Don’t Forget to Certify Within Six Years: Recent Opinion Addresses Timeliness of Government Contractor’s AppealOn May 19, 2020, the Federal Circuit upheld summary judgment against a government contractor for failure to file a claim timely within the six-year time limit prescribed by the Contract Disputes Act (CDA). In Electric Boat Corp. v. Secretary of the Navy, the Federal Circuit determined that the claim from the contractor, Electric Boat, accrued no later than August 15, 2005, the date when it first became entitled to a cost adjustment under its contract with the Navy. By certifying its claim more than seven years later, Electric Boat’s claim and appeal were untimely.

In 2003, Electric Boat signed a contract with the Navy to construct up to six submarines.  The contract included a change of law provision providing for a price adjustment if compliance with a change in federal law increased or decreased Electric Boat’s costs. For the first two years of the contract, no cost adjustment was allowed under that provision, but, after August 15, 2005, for cost increases in excess of $125,000, Electric Boat could qualify for an adjustment under the clause. The clause required that Electric Boat provide the Navy prompt notice of any change of law and submit a request for equitable adjustment for any cost increase.

In September 2004, OSHA issued a new regulation requiring Electric Boat to post a “fire watch” if certain conditions were present during “hot work” at its shipyard. Five months later, Electric Boat submitted a notice of change to the Navy stating that Electric Boat anticipated a cost increase from the new regulation in excess of $125,000. Electric Boat submitted a cost proposal to the Navy in 2007, and the Navy formally denied the proposal in May 2011.

After certifying its claim in December 2012 and receiving a Final Contracting Officer’s Decision from the Navy denying the claim, Electric Boat filed an appeal with the Armed Services Board of Contract Appeals (ASBCA). The Navy moved for summary judgment, arguing that Electric Boat did not file its claim within the six-year limitations period provided under the CDA. The ASBCA agreed, finding that Electric Boat knew of its claim no later than February 2005 and suffered injury no later than August 15, 2005. Because Electric Boat did not certify its claim until December 2012, some seven years later, the claim was untimely.

Electric Boat appealed the ASBCA’s decision to the Federal Circuit. Affirming the ASBCA’s decision, the Federal Circuit noted that claims under the CDA must be submitted within six years of “accrual.” Per the Federal Circuit, claim accrual is set as “the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known,” and, while monetary damages need not have been incurred, “for liability to be fixed, some injury must have occurred.”

Per the Federal Circuit, the Navy’s liability became fixed for purposes of claim accrual on August 15, 2005, when Electric Boat became eligible for costs associated with the new OSHA regulation under the change of law clause. The Federal Circuit rejected Electric Boat’s argument that its claim did not accrue until formal denial of its cost proposal in May 2011. The Federal Circuit found that, in the absence of any “mandatory pre-claim procedures” that prevented certification of Electric Boat’s claims, the date for claim accrual should not be linked with the May 2011 denial. The contract did not require Electric Boat to await a unilateral price adjustment or denial from the Navy prior to filing a claim, so the formal denial by the Navy did not excuse Electric Boat’s failure to timely file its claim in accordance with the CDA six-year limitations period.

The Federal Circuit’s decision in Electric Boat is an important reminder for government contractors to be conservative when calculating the time for filing any certified claims against the government. Government review of potential changes and requests for equitable adjustment can lag substantially during a project and even extend well-beyond project completion. However, the government’s delay in reviewing and assessing requests for equitable adjustment will not toll the running of the statute of limitations under the CDA for filing a certified clam. When you first anticipate a claim might require appeal to the U.S. Court of Federal Claims, the ASBCA or the Civilian Board of Contract Appeals, it is a good idea to calendar a date six years from the earliest date when your claim may have accrued regardless of whether you have received a response to a request for an equitable adjustment. Being mindful of the limitations period will help you avoid Electric Boat’s unfortunate fate.

If you have any questions about this decision or government contract claims generally, please feel free to contact Doug Patin, Aron Beezley, or Aman Kahlon.

Promises to Pay Sub-subcontractor Exposes General Contractor to Liability for Unjust EnrichmentOn May 14, 2020, in James G. Davis Constr. Corp. v. FTJ, Inc., the Virginia Supreme Court upheld a judgment on an unjust enrichment claim in favor of FTJ, a drywall supplier on a condominium project, against Davis, the general contractor. Notably, FTJ did not have a purchase order with Davis, but FTJ was able to rely on the existence of a joint check agreement and Davis’s multiple assurances regarding payment and the resulting inducement for FTJ to continue performance to succeed on its theory of unjust enrichment.

Davis subcontracted with a drywall company to complete the drywall and metal framing for the building. The subcontractor hired FTJ to supply the drywall materials for the project. According to the court, to ensure the smooth operation of the project, Davis, its subcontractor, and FTJ executed a joint check agreement for Davis to make any and all checks out to both the subcontractor and its supplier. When the subcontractor fell behind on invoices for drywall, FTJ repeatedly contacted Davis about these past due payments, and each time, Davis assured FTJ that a check had been written or would be written for the materials at issue. As a result, FTJ continued to ship materials that it would have typically withheld on a past due account. During these interactions, Davis learned that its subcontractor was having trouble meeting payment obligations and worried that it would be unable to pay FTJ for materials.

When the subcontractor defaulted, Davis requested that FTJ not ship further materials and, again, assured FTJ that there were funds available to pay FTJ on past due amounts. FTJ did not file a lien, in part, because of its confidence that Davis would satisfy its subcontractor’s debts. However, after terminating the subcontractor, Davis incurred additional costs to complete the subcontractor’s work and informed FTJ that Davis could only pay a fraction of the past due invoices. FTJ filed suit, and, after finding the joint check agreement void for lack of consideration, the trial court ruled in FTJ’s favor on its claim for unjust enrichment.

On appeal, Davis argued the trial court decision should be overturned based on the following:

  1. The joint check agreement was valid, and the existence of a contract covering the subject matter of a dispute precluded recovery for unjust enrichment.
  2. The unjust enrichment claim should be barred because it forced Davis to pay for the same goods twice, first, under the subcontract and, again, under the court’s judgment.
  3. Because the joint check agreement required Davis to make payments only when Davis actually owed money to the subcontractor, and no such payments were actually owed, FTJ failed to satisfy one of the key elements of an unjust enrichment claim — that a defendant must reasonably have expected to repay the plaintiff for the benefit conferred.

The Virginia Supreme Court rejected each of these arguments finding:

  1. The existence of the joint check agreement, even if valid, did not foreclose recovery under a theory of unjust enrichment, where the benefit conferred was outside the scope of that agreement. The court concluded the joint check agreement governed the parties’ interactions only as to the form of payment, and, thus, FTJ’s claim regarding nonpayment of delivered materials fell outside the plain terms of the joint check agreement. The court also reasoned that Davis’ repeated assurances that it would pay FTJ for materials after the subcontractor fell behind on payment created separate expectations regarding payment outside the confines of the joint check agreement.
  2. Davis was not being asked to pay twice for the same goods because the dispute with FTJ involved payment for specific supplies and not the overall cost of the project. The evidence established that Davis did not pay for the delivered materials, Davis used the materials, and, absent those materials, Davis would have had to procure replacement supplies elsewhere, so, the court reasoned, Davis was only being required to pay once for those materials.
  3. The language in the joint check agreement limiting Davis’s obligation to payment for amounts actually owed to the subcontractor was undone by Davis’s course of conduct in repeatedly assuring FTJ of payment to induce further delivery of materials. Based on that course of conduct, the trial court could plausibly conclude that Davis expected to pay for the drywall delivered by FTJ.

In upholding the trial court’s decision, the Virginia Supreme Court emphasized the narrowness of its holding as to the specific facts at issue. The court appeared particularly troubled by Davis’s intrusion into the subcontract-supplier relationship by providing repeated promises of payment to encourage FTJ’s continued performance. The opinion also includes a lengthy dissent criticizing a number of legal positions staked out by the majority.

What lessons can be learned from this decision?

Under these circumstances, any broad takeaways or lessons from the court’s ruling are limited. The decision creates as many questions as it answers.  For example, progress billings often do not itemize expenditures from individual suppliers, but the court’s decision suggests a contractor will not be able to rely on progress payments to demonstrate payment of suppliers whose work should have been incorporated into the work during the applicable pay period.  How, then, can a contractor be expected to avoid double payment for work when sub-subcontractor raises a claim for unjust enrichment?

Regardless, contractors should be mindful of the court’s approach in Davis. Strong legal arguments will not always be enough to overcome certain factual scenarios, and the reverse may also be true. The dispute in Davis was only over $160,000, and after extensive and expensive litigation, the court found the contractor responsible for the full amount. To avoid unfortunate and unpredictable results like the decision in Davis, it is important to spend time evaluating claims on the front end and exploring reasonable commercial resolutions to any dispute.

If you have any questions about the decision in Davis, please feel free to contact Aman Kahlon.

SBA Issues Interim Final Rule on PPP Loan ForgivenessUnder the Paycheck Protection Program (PPP), borrowers can seek loan forgiveness of the full principal amount of loans as early as eight weeks after disbursement of the loan proceeds. On May 22, 2020, the U.S. Small Business Administration (SBA) issued its Interim Final Rule regarding the loan forgiveness application process in advance of anticipated loan forgiveness applications from PPP borrowers. Here are the important takeaways from the rule.

Borrowers Must Apply for Loan Forgiveness

Excepting loans separately reviewed by the SBA, to qualify for forgiveness, a borrower must complete and submit to its lender a Loan Forgiveness Application using SBA Form 3508 or the lender’s equivalent. A lender has 60 days thereafter to review the application and issue a decision to the SBA on loan forgiveness.  If the lender determines that the borrower is entitled to forgiveness of any portion of the loan, the lender must request payment from the SBA when it issues its decision. The SBA will then remit payment of the amount forgiven, plus interest accrued through the date of payment, no later than 90 days after receipt of the lender’s decision. During its review of the lender’s decision, SBA may determine that the borrower was ineligible for a loan and the loan will not be eligible for forgiveness.

The lender must inform the borrower of the amount of loan forgiveness and any amount not forgiven must be repaid by the borrower on or before the date when the two-year loan matures. If the amount remitted by the SBA to the lender is greater than the remaining principal balance on the loan, the lender must remit to the borrower the excess amount, including accrued interest.

Costs Eligible for Loan Forgiveness

PPP borrowers are eligible to have loans forgiven in an amount equal to the total of costs incurred for payroll costs, plus non-payroll costs for interest payments on mortgages, payments due under lease agreements, and certain utility payments for service that began prior to February 15, 2020.  When calculating the eligible amounts spent by a borrower for payroll costs, borrowers can seek forgiveness of payroll costs paid or incurred during the eight consecutive week period beginning on either the date the borrower’s PPP loan proceeds were disbursed (the covered period) or, alternatively, borrowers can calculate payroll costs incurred beginning on the first day of the first payroll cycle after the disbursement date (the alternative payroll covered period). Payroll costs incurred during the borrower’s last pay period of the covered period or alternative payroll covered period are eligible for forgiveness if paid on or before the next payroll date.

Similarly, non-payroll costs are eligible for forgiveness if the costs were paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is outside the covered period. The alternative payroll covered period is not applicable when calculating non-payroll costs.

Avoiding Reductions in Loan Forgiveness

If a borrower reduces its number of full-time equivalent employees (meaning employees who work 40 hours or more, on average, each week) or employee salaries and wages during the covered period, then the borrower’s loan forgiveness amount may be reduced by the same percentage as the percentage reduction in full time equivalent employees. This reduction is limited, however, if by June 30, 2020 the borrower eliminates reductions in the number of full-time equivalent employees or employee salaries or wages that were reduced between February 15, 2020 and April 26, 2020.

Additionally, the rule also implements a new regulatory exemption that allows a borrower to avoid a reduction in a borrower’s loan forgiveness amount when the borrower has offered to rehire an employee or restore an employee’s hours, but the employee has rejected the offer. To be eligible for this exemption, the borrower must have made a good faith, written offer to rehire the employee for the same salary or wages and same number of hours as earned by the employee in the last pay period prior to separation or reduction in hours and the employee must have rejected the offer. The borrower must also maintain records documenting the offer and rejection and inform the applicable state unemployment insurance office of the employee’s rejection of the offer of reemployment within 30 days of the employee’s rejection of the offer.

The Importance of Full-Time Equivalent Employees

For a borrower to demonstrate that it has maintained its full-time equivalent employees, the borrower must select a “reference period.” The reference period can be February 15, 2019 through June 30, 2019; January 1, 2020 through February 29,2020; or, in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019. If the average number of full-time equivalent employees during the covered period is less than the average during the reference period, then the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in full-time equivalent employees (reduction quotient).

When calculating full-time equivalent employees, borrowers must divide the average number of hours worked by each employee by 40. However, an employee that worked more than 40 hours per week on average cannot count as more than one full-time equivalent employee.

For employees that worked less than 40 hours per week on average, borrowers may calculate full-time equivalency in two ways. On one hand, a borrower may calculate the average number of hours a part-time employee was paid per week during the covered period.  So, an employee who was paid for 30 hours per week on average during the covered period would be considered three quarters (0.75) of a full-time equivalent employee. Alternatively, borrowers may elect to use a full-time equivalency of one-half (0.50) for all part-time employees. Whichever method is chosen, it must be applied consistently across all part-time employees, and the borrower must provide the aggregate total of full-time equivalent employees for the selected reference period and the covered period or alternative payroll covered period. To calculate the applicable reduction quotient, the borrower should divide the average full-time equivalent employees during the covered period, or the alternative payroll covered period by the average full-time equivalent employees during the reference period.

The Effect of Reduced Salaries and Wages

While borrowers may reduce employee salaries up to 25 percent during the covered period without a proportionate reduction in the amount of loan forgiveness, reductions of more than 25 percent will generally result in a reduction in the amount a loan may be forgiven proportionate to the reduction in wages or salaries greater than 25 percent. In other words, for each employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce its loan forgiveness request by the total amount of salary or wage reductions in excess of 25 percent of the base salary or wages between January 1, 2020 and March 31, 2020 (except to the extent such wages are restored by June 30, 2020). This calculation must be performed on a per-employee basis and not in the aggregate.

Comparatively, if an employee’s wages are reduced solely because of a change in the employee’s full-time equivalent employee status (i.e., a full-time employee’s hours are reduced to part-time during the covered period), then the borrower is not required to conduct a salary or wage reduction calculation for that employee.

For-Cause Terminations and Voluntary Employee Actions

Finally, if an employee is terminated for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or alternative payroll covered period, then the borrower may include that employee at the same full-time equivalency level prior to such event when calculating the full-time equivalent employee reduction penalty.

Closing Remarks

Undoubtedly, this latest Interim Final Rule from the SBA will spawn additional questions from borrowers and lenders alike as loan forgiveness applications are filed in the coming weeks.  Bradley will continue to monitor and provide updates on subsequent guidance issued by the SBA. Please feel free to contact Aron Beezley, Elizabeth Boone, Frederic Smith, or Alex Thrasher if you have any questions regarding PPP loan forgiveness or the program generally.