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War Risks Clause Interpretation and Risk Allocation Strategies for Contractors in Conflict Zones

This article is part of our government contract law firm’s Federal Contract Claims Insight series. Learn more, and if you’re in need of a federal contract attorney, contact us today.

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.

The Civilian Board of Contract Appeals (CBCA) interpreted the scope of such a War Risks clause in a 2018 summary judgment decision arising under a Department of State (DOS) construction contract performed in Iraq. The contract was for constructing the U.S. embassy compound in Baghdad, under which the contractor presented nearly 200 cost claims totaling $270 million. Under the firm-fixed-price contract, the contractor was responsible for site preparation, infrastructure construction, housing, support facilities, and constructing a new office building while bearing all the costs of transportation of materials to the site. Notably, in case of excusable delays, the contractor could obtain time extensions but not money. However, the contract permitted an adjustment to the price if there were changes to the scope of the contract. In addition to its claims under the Changes clause, the superior knowledge doctrine, and the implied duty of good faith and fair dealing, the contractor asserted thirteen cost claims relying upon the War Risks clause of the contract.

The thirteen claims under the War Risks clause included payment requests for danger pay to contractor employees and delays encountered by truck convoys used by the contractor to transport construction materials. The relevant sentence of the War Risks clause stated that the “Government assumes the risk of loss or damage to and/or destruction of, completed or partially completed work performed under this contract, and materials delivered to the site, where such loss, damage, and/or destruction occurs by, or as a result of war risks.” Pointing to the firm-fixed-price nature of the contract, the DOS argued for a narrow interpretation of this War Risks clause, limiting the Government’s liability under the clause to only those claims that directly related to loss or damage to completed or partially completed work and to any materials delivered to the site. On the other hand, the contractor argued for a broader interpretation of the War Risks clause that encompassed costs such as danger pay to contractor employees and costs such as transportation delays. In support of its position, the contractor argued that the War Risks clause must be read broadly because the antecedent term “loss” was not set-off by a comma or modified with the word “of” in the relevant sentence. Therefore, in the contractor’s view, the term “loss” was not connected to the terms “work” and “materials”. According to the contractor, since the antecedent term “loss” was independent of those terms, it was also independent of the entire limiting phrase “completed or partially completed work, performed under this contract, and materials delivered to the site.” Therefore, the word “loss” was not modifying the limiting phrase and could be read to allow a broader interpretation of the War Risks clause which supported recovery of costs incurred as the result of all other war risks. The contractor cited the rule of the “last antecedent” to support this broad interpretation of the War Risks clause. Notably, however, the phrase “loss, damage and/or destruction” appeared two more times in the first sentence of the clause, and each of those other two times, the term “loss” was set-off by a comma – as it appears in this sentence.

The CBCA began its analysis by pointing out that the Federal Circuit had previously noted that the “last antecedent” rule and its corollary were more guidelines than absolute rules of interpretation. The CBCA also noted that the Supreme Court had previously cautioned that a plain-meaning interpretive analysis based on punctuation alone was incomplete and risked distorting a statute’s true meaning. The CBCA then determined that the Federal Circuit’s previous recitation of the “last antecedent” rule when used to interpret the War Risks clause at issue made it clear that the clause was to be read narrowly in this case. Specifically, in reciting the “last antecedent” rule, the Federal Circuit had previously stated that the rule should be used only “where no contrary intention appears.” Here, such contrary intention existed because in the other two instances in the clause, the term “loss” was set-off by a comma and further modified by the term “such.” Therefore, The CBCA refused to find that the term “loss” had a broader meaning in the first instance than it did in the rest of the clause. It determined that the phrase “loss damage and/or destruction” had to be read together and tied to the phrase “completed or partially completed work” to interpret the War Risks clause at issue correctly.

The CBCA stated further that adopting the contractor’s interpretation would create a conflict with other clauses in the contract, including the price clause, which stated that the contract was firm-fixed-price, as well as the excusable delays clause, which only permitted time extensions but not money for excusable delays. The CBCA dismissed the contractor’s arguments by stating that while an alternative interpretation of a clause may be conceivable, such a potential interpretation alone is not a sufficient basis for constructing the clause against the drafter. This was especially true if such an alternative interpretation is not reasonable when considering the contract as a whole and in the context of its purpose. The CBCA supported its decision through another cannon of interpretation requiring that the general terms of a contract be limited by its specific terms. The CBCA opined that if DOS had intended to compensate the contractor for all its losses attributable to wartime conditions, it would have documented this intention clearly within the War Risks clause instead of implying it by omitting a comma or modifier. The CBCA also cited an example of a previous Armed Services Board of Contract Appeals (ASBCA) decision where the War Risks clause specifically allowed recovery for increases in cost of performance due to hostilities.

Finally, the contractor had also argued in the alternative that if the CBCA found that the comma was omitted by error, thereby supporting the DOS’ narrow construction of the War Risks clause – the CBCA should at least find that the clause contained a latent ambiguity. The contractor added that since the DOS drafted the clause and because the contractor’s interpretation of the latently ambiguous clause was reasonable, its War Risks clause claims should at least survive the DOS motion for summary judgment. However, CBCA dismissed this alternative argument too and found that even if the omission of the comma created an ambiguity, it was a patent ambiguity because it was apparent on the face of the War Risks clause. Therefore, the contractor had a duty to inquire about the interpretation during the formation phase of the contract. Since the contractor failed in its duty to inquire, it could not raise the patent ambiguity argument.

Contractors performing on U.S. federal contracts in conflict zones around the world should review the War Risks clause of their contracts carefully to ensure they fully understand the distribution of risk of cost increases in various scenarios. Similarly, since War Risks clauses may be specifically tailored to the ground realities of performing in the at-risk region, prospective contractors should leverage their specialized knowledge and situational awareness to negotiate the War Risks clause of their contract, while clearly articulating its terms. Furthermore, contractors should flag any inconsistencies or ambiguities in the War Risks clause regardless of their perceived magnitude to avoid a situation where an inadvertently omitted comma or modifier may lead to a contract interpretation dispute. Since the increase in incurred costs attributable to an ambiguous clause may be significant and the risk of hostilities may evolve from the time of formation of the contract to its performance, contractors should carefully review the War Risks clause with a government contract attorney to maximize their chances of recovery of increased costs of performance.

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 a government contract attorney to determine how the law would apply in a specific situation.