Implied-in-fact contracts under the Federal Acquisition Regulation: why PacOrd got it wrong.

• Author: Mason, Arnie Bruce

The case of PacOrd, Inc. v. United States(1) exemplifies why people should follow their gut instincts. PacOrd, a subcontractor, hesitated to work with the general contractor, A & E Industries, in performing ship repair work for the United States government. PacOrd knew of A & E's reputation for not paying its subcontractors.(2) To entice PacOrd to do the work, a federal government contracting officer allegedly promised that the government would take measures to guarantee payment to PacOrd.(3) Relying on this promise, PacOrd agreed to do the work.(4) PacOrd's fears of nonpayment came to fruition when A & E hid behind the shield of bankruptcy and the government refused to honor its alleged promise.(5)

In addition to the mistake of neglecting its gut instinct, PacOrd erred by contracting with the federal government without securing a writing. Under the Federal Acquisition Regulation (FAR), a contract with the United States government must be in writing to be enforceable.(6) In PacOrd, however, the Ninth Circuit called into doubt the existence of this writing requirement by opening the door to ,an implied-in-fact contract.(7) Assuming that a writing requirement exists, PacOrd raises the issue of whether the regulatory writing requirement should bar the enforcement of implied-in-fact contracts in government acquisitions. This Note explains the importance of a writing requirement and the policy reasons for its consistent enforcement in light of history, case precedent, and the circumstances unique to government contracts.

The express language of the FAR supports the existence of a writing requirement.(8) The FAR has the force and effect of law,(9) and by definition requires that a contract be in writing, unless otherwise authorized.(10) The presence of a writing requirement is supported further in the context of agency authority.(11) The FAR charges all parties to a government contract with knowledge of the writing requirement.(12) A contracting officer has the authority to bind the government only when the contract meets all the requirements of the law, including the FAR's requirement that the contract be in writing.(13)

As the first section of this Note explains in greater detail, the import of history, the definition of a contract under the FAR, and the scope of authority vested in the contracting officer all combine to prohibit the enforcement of a contract unless a writing exists.(14) The second section of this Note highlights the case history surrounding the subject of writing requirements in government contracts. Although the cases do not demonstrate unanimous support for a writing requirement, it is clear that PacOrd chose the minority position by opening the door for a court to later find an implied-in-fact contract.(15) The third section of this Note attempts to resolve the doubt PacOrd created regarding the role of a writing requirement for government contracts by highlighting the benefits of a virtual statute of frauds(16) for government contracts, and distinguishing it from the traditional criticisms associated with statutes of frauds.

Strict enforcement of the writing requirement under the FAR serves important evidentiary and channelling functions,(17) but a per se enforcement of the writing requirement has its own dangers. Enforcement of the writing requirement in a case such as PacOrd may be unfair, and perhaps result in the perpetration of a fraud by the government.(18) Accordingly, the fourth section of this Note recognizes the major criticism of a virtual statute of frauds: that it will perpetuate, rather than prevent, fraud.(19) Government abuses of the requirement should be curtailed by a narrow exception to the requirement allowing an implied-in-fact contract upon a showing by the plaintiff of some blatant act rising to the level of fraud by the government.(20)

Whether the government defrauded PacOrd by not honoring the alleged oral agreement the contracting officer made is debatable, especially considering the lack of intent on the part of the government to cause PacOrd to rely on the contracting officer's statement. Absent such a showing of government fraud, the regulatory writing requirement should be enforced because parties contracting with the government should know the law, and therefore, know to obtain a writing before beginning any performance to their detriment. Consistent enforcement of the writing requirement absent a showing of fraud will prevent fraud, increase the certainty of when the government will be bound, and decrease transaction costs.

THE ANOMALY KNOWN AS PACORD

The Ninth Circuit's decision in PacOrd gives new life to the argument that the writing requirement for the formation of government contracts may be ignored when a party alleges a contract that is not memorialized in a writing. After the government refused to honor the oral promise in PacOrd, PacOrd sued to have it enforced.(21) The district court granted the government's motion for summary judgment on the basis "that the alleged contract was not in writing as required by the Federal Acquisition Regulation."(22) On appeal, the Ninth Circuit faced the issue of whether an implied-in-fact contract may be found despite a regulatory writing requirement for formation of a contract.(23) PacOrd took the controversial position that "[i]mplied-in-fact contracts with the government have been enforced despite statutory or regulatory requirements that contracts be in writing."(24) The disturbing holding created the possibility of enforcing a FAR contract "so long as [the plaintiff] can establish sufficient facts, beyond a mere oral agreement, for the court to infer the existence of an implied-in-fact contract."(25) Such a result dulls the thrust of the writing requirement under the FAR by undermining its goals of certainty, consistency, and lower transaction costs.

The PacOrd court relied heavily on Narva Harris Construction Co. v. United States.(26) In Narva Harris, the court ignored the writing requirement, choosing instead to enforce an implied-infact contract out of a fear that the government would escape liability.(27) In his dissenting opinion in PacOrd, Judge T.G. Nelson distinguished Narva Harris on two grounds:(28) first, that Narva Harris was not decided under the FAR,(29) and second, that "[i]t is just plain wrong."(30) Judge Nelson argued that "[w]ith thousands of contracts and hundreds of billions of dollars in play every year, the Government simply has to know to whom and for what it is obligated."(31) Two legal principles guided Judge Nelson's dissent: the language of the regulation and the concept of agency authority.(32) First, Judge Nelson interpreted the relevant FAR sections(33) to contain a virtual statute of frauds, thereby precluding enforcement of the contract absent a writing.(34) Second, he posited an agency authority argument, asserting that the proposition noted in Federal Crop Insurance Corp. v. Merrill,(35) that a party contracting with the government bears the risk of determining if the government officer has the authority to do so, should control the case.(36)

In Kenney v. United States,(37) the court reached a middle ground. In Kenney, the plaintiff negotiated with the government in an attempt to provide human resource development and training.(38) After a change in command, the negotiations became a low priority for the government and eventually the negotiations ceased.(39) Although the plaintiff never conducted any training courses for the government, the plaintiff sued the government for breach of contract.(40) The Kenney court granted the government's motion for summary judgment for two reasons.(41) First, the court held that there were insufficient facts to infer from the circumstances an implied-in-fact contract.(42) Second, the court noted that even if an implied-in-fact contract existed, the government could avoid its enforcement because the contracting officer lacked authority to bind the government.(43) Although Kenney acknowledged Narva Harris and implied-in-fact contracts in government contracting, the Kenney court delivered a blow to this line of reasoning by introducing the agency authority argument in such a context.(44)

PacOrd, Kenney, and Narva Harris all broke from the precedent established by United States v. American Renaissance Lines, Inc.,(45) which found a virtual statute of frauds based on a statute similar to the writing requirement found in today's FAR.(46) A later case criticized American Renaissance Lines, describing that court's statutory interpretation as "unique and appear[ing] to be a misapplication," given the statute's original budgetary control purpose.(47) The American Renaissance Lines court, however, did not ignore that the statute's original purpose "was to prevent executive officials from excessive or inappropriate spending,"(48) but simply believed that the writing requirement would protect "both sides from the possibility of fraud or misinterpretation by the other."(49) On this basis, the court found a virtual statute of frauds and, therefore, refused to enforce the oral contract.(50)

Just four years later, the court in American General Leasing, Inc. v. United States(51) reaffirmed the principles of American Renaissance Lines. American General Leasing interpreted a statute similar to the one in American Renaissance Lines to bar the enforcement of an oral contract.(52) The court in American General Leasing reasoned that, because "[t]he Federal Procurement Regulations have the force of law,"(53) and the "parties contracting with the Government are charged with having knowledge of the law governing the formation of such contracts,"(54) an oral agreement is unenforceable when an applicable procurement regulation requires a writing to bind the government.(55) Similar to the statute at issue in PacOrd, the applicable procurement regulation in American General Leasing defined a contract as the "`establishment of a binding legal relation...