TLF-Contract-Claims-Insight-96.jpg

Risk of Loss in Federal Contracts for Commercial Products

When acquiring commercial products, the federal government must give preference to customary commercial practices. To implement this preference, the Federal Acquisition Regulation (FAR) instructs the government to only use contract clauses that are consistent with customary commercial practices. One such clause is the clause at FAR 52.212-4, Contract Terms and Conditions – Commercial Products and Commercial Services, which includes a list of many terms and conditions incorporated in the contract by reference. This clause allocates the risk of loss and cost of shipping commercial items between the government and the contractor depending on whether the contractor must deliver the commercial items free on board (FOB) at the origin or destination. The standard clause at FAR 52.212-4(j) states:

Unless the contract specifically provides otherwise, risk of loss or damage to the supplies provided under this contract shall remain with the Contractor until, and shall pass to the Government upon:

(1) Delivery of the supplies to a carrier, if transportation is f.o.b. origin; or

(2) Delivery of the supplies to the Government at the destination specified in the contract, if transportation is f.o.b. destination.

Thus, unless stated otherwise, in commercial products contracts with FAR 52.212-4, the contractor is responsible for the risk of loss until it delivers the products to a carrier on FOB origin contracts. Meanwhile, in FOB destination contracts, the contractor is responsible for the risk of loss until delivery is made to the government location identified in the contract, at which point the title of the products is transferred to the government. Notably, the contractor may request that the contracting officer (CO) modify the risk of loss terms of the clause at FAR 52.212-4(j), consistent with customary commercial practices. In the absence of such a modification, however, the risk of loss terms of the clause at FAR 52.212-4 typically dictate whether the government or its contractor must bear the costs of lost or damaged supplies.

In Armed Services Board of Contract Appeals (ASBCA) No. 63282, when issuing a decision on the government’s motion of summary judgment, the Board partially relied on the risk of loss terms of the clause at FAR 52.212-4 to allocate the risk of loss of aviation fuel confiscated by the Taliban during the U.S. withdrawal from Afghanistan in 2021. In the August 12, 2024 decision, the contracts underlying the disputes were FOB destination, indefinite-delivery, indefinite quantity (IDIQ) contracts for supplying and delivering aviation turbine fuel to Afghan National Defense and Security Forces (ANDSF) sites in Afghanistan. The contractor was required to deliver the aviation turbine fuel via the “direct to tail” fueling method, which required it to use its trucks to fuel designated aircraft directly.

During the final phase of the U.S. forces’ withdrawal from Afghanistan, the contractor submitted several serious incident reports in August 2021, notifying the government of the Taliban takeover of various sites and the resultant loss of fuel and assets. When the Taliban took over Afghanistan on August 15, 2021, it confiscated all of the contractor’s fuel, transportation, storage and delivery equipment, and other assets. The government subsequently terminated the contract for convenience, effective September 7, 2021. Following the submission of the contractor’s termination settlement proposal (TSP) requesting payment of ~$14.2 M, the CO determined that the contractor was entitled to ~$2.2M for unpaid and disputed invoices and costs for preparing the TSP. However, the CO denied entitlement for the fuel stored on base, lost equipment, and undelivered fuel at the terminals. In his final decision, the CO reasoned that the contractor was not entitled to be paid for the loss of this fuel and equipment as they belonged to the contractor at the time of their loss and had not been delivered to the government.

In the appeal that followed, the contractor claimed that the government was liable for the loss of fuel and equipment because it breached the IDIQ contract by failing to pay for fuel delivered to aircraft after the Taliban takeover, providing inadequate security and facility access, breaching the covenant of good faith and fair dealing, and constructively changing the contract. Notably, the contractor attempted to categorize the fuel stored at the ANDSF facilities and regional terminals as having been delivered to the government, even though delivery had yet to be made for this fuel under the contract terms. Additionally, in its cross-motion for partial summary judgment, the contractor also claimed that it was entitled to compensation as part of its termination for convenience settlement costs for loss of contractually required fuel reserves and equipment.

The ASBCA began the pertinent part of its analysis by noting that the payment provisions of the clause at FAR 52.212-4 require the government to make payment for items that were accepted and delivered to the contract-specified destination, the AAF or SMW aircraft. The Board also pointed to the risk of loss terms of FAR 52.212-4(j) stated above to support the determination that the risk of loss of fuel remained with the contractor until the fuel was pumped into the aircraft. The contractor’s argument that the risk of loss terms only applied to losses relating to “performance” under the contract, such as losses occurring during transportation, storage, or handling of the fuel from acts such as pilfering along the way to the relevant facilities was rejected for not being supported by the contract’s plain language. The pertinent section of the statement of work (SOW) on which the contractor’s “performance” argument relied also placed the risk of loss of fuel on the contractor until delivery into the AAF or SMW aircraft. Additionally, the sections immediately following this SOW section made it clear that the government would not pay for loss or damage to equipment or fuel and even required the contractor to obtain adequate insurance to cover the risk of loss. Finally, the SOW warned the contractor that it might be required to perform the contract in dangerous or austere conditions and that the contractor was accepting the risk of loss associated with performance in such conditions. Thus, when read as a whole, the SOW and other parts of the contract placed the risk of loss of fuel squarely on the contractor until the contractor delivered the fuel to the aircraft.

The Board also rejected various other arguments advanced by the contractor to hold the government liable for breach of contract. For instance, the government was found to have no contractual duty to provide access to relevant facilities. The government also did not breach the implied duty of good faith and fair dealing. The contractor was also unsuccessful in its constructive change claim. Thus, the government motion for summary judgment on these issues was granted. Notably, however, the contractor’s motion for partial summary judgment for termination for convenience costs was denied as the Board found the record insufficiently developed on the issue of whether the contractor was entitled to payment for the contractually defined minimum fuel reserves and bowser quantities that were necessary to ensure an uninterrupted fuel supply to meet the fuel deliveries. Specifically, the record was unclear regarding the contractor’s options for mitigating the loss of the contractual minimum reserves. The record was similarly incomplete regarding whether the contractor obtained the contractually required insurance to offset some of the claimed termination costs. Thus, the Board’s decision did not resolve the contractor’s entire appeal, leaving open an avenue for recovery of termination costs related to the contractually defined minimum fuel reserves, especially the fuel reserves stored at government sites – provided the contractor can prove the fact of loss with certainty and the amount of its loss with sufficient certainty such that the determination of the amount of damages is more than mere speculation.

In contracts for commercial products that include the clause at FAR 52.212-4, Contract Terms and Conditions – Commercial Products and Commercial Services, the allocation of risk of loss at various stages of delivery depends upon whether the contract is FOB origin or destination. However, in certain situations, it may not be apparent whether the risk of loss lies with the government or the contractor. Such circumstances may particularly arise when delivering commercial items in dangerous and austere conditions. In these cases, contractors must review the contract as a whole to determine the allocation of risk of loss. Contractors should be aware that the risk of loss terms of the clause at FAR 52.212-4 may be tailored per the on-the-ground realities of performing the contract as long as the modified terms are consistent with customary commercial practices. Such modifications can be accomplished by amending the solicitation or the contract. Proactively modifying the risk of loss terms for their commercial products contracts can be an effective strategy for contractors to manage their risk in accordance with any evolving circumstances impacting delivery.

This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.

Related Insights

TLF-Contract-Claims-Insight-38.jpg

A War Risks clause may be added to government contracts if performance is required in regions with a risk of war or war-like events. Such a clause helps allocate responsibility between the government and the contractor for any losses or damages caused by such events. While the Federal Acquisition Regulation (FAR) does not specifically contain a standard war risks clause, the defense supplement to the FAR (DFARS) includes clauses such as DFARS 252.228-7000, “Reimbursement for War-Hazard Losses.” Such a clause addresses the allowability of costs of war-hazard benefits for contractor employees. A War Risks clause can typically be negotiated between the government and the prospective contractor at the time of formation of the contract. As contracts in different regions have varying circumstances, risk allocation for specific events described in the War Risks clause should also be tailored and negotiated for each applicable contract. When disputes between the government and the contractor arise that implicate the War Risks clause, adjudicative forums such as the Boards of Contract Appeals or Federal Courts interpret the language of the War Risks clause to allocate increased costs liability between the parties.

more
Shutterstock_1931171357.jpg

In the performance of government contracts, there are instances where the government does not breach any specific terms or conditions of the contract but is nevertheless responsible for the contractor’s damages due to the fault or negligence of government officials. If the government personnel’s negligence or fault occurs in the administration of the contract, the government may be liable for breach of contract. In such situations, the contractor must prove its breach of contract claim by showing that the government had an obligation or duty arising out of the contract and that the government was in breach of this contractual obligation. Additionally, the contractor asserting the breach of contract claim due to the government’s fault or negligence in administration must also establish that the damages it claims were reasonably foreseeable at the time of contract award. Finally, the contractor’s damages must also be the natural and proximate result of the government’s breach. Notably, while the contractor may recover damages resulting from the natural and probable consequences of the government’s breach, damages that are too remote or attenuated from the breach are typically not recoverable.

more
Shutterstock_2160344179.jpg

While the Contract Disputes Act provides no definition of a claim, the Federal Acquisition Regulation (FAR) § 2.101 defines a claim as a written demand or assertion by one of the contracting parties seeking, as a matter of right, the payment of a sum certain arising under or relating to the contract. The FAR further provides that a routine request for payment that is not in dispute when submitted is not a claim. However, such submissions may be converted to a claim by written notice to the contracting officer as provided in FAR § 33.206(a) if it is disputed as to the liability or amount or is not acted upon in a reasonable time. Finally, the FAR requires claims over $100,000 to be certified. To assess whether a submission is a CDA claim rather than a request for equitable adjustment (REA), contractors may typically look to three objective criteria:

  1. The submission meets the definition of a “claim”
  2. The submission includes a CDA certification
  3. The contractor must request a final decision from the contracting officer

Despite these objective criteria, it may not always be clear when an REA is converted into a “claim,” the denial or deemed denial of which can be appealed to a Board of Contract Appeals or the Court of Federal Claims (COFC). On August 29, 2024, the Armed Services Board of Contract Appeals (ASBCA) in ASBCA No. 63197 issued a decision on a government’s motion to dismiss for the contractor’s failure to convert an REA into a CDA claim. The underlying contract for medical coding services was issued by the Army in January 2018 using the government-provided browser-based Application Virtualization Hosting Environment (AVHE) for the United States Medical Command. Almost two years later, on November 18, 2019, the contractor submitted a “Request for Price Modification” seeking various cost adjustments. The pertinent portion of the request sought costs for lost production due to the government-imposed downtime for the AVHE system. In February 2021, the contractor provided supporting material to validate downtime costs in response to a government request for additional information. In July 2021, the contractor submitted a revised request for price modification labeled “Request for Equitable Adjustment,” seeking payment for downtime costs in the amount of $615,199 categorized as an unexpected loss.

more
Shutterstock_763113187.jpg

The apportionment of risk of increased performance costs in a government contract depends primarily on the type of contract and its included clauses. If a specifically included contract clause assigns the financial risk of an event on either the government or the contractor, that clause usually dictates which party bears the increased costs of performance due to the occurrence of that event. However, even if the contract does not specifically contemplate the occurrence of a particular event, dispute adjudicative forums may look to relevant clauses included in the contract to determine which party must bear the increased costs. A good indicator of whether an included clause apportions the risk of increased performance costs on the government is if the clause points to the contract’s changes clause. In ASBCA No. 62712, a decision issued on October 2, 2024, the Armed Services Board of Contract Appeals (ASBCA) held the government liable for increased costs associated with COVID-19-related quarantine of contractor employees due to a specifically included contract clause dictating the health and safety requirements under the contract. Notably, the relevant clause also pointed to the clause at Federal Acquisition Regulation (FAR) 52.243-4 “Changes,” which was incorporated in the contract by reference.

more

Risk of Loss in Federal Contracts for Commercial Products

TILLIT LAW Federal Contract Claims Insights