Last month, the Court of Federal Claims issued a decision reaffirming the importance of considering carefully subcontract release and waiver language in Government procurement.

MW Builders, Inc. v. United States involved a subcontract between MW Builders, Inc., the prime contractor, and Bergelectric, a subcontractor, in which Bergelectric agreed to provide a complete electrical system in accordance with contract plans and specifications, and to provide temporary power to the project site, prior to the installation of permanent power. The subcontract also required Bergelectric to provide periodic lien waivers and releases to MW Builders, together with applications for payment. The lien waivers and releases stated:

NOW, THEREFORE, effective as of receipt of the payment referenced in this Application, the undersigned [Bergelectric] irrevocably and unconditionally releases and waives any and all mechanic’s liens or other liens against the Realty or any other claims on any bonds or any other claims whatsoever in connection with this Contract and with the Realty through the end of the period covered by this Application, reserving however, all lien rights for materials and labor furnished or performed after said period and hold the Beneficiaries and their respective successors and assigns harmless against any lien, bond, claims or suits in connection with the materials, labor, and everything else in connection with this Contract, except with respect to the retainages to date, if any.

The release language did not contain a reservation authorizing Bergelectric to pass through claims against the Government, and Bergelectric executed releases during the entire period of a 6 month permanent power delay.

On September 29, 2017, the Court of Federal Claims issued an order that granted partial summary judgment to MW Builders, but determined that Bergelectric’s claims against the Government had been waived. MW Builders and Bergelectric then moved for reconsideration, based primarily upon two arguments: (1) the Court failed to consider evidence establishing that MW Builders and Bergelectric never intended the releases to extinguish pass through claims against the Government and (2) the Court should reform the release language to reflect the intent of the parties.

With respect to the first argument, the Court recited the long-established rule:

“Where the terms of a release are clear and unambiguous, they must be given their plain meaning—extrinsic evidence is inadmissible to interpret them. . . .  A contract provision is only ambiguous if susceptible to more than one reasonable meaning.”

MW Builders relied upon a number of cases in which the Court had considered evidence of the parties’ subsequent conduct that validated the parties’ intent. But here, the Court was unmoved, reasoning that, in those prior cases, the release language had been ambiguous regarding its coverage and extent. Compare Metric Constructors Inc. v. United States 314 F.3d 578 (Fed. Cir. 2002), (a case relied upon by MW Builders:  release the prime contractor “and the owners of the project from all claims whatsoever arising out of or relating to the subcontract or purchase order to the extent of the payments actually received”) with the release in this case (Subcontractor “releases and waives . . . any other claims whatsoever in connection with this Contract and with the Realty through end of the period covered by this Application”). In short, the Court viewed the release language here to contain “irrevocable and unconditional waiver” language and, as such, it was not permitted to consider extrinsic evidence.  The Court also noted that the cases on which MW Builders relied to support its argument that extrinsic evidence should be admissible to establish the parties’ intent involved contracts between prime contractors and the Government, and not between a Government prime contractor and a subcontractor.

With respect to the second argument, the Court bluntly stated: “MW Builders fails to recognize that the United States Court of Claims does not have jurisdiction to reform an agreement between a prime contractor and its subcontractor. The court’s jurisdiction is limited to contract claims between a plaintiff and the Government.” The Court further noted that its equitable authority does not extend to reforming contracts between private parties.

This case reminds us that Government contractors and subcontractors must carefully draft their contracts and tailor terms to each contract’s specific circumstances, including language relating to general waiver and general release. Here, despite the fact that both the prime contractor and subcontractor sought to submit evidence of their shared intent to permit pass-through claims, the Court refused to hear this evidence, in view of what it considered to be clear, unequivocal, and contradictory language reflecting the parties’ intent at the time the subcontract was executed. A release specifically drafted for this project – even a poorly drafted release with ambiguous and unclear language – would have yielded a better result for Bergelectric than reliance upon what may have standard or boilerplate release language that was not appropriate for a Government contract. And for subcontractors working on Government projects, this case reconfirms that, in federal procurement, a subcontract is almost always considered to be a private contract between a prime and sub, and that a sub’s rights against the Government, as well as the prime, will be controlled by the language that the sub negotiates in its subcontract.

We welcome your thoughts and comments.