By Sam Van Kopp and Andy Liu

July 27, 2020

In Appeals of Raytheon Company, decided June 24th, 2020, the Armed Services Board of Contract Appeals (ASBCA) looked beyond the somewhat ambiguous text of two contract clauses to award an equitable adjustment for work executed in accordance with years of contract performance. The decision represents a victory for non-textualist conceptions of contract interpretation.

The contract clauses at issue concerned the Statement of Content (SOC) – analogous to a ‘Statement of Work’ – governing the production of AMRAAM air-to-air missiles.  Section 2.a of the SOC required Raytheon to “manufacture, test, integrate, and deliver” a number of missiles over a three-year period and included “all the activities necessary to produce” those missiles.  Section 2.b of the SOC required Raytheon to “support future missile production and sustainment of fielded missiles” over a one-year period.  Since 1997, the Systems Engineering/Program Management (SEPM) support work identified in Section 2.b involved both the sustainment of missiles manufactured under previous contracts and the production of new missiles under Section 2.a.

In 2013, the Air Force Contracting Officer (CO) sought to distinguish SEPM support work involved in missile production from SEPM support work involved in missile sustainment.  Noting that Section 2.a included “all activities necessary to produce” missiles, the CO concluded that Section 2.a obligated Raytheon to provide three years of SEPM production support, independent of the one year SEPM support requirements of SOC 2.b.  As a consequence, the CO then directed Raytheon to continue performing SEPM production support work even after the conclusion of the one-year period for work under Section 2.b.

In deciding Raytheon’s subsequent appeal, the ASBCA found that Sections 2.a and 2.b were ambiguous since it was reasonable to read both clauses as covering the production SEPM.  In order to resolve the ambiguity, the ASBCA turned to the large body of evidence regarding the parties’ course of dealing to determine which of the two Sections governed production SEPM. After assessing testimony from many government officials and evidence of prior contract negotiations that proposed moving production SEPM from Section 2.b to  2.a, the ASBCA concluded that both Raytheon and the Air Force had “a common basis of understanding that SOC 2.b covered production SEPM.”  Because Section 2.a did not require Raytheon to provide production SEPM, the ASBCA held that the CO’s demand for three years of production support constituted a constructive change entitling Raytheon to its requested equitable adjustment.

Notably, the ASBCA chose not to characterize the ambiguity as latent or patent, or to examine whether Raytheon had a responsibility to clarify the ambiguity before bidding on the contract, as sometimes precludes contractor recovery where ambiguities are patent. See Triax Pac., Inc. v. West, 130 F.3d 1469 (Fed. Cir. 1997). Instead, the ASBCA’s decision, in dicta, observed that evidence of a course of dealing may establish an enforceable contract term even absent an ambiguity.  If, as the ASBCA noted, a course of dealing involves the same parties and “essentially the same contract provision,” it may evidence waiver of even explicit contract language.  This non sequitur followed pages of background facts suggesting that all parties except the CO understood Section 2.a not to require production SEPM in the current or previous iterations of the contract.  The CO himself acknowledged that his position was “slightly ‘unfair’” but “concluded that the plain language of the SOCs compelled the conclusion that SOC 2.a covered production SEPM.” The juxtaposition of such strong course of performance evidence with a superfluous paragraph about the power of course of performance evidence to override the text of a contract may signal that the ASBCA considered the CO’s purely textual position to be unreasonable.  In rejecting the CO’s purely textualist argument, Appeals of Raytheon illustrates the limits of textual revisionism in altering the parties’ course of dealing in long running government contracts.