Reflectone, Inc v. Dalton:
The Federal Circuit Restores the Balance in Contract Claims

In a long-awaited decision issued on July 26, 1995, Reflectone, Incorporated v. Dalton, the U.S. Court of Appeals for the Federal Circuit holds that initial submission of a request for equitable adjustment under a federal contract qualifies as a “claim” under the Contract Disputes Act, so long as it is a written demand seeking as a matter of right the payment of money in a sum certain. There is no requirement for a pre-existing dispute over entitlement or the amount claimed. The Court specifically overrules its prior decision to the contrary in Dawco Construction, Inc. v. United States, 930 F.2d 872 (Fed. Cir. 1991). Dawco and the cases which followed it in effect required contractors to twice submit demands first as a request for equitable adjustment, and then as a “claim” after the Government disputed the request or failed to act on it. Reflectone restores the Contract Disputes Acts’ original statutory scheme to promote the prompt, fair, and efficient resolution of contract disputes.

I. The Reflectone Decision

Reflectone is of such significance to contracts lawyers, contractors, and procurement officials, that we thought it best to outline what the decision does and does not decide before we describe its background. Reflectone decides:

A. The only requirements for a “claim” under the Contract Disputes Act, and FAR 33.201, are those stated in the first sentence of FAR 33.201. A claim is a written demand by one of the contracting parties seeking as a matter of right the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising out of or relating to the contract. There is no requirement that, before submission of such a claim, the parties have a dispute concerning liability or the amount of relief sought.

B. The only exception is for a “voucher, invoice or other routine request for payment that is not in dispute when submitted.” For example, if the contractor submits a monthly invoice for a progress payment, this invoice is not a claim. Such an invoice can be converted to a claim only by written notice to the contracting officer, if the invoice is disputed either as to liability or amount, or is not acted upon in a reasonable time. Reflectone specifically holds that a request for equitable adjustment is “anything but” a routine request for payment.

C. The submission of a claim starts the running of interest and the requirement for the contracting officer to issue a final decision on the claim. However, nothing prevents the contracting officer from requesting additional information concerning the claim, and nothing prevents the parties from engaging in negotiations in an effort to settle the claim.

D. Since Reflectone decides that a claim does not require any pre-existing dispute, the Court did not address the issues whether the dispute must be as to amount, or whether denial of liability is sufficient. Judge Nies, concurring in the en banc decision, concludes that there is no requirement for a pre-existing dispute as to amount where, as in Reflectone, the Government denies any liability.

II. Background of the Case

Reflectone, Incorporated, held a 1988 Navy contract to update helicopter trainers, and claimed that its work was delayed due to late delivery of government-furnished equipment. Reflectone and the Navy each blamed the other for the delays and reserved the right to claim against each other once damages were known. In 1990, Reflectone submitted a $266,840 request for equitable adjustment to the contracting officer. The request was certified and demanded a contracting officer’s decision. The contracting officer issued a final decision that denied Reflectone’s entitlement to all but $17,000, and simultaneously asserted a $657,000 government claim against Reflectone.

Reflectone filed its claim with the ASBCA. The Navy moved to dismiss, on the ground that Reflectone’s request did not satisfy the requirements of a “claim” under FAR 33.201 and the Contract Disputes Act, because at the time the request was submitted, the amount was not in dispute. The ASBCA granted the Navy’s motion, and dismissed Reflectone’s case for lack of subject matter jurisdiction, citing Dawco. The ASBCA held that under Dawco, the parties must have a pre-existing dispute over the amount requested, whether or not there is a pre-existing dispute over entitlement. Reflectone, Inc., ASBCA No. 43081, 93-1 BCA 25,512, at 127,056. Reflectone appealed.

In September 1994, a divided panel of the Federal Circuit affirmed the ASBCA decision. Reflectone, Inc. v. Kelso, 34 F.3d 1031 (Fed. Cir. 1994). Reflectone moved for reconsideration en banc, which was granted, and the Court then vacated the panel’s decision. 34 F.3d 1039 (Fed. Cir. 1994).

III. The Court’s Rationale

A. FAR 33-201 Means Exactly What It Says

The Contract Disputes Act does not define the word “claim;” only FAR 33.201 does. The first sentence of FAR 33.201 defines a claim as “a written demand. . .seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms or other relief arising under or relating to the contract. . . .”

The fourth and fifth sentences of FAR 33.201’s “claim” definition provide that a routine request for payment that is not in dispute when submitted is not a claim, but that it may be converted to a claim by written notice to the contracting officer if it is either disputed or not acted upon in a reasonable time.

Reflectone holds that the first sentence sets forth the only three requirements for a “non-routine” money claim that it be a written demand, seeking as a matter of right, the payment of money in a sum certain. These are the only requirements for a money claim. Reflectone also holds that the fourth and fifth sentences of FAR 33.201 establish the only exception to this definition of a money claim an invoice or other routine request for payment cannot be made into a money claim unless and until the contracting officer disputes it or fails to respond to it within a reasonable time.

B. Dawco Was Wrongly Decided.

Reflectone recognizes the error in the earlier Dawco decision, and Reflectone rectifies it. Dawco contained the statement that “a request for payment that is not in dispute when submitted is not a claim for purposes of the [Contract Disputes] Act.” As explained in Reflectone, Dawco incorrectly relied on Mayfair Construction Co. v. United States, 841 F.2d 1576, 1577 (Fed. Cir.) cert. denied, 488 U.S. 980 (1988), which had interpreted a different, interim regulation, that imposed an “in dispute” requirement later omitted from what is now FAR 33.201. Commentators have pointed out this error in Dawco, and Reflectone acknowledges that the commentators were correct.

In order to remove any doubt on this point, the Court plainly states:

To the extent that Dawco and its progeny have been read to also hold that, based on FAR 33.201, a “claim” (other than a routine request for payment) must already be in dispute when submitted to the C.O., they are hereby overruled.

The Court further recognizes that its prior decisions were contrary to the Contract Disputes Act’s goals of providing an efficient and fair method of resolving contract claims informally. The Court noted that nearly 200 agency board, Court of Federal Claims, and Federal Circuit decisions had addressed the jurisdictional issue of whether a claim was “in dispute” before it was filed, and that in more than half of these cases, the matter was simply dismissed for lack of jurisdiction. The Court describes these cases as “at best an inefficient use of limited resources.”

Additionally, the Court recognizes that Dawco had actually discouraged contractors from entering into informal negotiations, since Dawco had required that once negotiations begin, they must reach an “impasse” before the contractor can file a claim. See, e.g., Santa Fe Engineers v. Garrett, 991 F.2d 1579, 1582 (Fed. Cir. 1993). The Court recognizes the benefit of encouraging the parties to negotiate and settle claims at the administrative level whenever possible, and thus the Court reaffirms that there is no inconsistency between the existence of a valid claim and expressing a desire to negotiate a resolution.

V. Is There An Unintended Effect?

Reflectone expressly overrules Dawco “and its progeny.” Among the cases specifically overruled is Bill Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541 (Fed. Cir. 1995). Our last issue of Insights praised the Bill Strong holding that the costs of preparing a request for equitable adjustment are allowable costs of contract administration. We said, and we continue to believe, that making these costs allowable will promote negotiated settlement of claims, as intended by the Contract Disputes Act. While the citation of Bill Strong as among those decisions that are “hereby overruled,” raises the question whether any aspect of Bill Strong remains intact, we believe that claim preparation costs generally are allowable costs. However, some explanation is in order.

The issue in Bill Strong was whether or not costs of preparing a request for equitable adjustment to be submitted to the contracting officer were “costs of prosecuting a claim against the United States,” and therefore unallowable under the FAR cost principles, FAR 31.205-33 and -47. Bill Strong held that these costs were not unallowable for two independent reasons: the request for equitable adjustment was not a “claim,” (1) because it was not in dispute when it was submitted, and (2) because the contractor specifically withdrew its prior request for a contracting officer’s final decision on the request for equitable adjustment.

Reflectone now clearly holds that such a request for equitable adjustment is a Contract Disputes Act claim. Thus, this aspect of the Bill Strong rationale has disappeared.

However, the other, and we believe stronger, basis for the result in Bill Strong remains unchanged. Bill Strong held that the allowability of costs incurred in preparing a request for equitable adjustment will turn on the contractor’s intent. While Bill Strong noted that a contractor which incurred costs for the sole purpose of litigating a claim can be said to be prosecuting a claim against the Government, thus making the costs unallowable under FAR 31.205-33 and -47, Bill Strong recognized that most contractors (if not all) prepare requests for equitable adjustment in the hope of negotiating a settlement. As such, these costs normally are not costs of prosecuting a claim.

Bill Strong divided contract performance costs into three groups: first, the costs of actually performing the work (brick and mortar); second, the costs of administering the contract; and third, the costs of prosecuting claims arising out of the contract. Bill Strong recognized that although the contract work typically is complete, the preparation of requests for equitable adjustments and the negotiation of these claims is, usually, a cost of administering the contract. Essentially, Bill Strong held that preparation of a request for equitable adjustment normally is an allowable cost of contract administration, that unallowable costs of prosecuting a claim against the Government usually do not commence until a contractor appeals from a contracting officer’s decision denying the claim. This part of the Bill Strong reasoning is, we believe, unaffected by Reflectone, and appears to remain good law.

VI. Conclusion

Reflectone restores the statutory scheme Congress intended in the Contract Disputes Act. A claim is a written submission to the contracting officer demanding as a matter of right the payment of money or an adjustment in the contract terms. Such a submission, whether described as a request for equitable adjustment, a claim, or any other title, starts the running of interest and triggers the contracting officer’s duty to investigate and respond to the request.

The contracting officer certainly has the right to ask for additional information necessary to evaluate and decide the claim. However, the contracting officer cannot unreasonably postpone deciding the claim by making unwarranted requests for additional supporting information.

If the contracting officer believes the claim is unsupported, the contracting officer may deny the claim or decline to issue a final decision. The contractor then has the right to appeal from that denial, and an agency board or the Court of Federal Claims will have jurisdiction. Prior to such an appeal, the parties are free to negotiate in an effort to settle the claim, and there now will be no risks associated with entering into such negotiations.

Dan Donohue

Copyright © 1995 Kilcullen, Wilson & Kilcullen. All rights reserved.