October 2, 2019

When do hard-nosed negotiations become coercion? Or, when should you feel unlucky?

By: Stan Millan
Jones Walker, LLP

 

“You can’t go to a negotiating table pointing a gun, but you’ve got to keep it over your shoulder.” Joe Slovo

 

Conflict in a negotiation is to be expected and is arguably healthy for the process. Owners and contractors are constantly engaged in negotiations; whether it be negotiating changes to the work, changes to the schedule, or changes to the contractual terms.   But at what point does taking a strong position in a negotiation cross the line and become coercion or bad faith?

A recent decision from the Armed Services Board of Contract Appeals touched on this very issue.  While this is a government contract case, the issues discussed in this case (namely negotiating a change) are routinely encountered in just about every construction project. This decision is instructive because it adds to a trending line of cases that limit an owner’s and contractor’s negotiation tactics.

On August 5, 2019, the board issued an opinion in the appeal of Sand Point Services, LLC vs. NASA, ASBCA Nos. 6189.  In Sand Point Services, the contractor was hired by the owner to repair the Wallops Flight Facility’s aircraft parking apron. During its work, the contractor hit a differing site condition, namely unsuitable soils.  The contractor sought additional time and money for this differing site condition. The owner ultimately responded with a show cause letter to the contractor claiming, among other breaches, that the contractor was significantly behind schedule. This was generally viewed by all parties as the start of default proceedings against the contractor.

The contractor responded to the owner stating that it was behind schedule due to the owner’s impacts. The contractor principally argued that it was late due to the differing site soil conditions it encountered, which was the owner’s responsibility under the contract’s Differing Site Conditions Clause. Most construction contracts have similar risk shifting clauses placing unknown differing site soil conditions, for example, onto the owner and not the contractor. Such a differing site condition usually entitles the contractor to either additional time, money, or both.

In response to the contractor’s letter, the owner responded with a proposed change order. In that change order, the owner provided additional time, but no money. Importantly, the change order also required the contractor to execute a release and waiver with respect to this differing site condition claim. The contractor did not agree with the proposed change order and requested to be compensated for this impact, which it was entitled to receive under the contract if it had a legitimate basis for the additional costs.

The owner responded with a letter stating that if the contractor did not sign the proposed change order the contractor would “leave the Government no choice but to continue with termination for default proceedings.” The contractor believed the owner did not have grounds for default. Again, the main ground for default was the fact that the contractor was behind schedule. Yet, the owner tacitly, if not expressly, recognized the contractor was due additional time to its schedule as a result of the differing site soil conditions, a risk assumed by the owner. Faced with the possibility of a default termination—a death sentence to almost any construction contractor—the contractor signed the proposed change order.

The contractor later filed a suit against the owner seeking to essentially reopen the executed change order for the true cost of the differing site soils condition.  The owner moved for summary judgement (dismissal of the contractor’s lawsuit) based on the executed change order which only granted the contractor time, and no money.  The owner sought to also enforce the change order’s accompanying release and waiver signed by the contractor. The contractor argued it signed the contract modification under duress and because of the unfair negotiation that led to it executing the change order for only time, and no money.

In its decision, the board held that there were genuine issues of material fact as to whether or not the contractor signed the modification under duress.  Therefore, the board denied the owner’s motion for summary judgment.  In reaching its decision, the ASBCA cited to a line of cases holding that an owner cannot force a contractor to take an action (in this case sign a differing site condition modification for no money) under an improper threat of termination.  As the board noted, “the Government must have a good faith belief that it is entitled to take the threatened action.”  Sand Point Services, p. 8. While the board in this decision did not reach an ultimate conclusion on whether the owner’s actions rose to the level of duress or coercion, this case demonstrates that courts and boards do take such allegations seriously.

This recent decision in Sand Point Services adds to an already developed line of cases on this point. For example, courts and boards have previously determined that a wrongful threat of termination can constitute coercion. See Appeals of B & H Constr. Co., 1980 board LEXIS 239, *21, 80-2 B.C.A. (CCH) P14,568 (A.S.B.C.A. June 25, 1980) (noting a threat of termination constitutes coercion if the threat is not justified or otherwise legally permissible); Beatty v. United States, 144 Ct. Cl. 203, 206 (1958) (“[I]t is only the threat of a wrongful or unlawful act that may constitute duress.”). Therefore, the key to determining whether a threat of termination constitutes coercion is contingent upon the legitimacy, or lack thereof, of the threat. Appeals of B & H Constr. Co., 1980 board LEXIS 239, *21-22, 80-2 B.C.A. (CCH) P14,568 (A.S.B.C.A. June 25, 1980) (“[T]he propriety of the Government’s threats to terminate for default hinges upon whether the delays arose from unforeseeable causes beyond the control and without the fault and negligence of appellant and its subcontractors and suppliers at any tier.”).

So, while negotiations can be contentious at times, owners and contractors must be aware of their limits. Owners cannot threaten a contractor with default if there is no legitimate basis to support it. Likewise, contractors cannot threaten to walk off the project without there being a legitimate basis (for example, an owner’s material breach of the contract). These types of threats are highly charged and must not be made lightly; they require significant and substantial support. Equally important, these threats must have a legitimate basis. If such threats are made without a legitimate basis, the owner or contractor may be prevented from relying on any “deal” made during that negotiation. But the owner or contractor may be exposed to far greater liability: claims of coercion and bad faith. Keep in mind that this general principle is equally applicable down the chain of privity and in relations between general contractors and subcontractors.

It is important to recognize your limits during negotiations. It is also important to know when your counterparty crosses the line so you can protect your rights.

 

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.