The Magic Keys: Finality of Acceptance Under Government Contracts

• Author: by Thomas E. Shea, Esquire
• Pages: 03

As a general rule, once the Government or any other pur-ehoser accepts suppbes or services, the sellor has a 7ight to receive payment. In certain sttuatians, however, the purchaser can revoke his or her previously given acceptance, and refuse lo makepaymnt or demand refund ofpayment made. Ah. Shea dtseusses these sttuations in the eontezt of federal government procwement.

Mr. Shea zdentifies four "keys" which "unlock" the Govern. ment's acceptance of goods or seruiees. These are latent defects, fmnd, gross mistake amounting to fraud, and breach of warranty. In government contracts thesefour tradibonal nghts are all buttressed by standard inspection clauses and other provi. sions

As with other aspects offederal government procurement, the Court of Claims and the various agency boards of contract appeals haw developed a specialized body of law concerniq the keys to acceptance. .+IT. Shea analyzes this body of law and concludes that, though complex, it is relatively stable and ?e. liablefor both the Government and tts contractors.

The opinions and coneiusion6 expressed in this article are those af the author and do not neeessnriiy represent the view of The Judge Advocate Generpl'a School, the U.S.

Amy Corpe of Engmeers, the Department of the Army, manyather governmental agency.

**Assistant district counsel, €on Worth District. U. S. Army Corps of Englneem, Fort Worth, Texas, September 1976 topresent. B.S.,

1972, Reea College,

Denver, Colorado: M.A.. 1974. Bam State Umvermtv: J.D.. 1876. Universltv

~ ~~

of Denver College of Law. Member of the Bar of Colore.do. Author of AmhitsciEngtneer Lmbibty SwtS by the Gavmment, A Case for Elpandtng Junsdrcttm of ths A S.B.C

A , 18 A.F.L. Rev. 260 (No. 3, 1977).remi?ztcd at 15 Y.P.A. 75

(1978); and other pubimhed wltmgs

I. INTRODUCTION

The purpose of this article is to consider those situations in which the Government, as a contractingparty, has the right torevoke itsacceptance of supplies or serYiees. Because of the specialized clauses used in goy-ernment contracts, the rights and duties of both parties with respect to the finality af acceptance differ from those in the "on-governmental, commercial world.:

In commercial transactions. finality of acceptance ivnh respect to "goods" is governed by the Uniform Commercial Code, as modified by the legislature in each state.Z In the areas of constmetion and rer\ices, the d e s are more diverse, each state holding to its own partmlar combination of statutory and ease law..' In the federal arena. contract re. quirernents are governed by the Defense Acquisition Regulation (DAR) in the Department of Defense (DODl,* and by the Federal Procurement Regulations (FPRI' in civilian agencie8.l

I The validity and eonstnxtmn of eontracts of the Unired States are federal queationsand are noreantrolled by slate law. United Sratesv Allegheny County, 822 U. S. 174, 183 (19441, United States Y. Latrobe Con~tr Co.. 246 F. 2d 357 (8th Cir. 1957). Flight Test Eng'r Co , ASBCA Yo 7661, 1962 B.C.A 3606

However, where federal law 18 alent, the boards of eontract appeals have relied on modern law (in preference to the old common law of conrraefs). which is iikeiv alm to he state rather than federal la%' Kain Cattle Co ASBCA No

boprd noted the wide a&tamce of the Uniform Commercial Code IU C C 1, and quoted Alexander Pope, who raid. "Be nor the first h? iihom the new are tned. nor yet the last to lay the old snde," rd , at p. 20,877 See Evererr Plywood & Door Cow. V. United States, 419 F. Zd 425 (Ct CI 1969)

* U.C.C. 5 5 2406 through 2-608.*See Squillante, Tmnsaetions not Withrn the Code Saler, 76 Com. L. J. 101 (1971).

The Defense Acquisition Replation [hereinafter referred to 86 D A R.1 appears s+th identical eeecron nvmbenng ~n Title 32 of the Code of Federal Repletions [hereinafterreferred Lo asC.F.R I Hereinafrerinlhii artrcle. cilatmndf~

D.A.R.

will not include the parallel C F.R. references. The D.A R was formerls called the Armed Senices Prmuiemenf Replalion, or A S.P R

Tltie 41, C F R. The Federal Procurement Replalions will hereinafter he referred to as € P R

11. CLAUSES AFFECTING FINALITY A. DOD FIXED PRICE CONTRACTS

The four "keys" which will unlock the finality of the Government's acceptance of goads or services under fixed-price DOD contracts are: (1) latent defects, (21 fraud, (3) gross mistakes amounting to fraud, and (41 the lights of the Government under any warranty provisions.

The inspection clauses for fixed-price supply,' and research and development contractsL state: "Except as otherwise provided in this contract, acceptance shall be conclusive except as regards latent defects, fraud, or such gross mistakes as amount to fraud." The clause for tixed-price construction contracts states: "Acceptance shall be final and conclusive except as regards latent defects, fraud, or such gr08S mistakes as may amount to fraud or as regards the Government's right under any warranty or guarantee."9

The difference between these clauses IS that the construction clause specifically includes warranty rights as an exception to finality of ac-ceptance, while the research and development and supply clauses .we silent on this point. lo

This omission should not be construed as indicating that warranty rights do not operate as an exception to finality of ac-ceptance in research and development or supply contracts in the same manner as construction contracts. In fact, the effect of warranty provisions is the same in all three cases, considenng the different subject matter of the contract types.:'

e All Department of Defense contracts are governed by D.A.R. and maet other government contracisaregoverned by €.P.R Theoffice ofFederalProeurement Policy is piesenfly attempting to consolidate thew two regu18tmn8.

' D.A R. 9 7-103.5(a), auhpara. (d). D.A R. P 7302.4(a), subpara. (d).

D.A.R P 7402 Il(0 See Defense Procurement Circular Yo. 7 6 6 (15 October 19761.

Io

Warranties are seldom used I" cost-reimbursement contracts. Such use must be approved by the chief of the responsible purehasmg office D A R. $1-S24.Ua).

'I See notes 16MG m/ro and Becompanying text. 113

MILITARY L.46 REVIEW [VOL. 86

B. D.O.D.

COST-REI4~B~RSEVEST A.YD OTHER COXTRACTS

The relerant provisions for cost-reimbursement contracts are more complicated. The clause entitled "Inspection of Supplies and Correction of Defects" is prercnbed for use in cost-reimbursement true 6wuiv contracts. This clause provides as folioas:

At any time during performance of this contract, but not later than six (6) months (or such other period as may be provided in the Schedule, after acceptance ai the supplies or lots of supplier last delivered m accordance i\ith the requirements of thk contract. the Government may require the Contractor to remedy by correction or replacement. as directed by the Conrraetlng Officer, any supplies or lots of supplies iihieh at the time of deliver? thereof are defective in material or aorkmanshig or otherwise not in conformity *Ith the requirements of this eon-tract. Except as otherum proiided in paranaph IC1 hereof. :he cost of an? such replacement or correction shall be included 111

Allowable Cost determined ai provided ~n the clause of this contract entitled "Allowable Cost. Fixed Fee and Pqment '

but no additional iee shall be payable wth respect thereto

(e) Sotwithstanding the proiisiona of paragraph (b) hereof. the Government may at any time require the correction or replacement bi the Contractor. nithout cost to the Gaiernment. of supplies or lots of supplies which aye defectke in material or workmanship. or otheruire not in eonformitmentz of this contract, if such defects orfraud. lack of good fwth or nillful miiconduct an the part ai any of the Contractor's directors or oificere. or on the part of an! of his managers. superintendents. or other equivalent representatives. who has superiisian or direerion of (11 ail or substantially all of the contractor's business, or in) all or substantmSly all ai the Contractor's operations at any one plan' or separate location in which this contract 13 being pelformed or 11ii) a separate and complete major industrial operation in connection with the performance of this contract The Government ma! at an) time also require correction or replacement by the Can-tractor, irithout cost to the Government. of an: rueh deiectne

suppiies or lots of supplies if the defects or failures are caused by one or more individual employees seiected or retained by the Contractor after any such supervisory personnel has reasonable grounds to believe that such employee is careless or otherwise unqualified.

The clause further provides:

Except as provided in this clause and a8 may be provided in the Schedule, the Contractor shall have no obligation or liability to correct or repiace supplies or lots of supplies which at the time of delivery are defective in material or workmanship or other-wise not in conformity with the requirements of this contract.'3

The clauses entitled ''Inspection and Correction of Defects" which are prescribed for cost-reimbursement type research and development eon-tracts," and for time and materials and iabor hours contracts,1b are

D.A.R. I7-203.5(a), subpara. (b) and (e). See Defense Aequiaman Cireular NO. 1616 (1 Aug. 1978)

Is D.A.R. I7-20S.5(a). subpara. (0. Sei Defense Acqvlsition Clrcular No 7616(1 Aug 1878)

D.A.R. g 7402.5(4(1) state8:

(b) At my time during performanee of this fOntmCt. but not later than six (6) months (or such other time 88 may be provided in the Schedule) &er acceptance of all of the end items (other than designa, drawings, or repons) to be delivered under this COnVact, the Government may require the Contractor to remedy by correction or replacement, 88 directed by the Contracting Officer, any failure by the Contiaetai to comply with the requirements of this contract. Any time devoted ta such cor.rection 01 reoiacement ahail not be included in the earnoutation of the period of time specified in the...