In government contract interpretation disputes, adjudicative forums may rely on extrinsic evidence of the parties’ prior course of dealing to interpret ambiguous terms. In this context, prior course of dealing refers to a sequence of previous conduct between the government and the contractor which can be fairly regarded as establishing a common basis of understanding for the purposes of interpretation. When the parties have interpreted the disputed terms in a certain manner in a previous contract, those terms are typically presumed to hold the same meaning in a later disputed contract, absent clear evidence of changed intent or the parties’ disagreement at the time of contract formation. Furthermore, for the parties to be bound by their prior course of dealing, they must have actual knowledge of the conduct and be aware that it can reasonably be construed as indicative of their common understanding or intentions. In such cases, after determining the existence of an ambiguity, the claims adjudicative forum may rely on prior course of dealing evidence to assign meaning to the disputed terms.
In Armed Services Board of Contract Appeals (ASBCA) No. 60448, issued on June 24, 2020, the Board determined that the contractor was entitled to an equitable adjustment as the parties’ prior course of dealing had established a common basis of understanding regarding the ambiguous terms. The U.S. Air Force issued the three underlying contracts for the production and delivery of Advanced Medium Range Air-to-Air Missiles (AMRAAM). The contracts were part of a series of annual contracts issued for over more than two decades under which the contractor delivered a specified number of missiles each year. As relevant to the interpretation dispute, the statements of content (SOCs), which are similar to statements of work, for the three contracts each contained two paragraphs that the Board determined were ambiguous. The first paragraph, SOC 2.a, required the contractor to produce a specified number of missiles (or lot) over a three-year period of performance. Meanwhile, the second paragraph, SOC 2.b, required the contractor to provide Systems Engineering/Program Management (SEPM) support for a one-year performance period.
The dispute concerned “production SEPM” support, for which the contractor, as part of an ongoing practice, charged the government on the current year contract, even though the actual production SEPM support delivered would extend to up to three annual lots of missiles due to the difference in the SOC 2.a and SOC 2.b performance periods. The Air Force became concerned about a production SEPM support gap due to this difference and attempted to move all production SEPM tasks from SOC 2.a to SOC 2.b to address this potential issue. However, the government had to abandon this attempt due to the prospect of increased costs, owing to the difference in the performance periods. Following this attempt, beginning with Lot 22, the Air Force revised the relevant SOC paragraphs to include production SEPM in SOC 2.a and required the contractor to provide production SEPM for a three-year period. In response, the contractor submitted a request for equitable adjustment (REA) followed by a certified claim for roughly $48.2 million for its costs of providing production SEPM for three years under SOC 2.a, rather than one year under SOC 2.b.
In the appeal that followed, the Board first determined that the relevant contract language was ambiguous as production SEPM could reasonably be covered under either SOC 2.a or SOC 2.b. Given the ambiguity, the Board considered the parties’ prior course of dealing as extrinsic evidence. The Board noted that the government’s contracting officers, program manager, requirements manager, chief of AMRAAM production, and the chief engineer had all, at various points over the course of the series of annual contracts, acknowledged and verified that production SEPM was included in SOC 2.b. Furthermore, the fact that the Air Force specifically attempted to move production SEPM from SOC 2.b. to SOC 2.a. demonstrated that the parties understood production SEPM to be covered under SOC 2.b. Under these circumstances, the Board concluded that the parties’ prior course of dealing established a common basis of understanding that the production SEPM had a one-year performance period. This conclusion ultimately led the Board to sustain the appeal, and the contractor recovered its costs and a reasonable profit for providing production SEPM during the two-year gap period.
In government contracts, course of dealing can be defined as a series of prior conduct between the government and the contractor that can be fairly regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. In contracts involving ambiguous terms, prior course of dealing between the parties may be properly used as extrinsic evidence to resolve the ambiguities. To be bound by their prior course of dealing, the parties must have actual knowledge of the relevant conduct and be aware of its proclivity to be reasonably construed as indicative of their common understanding or intentions. In such cases, the prior course of dealing evidence may be properly used to give meaning to ambiguous terms. Notably, in addition to resolving ambiguities, such evidence may also be used to demonstrate waiver of unambiguous contract terms. When used in this manner, the contractor must show that the disputed contract and the prior course of dealing involved the same procuring agency, the same contractor, and essentially the same contract provision. In the case described above, these requirements were also met, meaning the Board would have reached the same conclusion through waiver even if the relevant terms had been deemed unambiguous.
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.
