______________________________________________________ MOTION FOR SUMMARY RELIEF DENIED: November 24, 1993 ______________________________________________________ GSBCA 11286-COM, 11576-COM PLANNING RESEARCH CORPORATION, INC., Appellant, v. DEPARTMENT OF COMMERCE, Respondent. A. Wayne Lalle, Jr. and Paul J. Kennedy of Graham and James, Washington, DC, counsel for Appellant. Jerry A. Walz, Mark Langstein, and Lesslie Viguerie, Office of the Assistant General Counsel for Finance and Litigation, Department of Commerce, Washington, DC, counsel for Respondent. Before Board Judges DEVINE, NEILL, and HYATT. HYATT, Board Judge. This appeal is of a contracting officer's decision denying claims sponsored by appellant, Planning Research Corporation, Inc. (PRC), on behalf of two of its subcontractors under certain equipment leases. These claims arose from the decision of respondent's Patent and Trademark Office not to fund a renewal of equipment leases in the option years, allowing the leases to expire. PRC asserts that the nonexercise of the options to renew the leases constituted a breach of contract, an improper termination for convenience, and a deductive change. Respondent has moved that the appeal be denied summarily because under the plain, unambiguous terms of the contracts, PRC, and thus the Government, were entitled to permit the leases to lapse. PRC has opposed the motion, arguing that material facts are in dispute and, in addition, that the cases relied upon by respondent are inapplicable in this context, involving options between a prime contractor and its subcontractors. Because we cannot determine at this juncture that the Government is entitled to prevail as a matter of law, we deny the motion. Background Respondent, the United States Department of Commerce, Patent and Trademark Office (PTO), awarded a cost-reimbursement contract to PRC for the design, development, and implementation of an automated patent system (APS) for the PTO. The contract was awarded in April of 1984. Appeal File, Exhibit 1. The APS design developed by PRC, and approved by the PTO, provided that the APS text search function would be performed by computer processor "search engines" that would be coupled to mainframe computers. Appeal File, Exhibit 10. In connection with this design feature, PRC entered into a subcontract with Federal Technology Corporation (FTC) for the acquisition of UNIX- based processors and associated equipment. Complaint 14. In conjunction with the FTC subcontract, PRC also entered into equipment lease agreements (the "leases") with Finalco and Eden Hannon (the "lessors"). Complaint 15, 16. The equipment leases were of the "lease to ownership plan (LTOP)" type, providing that after sixty months the equipment, which would be purchased by the lessors and furnished to PRC, would be owned outright by the PTO. The lease with Finalco was executed on August 9, 1986; the lease with Eden Hannon was executed on October 1, 1987. Appeal File, Exhibits 2, 4. The parties contemplated that the term of each lease would be sixty months. Appeal File, Exhibits 3, 5, 6, 10; Supplemental Appeal File, Exhibits 15, 18, 19. These leases, although entered into between the lessors and PRC, are stated to have been authorized and funded by the prime contract between the PTO and PRC. The equipment lease agreement between Finalco and PRC provides that equipment needed by PRC to perform its prime contract with the PTO would be purchased by Finalco from a designated equipment vendor on a schedule negotiated and executed by PRC and Finalco. PRC would assign any subcontract rights it had with such vendor to Finalco, which would lease the equipment to PRC under the terms stated in the schedule. The equipment lease agreement further provides that upon payment of sixty monthly lease payments, Finalco shall transfer and deliver title to the equipment to the Department of Commerce as directed by PRC. Appeal File, Exhibit 2. On July 23, 1987, PRC and Finalco executed an assignment of subcontract purchase rights, as provided under the equipment lease agreement. The assignment permitted Finalco to purchase equipment from FTC pursuant to the August 1985 contract entered into by PRC and FTC. Complaint 17. Also on July 23, 1987, equipment schedule number F003A to the PRC-Finalco equipment lease was executed. The schedule provided that PRC would lease thirty search engines and other associated items from Finalco. Under the heading "lease term," the lease is stated to be a "60 month Lease to Ownership Plan [LTOP] subject to section 9.2 of the Agreement and subject to any cancellation or termination rights of Lessee [PRC] under the Agreement." Appeal File, Exhibit 3. On October 1, 1987, PRC entered into an equipment lease agreement with Eden Hannon and Company. This lease is almost identical to the PRC-Finalco agreement. It similarly provides for a sixty month LTOP schedule for the subject equipment and for assignment of PRC subcontract rights. Appeal File, Exhibit 4. On April 16, 1988, PRC and Eden Hannon executed an assignment of subcontract purchase rights, permitting Eden Hannon to purchase equipment from FTC pursuant to the August 1985 PRC-FTC contract. They also executed equipment schedule number E003D providing that PRC would lease twenty-two search engines and associated items from Eden Hannon. Appeal File, Exhibit 5. Section 9 of both leases contains flow-down clauses such as disputes (paragraph 9.3), termination for the convenience of the Government (paragraph 9.4) and various Federal Acquisition Regulation (FAR) clauses incorporated by reference (paragraphs 9.5 and 9.6). Paragraph 9 in each lease states that "[t]he following contract clauses are based upon equivalent clauses contained in the User Contract."[foot #] 1 Appeal File, Exhibits 2, 4. Both leases include paragraph 9.1, which states as follows: Option to Extend the Term of the Equipment Leases. Notwithstanding any provision below to the contrary, Lessee shall be deemed to have exercised its option to extend the term of any Equipment Lease for the next Government Fiscal Year (as defined below) if the User issues a modification to the User Contract providing Government Fiscal Year funding for the Equipment Lease and authorizing Lessee to exercise its option to extend the term of the Equipment Lease for the next Government Fiscal Year. This clause is applicable and shall be deemed to be included in each and every Equipment Lease executed under this Agreement notwithstanding the term of this Agreement or the expiration of any other Equipment Lease. The initial term of each Equipment Lease is from the stated commencement date until the end of the then-current Government Fiscal Year. Each Equipment Lease is renewable at the same monthly rate applicable at the inception of the appropriate Equipment Lease, at the option of Lessee, by Lessee ----------- FOOTNOTE BEGINS --------- [foot #] 1 The "User" is defined in the leases to be the PTO. Appeal File, Exhibits 2, 4. ----------- FOOTNOTE ENDS ----------- giving written notice of renewal to lessor by the commencement of the next Government Fiscal Year or within 30 days after Government funding for such Government Fiscal Year becomes available, whichever date is later, such notice to include a copy of the User Contract funding document; provided that Lessee shall have given preliminary notice of Lessee's intention to renew at least 15 days before the Equipment Lease is to expire. Such a preliminary notice of intent to renew shall not be deemed to commit Lessee to renewals. If the User has not so authorized Lessee, by the end of the then-current Government Fiscal Year, to exercise the option to extend the term of the Equipment Lease for the next Government Fiscal Year, Lessee may, at its option, so extend such Equipment Lease on a month-to-month basis. In such event the terms and conditions applicable to such Equipment Lease under this Agreement shall be in full force and effect including the provisions of this Section 9.1. The total duration of such Equipment Lease, including the exercise of any options under this Section 9.1, shall not exceed 60 months. Appeal File, Exhibits 2, 4.[foot #] 2 In contrast to paragraphs 9.3 through 9.6, there is no clause that equates to paragraph 9.1 in the prime contract between PRC and the PTO. PRC contends that all the principals, including various PTO officials, intended and construed the leases to require exercise of the options to the extent funds were available. This, according to PRC, was a clear condition of obtaining financing for the leases. The following averments, relating to the Eden Hannon lease, are made in an affidavit offered by PRC: In connection with the Lease Equipment Agreement ("Lease") relating to the provision of search engines and related equipment to the United States Department of Commerce, Patent and Trademark Office ("PTO"), I attended a meeting on behalf of Connecticut General in Washington, D.C. on September 30, 1987, to confirm the PTO's commitment to performance of the Lease for the full 60 months. The meeting was held at my request and as a precondition to Connecticut General's participation in the Lease financing. In attendance at this meeting were . . . the Director of Procurement of PRC and . . . the Assistant Commissioner for Information Systems of the PTO. I advised [the PTO ----------- FOOTNOTE BEGINS --------- [foot #] 2 Paragraph 9.2 of the PRC-Finalco agreement permits PRC to discontinue leasing equipment upon 25 days written notice if the PTO discontinues leasing under its agreement with PRC. Appeal File, Exhibit 2. This provision is omitted in the agreement between PRC and Eden Hannon. Appeal File, Exhibit 4. ----------- FOOTNOTE ENDS ----------- Commissioner] that Connecticut General's willingness to finance the lease depended on the correctness of the representation that the risk of non-appropriation was limited to the case in which the entire PTO automation project was discontinued and that, other than in the case of a lessor default, any other termination would be "for convenience," which would result in damages that would make a lender whole. I further advised [the PTO Commissioner] that my purpose in requesting the meeting was to obtain assurance that PTO interpreted the Lease arrangement in a way wholly consistent with Connecticut General's understanding and that such assurance was a condition to financing the Lease. [The PTO Commissioner] indicated that the only impediments to continued funding of the Lease for the full term were non-appropriation of funds by Congress for PTO automation as a whole and termination by the PTO for convenience or default. I was interested in obtaining this commitment from the PTO because the equipment to be provided under the Lease was designed specifically for the PTO, and we had no basis for judging whether it would have any value on the open market, a point I made to [the PTO Commissioner]. [The PTO Commissioner's] response was that even if the Government had the right to terminate individual items of equipment without full compensation (a right he repeated it did not have), the government would not exercise such a right in this case because the equipment was of such general utility within the Commerce Department. Without the PTO's affirmation of the interpretation of the Lease arrangement, Connecticut General would not have financed the Lease. Declaration of Donald F. Rieger, Jr. (Rieger Declaration) (August 20, 1991) 2-3.[foot #] 3 On March 31, 1988, the Findings and Recommendations of the Automated Patent System Industry Review Panel were issued. The Review Panel endorsed an alternative system not using search engines. Supplemental Appeal File, Exhibit 20. On April 22, 1988, PRC and Eden Hannon entered into a letter agreement amending the terms of the lease agreement and equipment schedule. The letter agreement provided that PRC would pay an amount equal to the aggregate amount of unpaid monthly lease payments if 1) the user contract between PRC and the Department of Commerce was modified to provide for the expiration of the ----------- FOOTNOTE BEGINS --------- [foot #] 3 Connecticut General financed the Eden Hannon lease and received an assignment of the proceeds; American Security Bank financed the Finalco lease under a similar arrangement. ----------- FOOTNOTE ENDS ----------- user contract on a date on which not all of the monthly lease payments had been paid in full, or 2) if the PTO discontinued payment for the use of the equipment at any time prior to the end of the Lease Term "for any reason other than a termination for convenience as contemplated by Section 9.4 of the Lease Agreement or a nonrenewal as contemplated by Section 9.1 of the Lease Agreement." Appeal File, Exhibit 6. In a letter dated September 19, 1989, the contracting officer for the PTO-PRC prime contract notified PRC that "[d]ue to budgetary constraints" the fiscal year 1990 lease schedules with Finalco and Eden Hannon should not be funded. At the same time, other leases, pursuant to different equipment schedules under the same Equipment Lease Agreements, would be funded. Appeal File, Exhibit 7. In letters dated September 29, 1989, PRC in turn informed Finalco and Eden Hannon that "in accordance with Section 9.1, Option to Extend the Term of the Equipment Lease" of its lease agreements with these companies, PRC had been informed by the PTO that the lease schedules would not be funded in fiscal year 1990. Appeal File, Exhibits 8, 9. On August 13, 1990, American Security Bank (ASB), assignee for Finalco, forwarded a claim to PRC for $793,722.47, plus interest and attorney fees for the termination of the equipment lease. Appeal File, Exhibit 10. On August 21, 1990, Eden Hannon similarly submitted a claim for the remaining lease payments from the date of the last lease payment made. PRC in turn certified these claims[foot #] 4 and submitted them to the contracting officer, who denied them. ----------- FOOTNOTE BEGINS --------- [foot #] 4 The initial certification of the claims by PRC has been challenged by the Government as inadequate to establish jurisdiction at the Board. A decision on this motion has been deferred because PRC, as a precautionary measure, submitted a second certification of its claim, one which PTO agrees is satisfactory under the FAR. The "second" certification of PRC's claim is docketed as GSBCA 11576-COM. Thus, the certification issue has become a matter of resolving the date from which entitlement to interest commences, a matter which is not pressing unless the appeal is resolved in appellant's favor, at least in part. ----------- FOOTNOTE ENDS ----------- Discussion PRC's complaint alleges that the PTO improperly terminated the portion of PRC's prime contract that related to the subcontracts of Finalco and Eden Hannon. According to PRC, the PTO's actions constituted a beach of contract, an improper partial termination for convenience, and a deductive change. PRC contends that recovery would be justified under any of these alternative legal theories. Respondent's motion for summary relief is premised on paragraph 9.1 of the lease agreements PRC entered into with Finalco and Eden Hannon. Respondent argues that this lease provision is an option clause providing PRC the absolute right not to renew the leases. Based on this clause, respondent further urges that the term of each lease is limited to a single fiscal year. Accordingly, respondent contends, when PRC, in consonance with the PTO's instructions that the leases would not be funded, did not opt to renew the leases, no further cause of action was available to these subcontractors. Relying on Government Systems Advisors, Inc. v. United States, 847 F.2d 811 (Fed. Cir. 1988), respondent thus urges that this appeal raises a matter of pure contract interpretation as to which summary relief is clearly available because the plain language of the option clauses in the leases controls. Appellant disagrees, pointing out that summary judgment is not always available in cases involving contract interpretation absent a record sufficient to show the circumstances surrounding the contract. Campbell v. United States, 2 Cl. Ct. 247, 249 (1983); Jay Automotive Specialties, Inc., ASBCA 38930, 91-2 BCA 23,716. The standard by which a motion for summary relief, or summary judgment, should be measured is whether there are any genuine issues of material fact to be resolved that would affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Stroh Corp. v. General Services Administration, GSBCA 11029, 93-2 BCA 25,841. In considering a motion for summary relief, we draw all inferences in favor of the non-moving party. See Reliance Insurance Co. v. United States, 931 F.2d 863, 865 (Fed. Cir. 1991). In the principal case cited by the PTO, Government Systems Advisors, Inc., the Government had entered into a lease to ownership contract with Government Systems Advisors, Inc. The terms of the lease were similar to those of the subcontracts in issue here, and the lease contained an option clause comparable to section 9.1 of the Finalco and Eden Hannon leases. In Government Systems, the agency decided not to renew the leases in option years; the lessor asserted a claim, urging that the Government was obligated to exercise the options unless no funds were available. Pointing out that the case did not involve any allegations of Government conduct or actions that might affect the interpretation of the contracts, the Court held that the language in question was unambiguous and established a true option contract. The Government, therefore, was not bound to exercise the options regardless of the availability of funds. In these circumstances, the Court affirmed the lower court's decision granting the Government's motion for summary judgment. The PTO's position is that Government Systems is controlling -- under the plain language of the leases there was absolutely no obligation for PRC (or thus the PTO) to renew; PRC was therefore well within its contractual rights to let the leases expire. Section 9.1 establishes one-year terms for the leases, with options to renew for up to a total of a sixty months. As the PTO points out, in general, option clauses are deemed to be just that -- there is no requirement that an option be exercised. See, e.g., Government Systems Advisors, Inc.; Vehicle Maintenance Services v. General Services Administration, GSBCA 11663, 93-3 BCA 25,929; Centennial Leasing v. General Services Administration, GSBCA 11409, 93-2 BCA 25,609; Gricoski Detective Agency, GSBCA 8901, 90-3 BCA 23,131; Optimal Data Corp., NASA BCA 381-2, 85-1 BCA 17,760 (1984). Thus, respondent contends, since the subcontracts contain exculpatory language relieving PRC from any liability to the lessors, the Government is also immune from liability to PRC. At the outset, PRC points out that there is no privity of contract between the PTO and the lessors, such that the PTO might properly invoke these clauses as a defense to this appeal.[foot #] 5 This is particularly so because there is no comparable option provision in the prime contract entered into between the PTO and PRC.[foot #] 6 Thus, PRC argues, the Government cannot in any event rely on section ----------- FOOTNOTE BEGINS --------- [foot #] 5 It is unclear whether respondent, in urging that both PTO and PRC were entitled to allow the options to expire, is suggesting that for this purpose, PTO and PRC shared the same shoes. In any event, to the extent respondent is intimating that there is an agency type of relationship that permits PTO to establish privity of contract with the lessors, such that it might have the right to rely on this clause, the record is insufficiently developed to ascertain whether this is factually correct under controlling precedent. See U.S. West ___ __________ Communications Services, Inc. v. United States, 940 F.2d 622 _________________________________________________ (Fed. Cir. 1991); United States v. Johnson Controls, Inc., 713 _________________________________________ F.2d 1541 (Fed. Cir. 1983). In addition, at least one court, in addressing the same contract, has held that there is no agency relationship. See Amdahl Corp. v. Baldridge, 617 F. Supp. 501 ___ __________________________ (D.D.C. 1985). [foot #] 6 Indeed, PRC has made an argument that the option clauses in paragraph 9 of the leases are inapplicable in light of the introductory language stating that the provisions in paragraph 9 are based on equivalent provisions in the prime contract and the absence of a corresponding option clause in the prime contract. ----------- FOOTNOTE ENDS ----------- 9.1 of the leases to avoid the dispute that exists between it and the prime contractor, PRC. Accordingly, PRC claims that the cases cited by respondent do not apply here. In Severin v. United States, 99 Ct. Cl. 435 (1943), cert. denied, 322 U.S. 733 (1944), the Court of Claims held that a subcontractor could not recover against the Government when its agreement with the prime contractor completely exculpated the prime contractor from any liability to the subcontractor. Subsequent cases have clarified that this is a limited defense and that the Government, to the extent it seeks to invoke the Severin doctrine, has the burden to prove that the sponsoring prime contractor has no liability to its subcontractor. Southern Construction Co. v. United States, 364 F.2d 439 (Ct. Cl. 1966); Folk Construction Co. v. United States, 2 Cl. Ct. 681 (1983). Indeed, Severin has been refined to the extent that "it requires an iron-bound release or contract provision immunizing the prime contractor completely from any liability to the sub[contractor]" to be applicable. Cross Construction Co. v. United States, 225 Ct. Cl. 616, 618 (1980). The limited record available to us in this matter does not show this to be the case. PRC has alleged facts that, if proven, could show that it is in fact obligated to the lessors to pay for the equipment. Even if we might, on a fully developed record, deem this lease clause to be one that completely exonerated PRC from liability to its lessors, the Government cannot rely on it in the context of a summary relief motion to defeat this claim. Additionally, PRC notes that to the extent it may be eligible to recover the amounts claimed under a contract clause providing for a price adjustment, rather than under a breach of contract theory, the Severin doctrine is simply inapplicable. Seger v. United States, 469 F.2d 292 (Ct. Cl. 1972); Blount Brothers Construction Co. v. United States, 348 F.2d 471 (Ct. Cl. 1965); F.E. Constructors, ASBCA 25784, 82-1 BCA 15,780.[foot #] 7 PRC has alleged, and offered some substantiating evidence to corroborate, certain facts that support its contention that the Government should have treated the decision to jettison these particular leases as a partial termination for convenience of the prime contract, or, alternatively, as a deductive change under the prime contract. The record is not sufficiently developed to determine if these theories are viable or not. The existence of potentially exculpatory language in the subcontracts is thus not sufficient to bar equitable adjustment claims asserted by a prime contractor on behalf of its subcontractors. ----------- FOOTNOTE BEGINS --------- [foot #] 7 The rationale for not permitting an exculpatory clause to bar recovery of an equitable adjustment is that these clauses were intended merely to protect the prime contractor from liability to the subcontractor in the event its prime contract did not permit recovery of a particular cost. Seger v. United _______________ States, 469 F.2d 292 (Ct. Cl. 1972). ______ ----------- FOOTNOTE ENDS ----------- Even assuming arguendo that the Severin doctrine might bar the breach of contract claim,[foot #] 8 however, PRC opposes the motion because there are disputed factual issues concerning the intent of the parties in entering into the lease agreements, which are subcontracts to which the PTO is not even a party. In particular, PRC contends that there are at least two material facts that appear to be disputed: 1) PRC's assertion concerning the contemplation of the parties that notwithstanding section 9.1, which was intended only to cover the contingency that funds might not be appropriated, the lease terms would be for 60 months; and 2) PRC's assertions concerning the reliance of the finance companies on the representations of the PTO as to the extent of the Government's commitment. PRC has provided an affidavit to support its contentions in this regard. The affidavit raises sufficient doubt as to the intentions of the parties to the subcontracts to prevent the summary disposition of this matter. In addition, section 9.1 is set forth in a group of flow-down clauses, but does not have a counterpart in the prime contract, another circumstance that contributes to ambiguity as to the intentions of the parties. Decision The motion for summary relief is DENIED. ______________________________ CATHERINE B. HYATT Board Judge We concur: ______________________________ _______________________________ DONALD W. DEVINE EDWIN B. NEILL Board Judge Board Judge ----------- FOOTNOTE BEGINS --------- [foot #] 8 To overcome the summary relief motion as to its breach of contract allegation, appellant must simply demonstrate the existence of a question of fact as to whether the Government acted properly. One way to prove breach of contract would be to provide evidentiary support for the contention that PTO's decision directing PRC not to renew the leases was improperly motivated by bad faith. Vehicle Maintenance Services, 93-3 BCA _____________________________ at 128,967. PRC has alleged that the timing of the issuance of the Industry Review Panel's report, coupled with the Government's decision to drop the search engine leases, provides evidence of possible bad faith.