaintiffs' implied-in-fact contract claims fail.
Southern Delta's implied-in-fact claim also fails because Southern Delta has not established mutuality of intent to contract or lack of ambiguity in offer and acceptance. According to the testimony of Jeffrey Vineyard and David Chambers, the woman from the Navy with whom they spoke did not make any promises with respect to monitoring the trust account or guaranteeing payment. Moreover, neither Vineyard nor Chambers believed that they were entering into a contract with the government during these pre-award conversations.
B. Third Party Beneficiary
Plaintiffs also claim that they are entitled to recovery against the United States as third party beneficiaries to an agreement between the United States and AE to establish and monitor an escrow account from which Plaintiffs would be paid. Plaintiffs' third party beneficiary claims fail for the simple reason that there was no agreement between the United States and AE imposing any obligations on the United States in connection with the subcontractor/vendor account.
At the outset, the Court notes that it is unclear whether third party beneficiaries may sue the United States under the CDA. Plaintiffs rely onNational Surety Corp. v. United States, 31 Fed. Cl. 565 (1994), for the proposition that third party beneficiaries may maintain actions against the government under the CDA. The court in National held that the performance bond surety on a defaulted government construction contract could seek recovery against the government as a third party beneficiary to a contract between the government and the contractor, which contained a retainage clause. However, on appeal, the Federal Circuit affirmed on suretyship principles as opposed to third-party beneficiary principles.National Surety Corp. v. United States, 118 F.3d 1542 (Fed. Cir. 1997).
The United States cites Admiralty Constr., Inc. by Nat. Am. Ins. Co. v. Dalton, 156 F.3d 1217 (Fed. Cir. 1998) in support of its position that a subcontractor cannot sue the government under the CDA as a third-party beneficiary. However, the United States misreads Admiralty.
In Admiralty, National was the surety for a contract between Admiralty and the Department of the Navy. Admiralty executed a General Agreement of Indemnity with National, which permitted National to exercise all rights of Admiralty. The Navy terminated Admiralty's contract for default and the Navy's contracting officer issued a decision assessing Admiralty $69,785 for completion of the contract and liquidated damages.
The issue before the court in Admiralty was whether National could pursue an appeal of the contracting officer's decision on behalf of Admiralty. National did not claim that it was a third party beneficiary to a contract between Admiralty and the government. The court held that National could not appeal on its own as it was not a party to a contract with the Navy. The court explained; "The Navy's relationship to the contract between Admiralty and National was as a third party beneficiary, not as a party. Accordingly, National was not a 'contractor' as required by the CDA to file a claim." Id. at 1221. (Emphasis added.) The Navy, not National, was in the position of third party beneficiary.
In Hodgdon v. United States, 919 F. Supp. 37 (D. Me. 1996), the district court assumed, without deciding, that the term "contractor" in the CDA includes third party beneficiaries. The court pointed to cases holding that third party beneficiaries have standing to sue the government under the Tucker Act. See, e.g., Clean Giant. Inc. v. United States, 19 Cl. Ct. 390 (1990); Schuerman v. United States, 30 Fed. Cl. 420 (1994). The court explained:
This Court is aware of no case directly addressing the precise issue of the standing of third-party beneficiaries under the CDA. Still, the Tucker Act cases are at least instructive on the issue in that many of the same principles of privity, standing, and sovereign immunity are involved.Id. at 39, n. 2.
Assuming, but not deciding, that Plaintiffs can sue the United States under the CDA as third party beneficiaries, Plaintiffs' third party beneficiary claims still fail. It is a basic principle of contract law that "[t]he rights of a third-party beneficiary are limited by the contract between the promisor and the promisee." Punikaia v. Clark, 720 F.2d 564, 570 (9th Cir. 1983). See Williston on Contracts, § 37:23 at 146-47 (4th ed. 2000) ("Not only must the underlying contract be valid, but the alleged beneficiary's rights, like the rights of the promisee, are absolutely defined by the terms of the contract.")
Plaintiffs have not shown that there was an agreement between the United States and AE that required the United States to monitor the trust account and/or ensure that Plaintiffs were paid. The agreement between the United States and AE with respect to the subcontractor/vendor account is reflected in the exchange of letters between Leo J. Farrell, Contracting Officer for SupShip, and AE. (Exhibits 1004 1005.)
Farrell's letter explained that before AE could be awarded the contracts, AE was required to provide SupShip with additional information, including the following: "A proposed plan on how you intend to pay all subcontractors and suppliers on the USS Constellation (CV-64) contracts, if awarded. A weekly update will be required of all payments received by AEI and all disbursements made to subcontractors."
AE's letter of July 30, 1993 (Exh. 1005) responded to Farrell's letter by outlining how AE would set up a separate account at South Bay Bank for payments to subcontractors and suppliers and would deposit a percentage of payments received from SupShip into this account. AE also explained that after every progress payment, AE would provide the Contracting Office with proof of these percentage deposits and a weekly statement regarding payments made and materials purchased. By awarding the contracts to AE, SupShip indicated its approval of AE's proposed plan.
Nothing in AE's letter or Farrell's letter imposes duties upon the United States in connection with the account. Similarly, there is nothing in the prime contracts requiring the United States to monitor the account or otherwise ensure payment to Plaintiffs.
At trial, counsel for Plaintiffs argued that the United States was bound by an implied duty to cease making progress payments to AE if it appeared that the subcontractors were not being paid. The Court rejects this argument.
Under general contract principles, "a contract includes not only the promises set forth in express words, but, in addition, all such implied provisions as are indispensable to effectuate the intention of the parties and as arise from the language of the contract and the circumstances under which it is made." Choctaw Nation v. United States, 121 F. Supp. 206 (Ct.Cl. 1954) (emphasis added). "[T]erms are to be implied in contract, not because they are reasonable, but because they are necessarily involved in the contractual relationship, such that the parties must have intended them and must have failed to express them only because of sheer inadvertence or because they are too obvious to need expression." Williston on Contracts, § 31.7 at 321 (4th ed. 2000).
Nothing in the letters exchanged between SupShip and AE or the surrounding circumstances indicate that it was the intention of the parties that SupShip undertake a duty to monitor the account and cease making progress payments if it appeared that the subcontractors were not being paid. It would have made sense for the parties to agree to such terms for the protection of the subcontractors. However, the facts do not support a finding that the parties intended such terms. The Court will not imply a duty not expressly set forth in the contract or supported by the evidence.
Plaintiffs have failed to show that the agreement between SupShip and AE imposed duties upon SupShip to monitor the subcontractor/vendor account and to stop making progress payments if it appeared that AE was not paying the subcontractors. Accordingly, Plaintiffs cannot show a breach of contract by SupShip, and Plaintiffs cannot obtain recovery against SupShip as third party beneficiaries.
V. CONCLUSION
For the reasons discussed above, judgment shall be entered in favor of defendant United States of America and against plaintiffs J.W. Bowman Co., Inc., Master Pipefitting Welding, Inc., Southern Delta Metal Fabricators, Inc., and Allied Piping Welding, Inc. On May 30, 2000, Plaintiffs orally moved to dismiss AE Industries, Inc., without prejudice. Plaintiffs' motion is hereby granted. Accordingly, this judgment is final.
IT IS SO ORDERED.