A foundational pillar of public procurement is the principle that only their authorized agents can bind governments contractually with another party. This concept of limited authority pervades all public procurement actions. Despite its fundamental nature, however, the issue of authority, and whether a specific public official has the authority to bind his government principal, remains a source of controversy.
Within each federal government agency, general authority for contracting is vested in the agency head. FAR 1.601. The agency head may delegate, to a special and limited class of employees known as “contracting officers,” the authority “to enter into, administer, or terminate contracts and make related determinations and findings.” FAR 1.602-1. The authority delegated to contracting officers is specific and limited, and a contracting officer “may bind the Government only to the extent of the authority delegated” to that contracting officer. Id.
Under agency law, an agent acting for a principal may possess one of two types of authority. First is actual authority, which may either be express or implied. A contracting officer, for example, has express actual authority to enter into contracts by virtue of a Standard Form 1402, Certificate of Appointment, which “shall state any limitations on the scope of authority to be exercised, other than the limitations contained in applicable law or regulation.” FAR 1.603-3.
An agent’s actual authority may be implied when an agent does something that is “normally incidental to the authorized transaction” for which the agent has been given express authority. Thomas v. I.N.S., 35 F.3d 1332, 1339 (9th Cir. 1994) (“Implied authority . . . is intended by the principal, or would be if the principal thought about it, even though instead of being express, it is implied by words, deeds, custom, acquiescence, and other circumstances.”)
In commercial settings, an agent can bind his/her principal based on apparent authority. Apparent authority is that which an agent possesses by virtue of his or her title or position with the principal. The significant distinction between apparent authority and implied actual authority is that actual authority is required to bind the federal government. See Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380 (1947). If apparent authority were sufficient, a contractor’s life would be much easier since the government agent, simply by virtue of his or her title as “contracting officer,” would have the apparent authority to bind the government. As it is, however, “anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority.” Id. at 384; see also CACI, Inc. v. Stone, 990 F.2d 1233, 1236 (Fed. Cir. 1993).
So what if an agent acts beyond his or her authority? What rights does a contractor have to recover costs arising out of an unauthorized action? It is precisely this question that has spawned substantial litigation.
The short answer is that when a government agent exceeds his or her authority, the government is not bound by the agent’s actions. A recent Court of Federal Claims case, Foley Company v. United States, 36 Fed. Cl. 788 (1996), illustrates the dangers posed to contractors who fail to investigate sufficiently the authority of a particular government agent.
The question that produced the controversy was whether a project, construction of a sewage treatment facility at Ft. Knox, Kentucky, would be exempt from taxation by the Commonwealth of Kentucky. Rather than investigate the matter through the Kentucky revenue department, Foley had a secretary call the Louisville District of the Army Corps of Engineers (the Corps), the issuing agency for the invitation for bids. A Corps employee named “Cynthia” told the secretary that the project was exempt from Kentucky state taxation. This information, as it later turned out, was erroneous. Foley submitted its bid to the Corps, excluding any allowances for Kentucky sales tax.
After contract award, Foley, having not received a tax exemption certificate for the project, investigated further and learned that the project was not in fact exempt from Kentucky state taxes. As a result, Foley was required to pay over $290,000 in Kentucky sales tax.
Foley filed a claim, seeking reformation of the contract under the doctrine of mutual mistake. The court listed four elements that must be satisfied before such reformation could occur:
1. The parties to the contract were both mistaken in their belief regarding a fact;
2. That mistaken belief constituted a basic assumption underlying the contract;
3. The mistake had a material effect on the bargain; and
4. The contract did not put the risk of the mistake on the party seeking reformation.
Foley, 36 Fed. Cl., at 790 (citing Dairyland Power Coop. v. United States, 16 F.3d 1197, 1202 (Fed. Cir. 1994)).
Taking Foley’s allegations as true, the court found that Foley could very well likely prove three of the four elements of mutual mistake. On the fourth element, however, the court concluded that Foley’s claim fell short primarily because of “Cynthia’s lack of authority to alter the terms of IFB and the resulting contract.” 36 Fed. Cl., at 790. Despite that “Cynthia” turned out to be a knowledgeable, and fairly senior, Corps employee, and despite that she “appeared to be knowledgeable about the tax status of the project and did not indicate that she was without authority to answer the questions posed by Foley,” she was not the contracting officer, and therefore did not have the authority to bind the Corps with respect to the tax status of the Ft. Knox project.
Foley cited several cases allowing contract reformation under similar factual circumstances, but the court found them distinguishable, noting that “those cases did not apply the Dairyland standard, binding on this court, allowing reformation only when the contract does not place the risk of mistake upon the contractor.” 36 Fed. Cl., at 792. Although the court chastised Foley for failing to submit its questions in writing, as required by the solicitation, finally, it was Cynthia’s lack of authority that led to the dismissal of Foley’s complaint. Acknowledging Foley’s arguments, the court concluded:
In any event, none of the cases assist Foley unless Cynthia had some actual or implied actual authority to provide information regarding the taxability of the project in the Commonwealth of Kentucky. There is no such allegation in Foley’s claim.
36 Fed. Cl., at 792-793. Because it was Foley’s burden to determine the tax-exempt status of the project, and also Cynthia’s authority, the court found that Foley could not meet the four-element test for mutual mistake, and therefore the complaint was dismissed.
Ratification
An unauthorized agency action is not necessarily void, and many times is no more than voidable. Upon learning of an unauthorized act by a subordinate, an authorized government agent may reject the action. The authorized agent may also, however, at his or her option, “ratify” the unauthorized act. FAR 1.602-3 defines ratification as “the act of approving an unauthorized commitment by an official who has the authority to do so.” The result of ratification is that the act, though unauthorized when originally performed, is given the effect of having been authorized. Ratification does not require an affirmative act by an authorized government agent, but rather occurs “when the principal, upon learning of an unauthorized act of its agent, acquiesces in or affirms that act through his conduct.” HNV Central River Front Corp. v. United States, 32 Fed. Cl. 547, 550 (1995). The key element to bind the agency is knowledge of the unauthorized act by a government official possessing the necessary authority to ratify that act.
The concept of ratification was recently discussed in Dan Rice Construction Co. v. United States, 36 Fed. Cl. 1 (1996). In Dan Rice, the government sought summary judgment in defense of a contract claim for constructive change by arguing that “because plaintiff has identified the NASA agents who directed the additional work as the Contracting Officer’s Technical Representative (COTR) . . . and project engineer, . . . neither of whom . . . had contracting authority,” the contractor could not recover for the additional work because the contract modifications at issue were not authorized. To support its claim, the contractor provided depositions by its own employees, and also agency employees, confirming that the contracting officer was present at the telephone conference during which the direction to perform the additional work was given. The court denied the government’s motion for summary judgment, concluding:
If the CO agreed with the COTR and the project engineer’s directive, confirmed it to plaintiff or kept silent during the telephone conference when the directive was given, he may well have ratified the directive.
Id., at 4.
The concept of ratification is not without its limits, however, as demonstrated by the Federal Circuit’s decision in CACI, supra. In CACI, this Firm successfully appealed the denial of a protest by the General Services Board of Contract Appeals (GSBCA) to the Federal Circuit, arguing that the Army’s lack of procurement authority rendered the contract void. During the GSBCA protest, the Army conceded that it failed to obtain a delegation of procurement authority (DPA) from GSA prior to awarding a contract for Federal Information Processing services. Although it acknowledged the requirement for the DPA, the Army asked the court to ignore its prior concession, arguing that it was based on an erroneous interpretation of the applicable regulations. The court held the Army to its prior position, citing the Army’s failure to raise the issue during the protest before the board.
The board had concluded that the Army’s failure to obtain a DPA was a serious, but remediable, deficiency that did not necessarily render the contract void. The court disagreed with the board, however, finding:
There can be no clearer example of a case in which the illegality is plain and clear than one in which there is a facial absence of actual authority to enter into the contract . . . . Thus, to the extent that the board held that a government procurement or contract may proceed without a valid DPA, the board was in error.
Id., at 1236. The court found, while 40 U.S.C. § 759(f)(5)(B) “gives the Board discretion to suspend, revoke or revise an ADP services contract by suspending, revoking, or revising the Administrator’s procurement authority,” that statute (now repealed) “does not permit the Board to ratify a contract that an agency had no authority to create initially.” Id. Thus, the court concluded that the Army lacked procurement authority to enter into the contract at issue, and that the board had no power to ratify the Army’s improper action, and therefore the contract was void, and not merely voidable.
Equitable Estoppel
A parallel to the concept of ratification is the concept of equitable estoppel, in which a contractor may recover, based on its reliance on the unauthorized action of a government employee, on “fairness” grounds. Estoppel essentially is a remedy that prevents one party from raising an otherwise valid defense to a claim because the party’s actions induced reasonable reliance by the other party. Estoppel has traditionally not been available as a remedy in disputes with the federal government. As the Supreme Court long ago stated in Utah Power & Light Co. v. United States, 243 U.S. 389, 409 (1917):
[I]t is enough to say that the United States is neither bound nor is estopped by acts of its officers or agents in entering into an arrangement or agreement to do or cause to be done what the law does not sanction or permit.
See also Federal Crop Insurance Corp. v. Merrill, supra.
With the growth of government in the modern era, “and the concomitant increase in its functions, power and contacts with private parties,” courts began to limit the scope of the “governmental immunity from estoppel” doctrine. United States v. Georgia-Pacific Company, 421 F.2d 92, 99-100 (9th Cir. 1970). In Georgia-Pacific, the court decided that “equitable estoppel may be found against the Government (1) if the Government is acting in its proprietary rather than sovereign capacity; and (2) if its representative has been acting within the scope of his authority.” (footnote omitted.) 421 F.2d, at 100.
The Court of Claims followed Georgia-Pacific in Emeco Industries, Inc. v. United States, 485 F.2d 652 (Ct. Cl. 1973), finding that the government was estopped to deny the existence of a contract for the manufacture and delivery of 31,893 boxes based on its failure to inform the contractor of its receipt of a late bid. Because the late bid was lower, the government decided to buy most of its boxes from the late bidder, issuing plaintiff a purchase order for only 2713 boxes. The court applied the following four-part test to decide whether grounds for estoppel existed:
(1) The party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former’s conduct to his injury.
485 F.2d, at 657. Finding all these “essential elements” to be present, the court held that plaintiff was entitled to recover. Regarding the measure of recovery, the court noted that in contracts containing a termination for convenience clause, “recovery must be calculated in accordance with that article and should not include prospective profits, or consequential damages.” Id. at 659; see also Manloading & Management Assoc., Inc. v. United States, 461 F.2d 1299 (Ct. Cl. 1972). In Emeco, the court also observed that “[o]f course, it is essential to a holding of estoppel against the United States that the course of conduct or representations be made by officers or agents of the United States who are acting within the scope of their authority.” 485 F.2d, at 657.
For a time, the principles of Georgia-Pacific and Emeco enjoyed continued application in federal procurement disputes. See, e.g., American Electronic Laboratories v. United States, 774 F.2d 1110, 1113-16 (Fed. Cir. 1985) (government statement that it would fund $900,000 overrun met the four elements of estoppel); Hughes Aircraft Corp., ASBCA No. 24601, Mar. 4, 1983, 83-1 BCA ¶ 16,396, at 81,519-20 (contractor awareness of facts, lack of reliance, precluded estoppel). In OPM v. Richmond, 496 U.S. 414, 426 (1990), however, the Supreme Court appeared to narrow significantly the applicability of estoppel against the federal government. In Richmond, the Court ruled that a government employee’s improper direction could not provide the basis for obtaining a money judgment against the government, if statute or regulation bars such payment. The Richmond decision was given broad application in restricting government contract claims until the Federal Circuit brought the law into perspective in Burnside-Ott Aviation Training Center, Inc. v. United States, 985 F.2d 1574 (Fed. Cir. 1993). In Burnside-Ott, the Federal Circuit reversed a Claims Court holding that the plaintiff’s equitable estoppel claim was barred as a matter of law by Richmond. The Federal Circuit explained:
[T]he Claims Court erred in concluding that Richmond stands for the proposition that equitable estoppel will not lie against the government for any monetary claim. The Richmond holding is not so broad. Richmond is limited to “claim[s] for the payment of money from the Public Treasury contrary to a statutory appropriation.” 496 U.S. at 424, 110 S. Ct. at 2471 (emphasis added). Indeed, because the Supreme Court’s analysis in Richmond is based entirely on the Appropriations Clause of the Constitution, Article 1, S.9 C7, which provides that “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law,” its holding must be limited to claims of entitlement contrary to statutory appropriations.
985 F.2d, at 1581. The court continued:
Burnside-Ott’s assertion of a right to payment of money from the Public Treasury, however, is not based upon a statutory entitlement. Burnside-Ott’s assertion is instead based upon its contract with the Navy. Nor does Burnside-Ott claim entitlement contrary to statutory eligibility criteria, as did Richmond. Thus, neither the holding nor analysis in Richmond is applicable in this case, and Burnside-Ott’s equitable estoppel claim is not barred as a matter of law because of Richmond. Equitable estoppel may or may not apply in this case depending on facts yet to be established.
Id. Thus, in the contracting arena, the concept of estoppel continues to be alive and well.
Closely linked with the theory of equitable estoppel is the doctrine of “waiver.” If, for example, an agency consistently waives the enforcement of a particular specification in a contract, inducing a contractor to treat that specification as unimportant, the government may very well be held to have waived its right to strict compliance with that specification, absent prior notification to the contractor of the new standard. See Gresham & Co., Inc. v. United States, 470 F.2d 542, 554-56 (Ct. Cl. 1972). See also Hughes Aircraft, supra. The waiver theory frequently appears in disputes over the termination of a government contract for default. By allowing performance after a contract delivery date, the government may be deemed to have waived its right to terminate for failure to meet the delivery schedule. See, e.g., DeVito v. United States, 413 F.2d 1147, 1153-54 (Ct. Cl. 1969); Freeway Ford Truck Sales, Inc. v. General Services Administration, GSBCA No. 10662, Apr. 29, 1993, 93-3 BCA ¶ 26,019, at 129,357-58. As with estoppel, however, waiver is only a viable theory in situations where a government agent is acting within the scope of his or her actual authority. Gresham, supra.; see also Miller Elevator Company, Inc. v. United States, 30 Fed. Cl. 662, 694-95 (1994).
So what is a prudent contractor to do? Here are some guidelines to remember in all dealings with government agencies on contractual matters:
1. Know your contracting officer (and the limits of his or her authority). Keep in mind that even if you are dealing directly with the contracting officer, no directive should be blindly followed without at least cursory consideration of the propriety of the directive.
2. In dealing with a contracting officer’s “authorized representative,” carefully review the limits of that individual’s authority, particularly with respect to a specific purpose or area of expertise involved.
3. Train your people to insist that all directives affecting cost be issued by the contracting officer or his authorized representative, and to ensure that your project manager is made aware of any directives potentially affecting the cost of the project.
4. Get it in writing. If the solicitation presents a method for getting your questions answered (most do), follow that method to the letter. If a government employee directs you to perform additional work, ask that the direction be put in writing and signed by an authorized representative of the contracting officer. At a minimum, confirm your own understanding of the directive in a letter to the contracting officer.
5. If an agency disclaims responsibility based on a lack of authority by the directing agent, remember that the agent may well have retained the implied authority to have acted as he or she did, even though such action may have exceeded the express written authority delegated to that individual. Furthermore, the doctrines of ratification or estoppel, and other alternative doctrines not discussed herein, may still be available to hold the agency accountable for its actions.
As a rule of thumb, remember that when an agency tries to “weasel out” of its commitments by claiming that its agent lacked the necessary authority to hold it to its word, it is probably a good time to contact your friendly government contracts counsel and respond in a meaningful way. As with any potential dispute, the sooner an agency can be convincingly shown the error of its ways, the more likely it is that a satisfactory resolution can be achieved, and drawn out, costly litigation can be avoided.
— Chris Jensen
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